France faces deeper recession than we feared, warns IMF

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France faces a deeper than expected recession this year and must overcome "critical obstacles" to improve competitiveness, the International Monetary Fund warned yesterday.

It expects the eurozone's second biggest economy to shrink by 0.2 per cent this year, worse than its previous estimate of a 0.1 per cent decline, before recovering to grow by 0.8 per cent next year.

But the fund heaped more pressure on France's unpopular President Francois Hollande to implement reforms, and warned that longstanding problems such as falling productivity would bite harder as European neighbours make moves to boost their own competitiveness.

The IMF said France should focus on cutting spending to cut the deficit rather than tax rises such as the proposed 75 per cent rate on earnings over €1m which drove the actor Gerard Depardieu to take Russian citizenship.

It added: "The cost of labour remains a critical obstacle to employment at the lower skill end of the labor market. This affects a large part of the population, particularly among the youth."

France's banks have continued to repair their balance sheets at a sustained pace, and overall risks to financial stability have abated considerably, it concluded. But the IMF verdict added: "French banks still have some way to go to increase their liquidity buffers and improve net stable funding ratios. This requires a move toward more market-intermediated credit and higher deposit collection."

Edward Gardner, the chief of the IMF's mission to France, said unemployment was unlikely to fall before the end of the year, as promised by Mr Hollande.

He praised two recent reforms – a tax credit that cuts payroll taxes for companies and an employment law aimed at reducing the cost of firing staff – but added: "We consider them to be initial steps of a process that needs to be deepened and broadened."

Mr Garnier also warned that high taxes were hitting consumers and detering companies from investing, adding: "There is no more scope for increasing the tax burden in France."