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Recession reality bites as France joins global rout

Last week national champions such as Air France-KLM, Europe's biggest airline, and PSA-Peugeot-Citroen, Europe's second biggest carmaker, announced massive losses and plans to cut spending and shed thousands of jobs.

The announcements came as the government said France would finally suffer the same fate as most of its neighbours and slump into recession in 2009.

The French economy miraculously managed to expand by 0.1 percent in the third quarter of 2008 after contracting in the second, thereby narrowly averting recession, defined as two successive quarters of negative growth.

But the latest official data released on Thursday showed that the economy shrank by 1.2 percent in the fourth quarter of 2008, prompting the government to concede that recession was inevitable this year.

"After having been one of the rare European countries where economic activity increased in the third quarter, France ... suffered from the negative effects of the financial crisis," Finance Minister Christine Lagarde said.

She attributed the fourth quarter results to a pronounced fall in company inventories, "a sign of hesitancy in the face of a very uncertain climate," as well as to "a crisis in the auto sector."

Car manufacturing employs one French worker in ten, but the sector has fallen on such hard times that President Nicolas Sarkozy plans to lend PSA Peugeot Citroen and Renault three billion euros (3.9 billion dollars) each.

This allegedly protectionist measure -- which is being examined by the European Commission to make sure they do not break competition law -- came in exchange for a promise not to shut French plants or sack French workers.

Peugeot said Wednesday it had lost 343 million euros in 2008 -- having made 885 million in profit the previous year -- and forecast that the European market for new cars would shrink by another 20 percent in 2009.

There was also bad news from smaller rival Renault a day later when it revealed an operating loss in 2008 and said it would focus on freeing up cash this year to weather even worse market conditions ahead.

Contributions from firms in which the French company has stakes, notably Japan's Nissan, allowed Renault to hold its head above water and turn a profit of 599 million euros), but that was down 78 percent on the year.