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France's economic troubles deepen

France's economic troubles deepen
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France has reported a fall in factory production in June, chipping away at the prospects for a European recovery

The unexpected decline in industrial output – down 1.4 percent from the previous month – contrasts with recent more positive data and business confidence surveys suggesting the eurozone’s second-largest economy is pulling out of recession.

The contraction came from a decrease in the production of food and agricultural goods as well as in energy and mining.

Higher readings in business and consumer confidence and a rise in industrial output in April prompted French President Francois Hollande to make optimistic pronouncements about the health of the economy in recent weeks, even saying “recovery is here”.

But muted domestic demand is still holding back growth.

And businesses, consumers and the International Monetary Fund have warned that the Socialist government’s plans to raise already high taxes next year will choke off the fragile recovery.

Companies are particularly concerned about a prospective rise in payroll taxes as part of an overhaul of the pension system which the government hopes to thrash out by year-end.

In its annual review of French economic policies, the IMF warned that companies and consumers were holding back spending crucial for the recovery on concerns taxes would keep rising.

Although President Hollande has pledged to keep new tax rises to a minimum, his government is looking to raise at least 6 billion euros ($8 billion) in new revenues under the 2014 budget, due to go to parliament in September.

That will come on top of 30 billion euros in new taxes – equivalent to 1.5 percent of gross domestic product – imposed on the two trillion euro economy this year.

The French tax burden is already one of the heaviest in the world. At 44.2 percent of GDP, it ranks behind only Denmark and Sweden among the 34 members of the Organisation for Economic Cooperation and Development.