French economy set for only 0.4% growth this year, says INSEE

PARIS, Sept 10 (Reuters) - The French economy will grow markedly less this year than the government has anticipated as declining purchasing power weighs on consumer spending and firms rein in investment, the national statistics office forecast on Thursday, cutting its outlook.

The euro zone's second-largest economy is now expected to grow just 0.4% this year, down from INSEE's June forecast of 0.7% and less than half the 0.9% expansion recorded last year.

That would fall short of the government's current 0.7% forecast, though it is set to revise its forecast on Friday as it prepares to send its 2027 budget bill to parliament at the end of the month.

The weaker outlook makes France's current deficit-reduction target extremely difficult to reach. The government had aimed to narrow the fiscal deficit to 4.9% of economic output this year from 5.0% in 2025, but is also expected to revise that forecast on Friday.

On a quarterly basis, INSEE forecast growth would only slightly pick up in the second half of the year after contracting in the first quarter and flat-lining in the second quarter.

With summer heatwaves and drought weighing on agriculture output, growth was seen at only 0.1% in the third quarter from the previous three months before picking up to 0.2% in the final quarter.

CONSUMER AND CORPORATE CAUTION

INSEE forecast inflation, using EU-harmonised data, would tick up from 2.7% in August to 3.1% by the end of the year, giving an average rate of 2.3% for the year.

Higher prices and stagnant wage growth are expected to leave household purchasing power down 0.4% this year. Consumer spending is nevertheless forecast to increase by 0.3%, largely because households are expected to dip into their savings.

Weak consumer demand and higher interest rates would meanwhile weigh on business investment, which was forecast to fall 0.3% this year as firms also contend with a difficult international context due to the war in the Middle East.

Against that backdrop, the French economy is expected to lose 52,000 private sector jobs over the course of the year, pushing the unemployment rate to 8.6% by year-end, up from 8.0% a year earlier.

(Reporting by Leigh ThomasEditing by Ros Russell)