The International Monetary Fund said Tuesday that France must keep up momentum on the reforms launched by the government a year ago to remove obstacles preventing the country to jumpstart growth and create badly-needed jobs.
Once again, the Washington-based IMF downgraded its forecasts for the French economy, expecting gross domestic product (GDP) to contract by 0.2 percent this year and grow by 0.8 percent in 2014.
In April it had predicted a 0.1 percent contraction in 2013 and 0.9 percent growth next year.
The eurozone's second largest economy fell into recession in the first quarter and registered a record number of jobseekers in April -- the 24th consecutive month of rising unemployment.
French President Francois Hollande has vowed to boost growth and curb the rising unemployment trend by the end of 2013, but as it published Tuesday its annual evaluation report on France, the IMF warned this would be hard.
"Following two quarters of negative growth (last quarter of 2012 and first quarter of 2013), economic activity should begin to recover in the second half of 2013, driven by a gradual improvement in the external environment," it said.
But it warned there were still downside risks in the form of precarious growth prospects in Europe, and uncertainty in France on tax policy, "which weighs on spending decisions of households and enterprises."
It also said "significant rigidities hinder the economy's capacity to grow and to create jobs."
Edward Gardner, the IMF's mission chief for France, told reporters that "macroeconomic variables lead us to think unemployment will continue to rise and that it will be hard to reverse this rise by the end of the year."
"It reflects in large part a general phenomenon in Europe that the recovery is slower in coming than we had expected," he added.
Faced with a decline in productivity, companies have maintained real wage growth at the expense of profit margins, according to the IMF, "which in turn has undermined the capacity of enterprises to innovate and remain competitive in international markets."
It said restoring external competitiveness remained a "critical priority."
Striking a positive note, however, the IMF said Hollande's government "has made meaningful progress on the structural reform front", but that it now needs to build on that.
"This forward momentum should be sustained and broadened to address the multiple and deep challenges faced by France," it said, calling for more competitiveness in the services sector, pointing especially to regulated professions, transportation and distribution.
Gardner said the fund is firm in its belief that "competition should be seen as an instrument to create jobs (...) rather than an instrument that would destroy jobs".
He added there is "no more scope for increasing the tax burden", saying it has already reached a critical level.
France's Industrial Renewal Minister Arnaud Montebourg responded by saying the risks linked to hiked competition "are sometimes destructive and can prevent companies from investing".
The IMF pointed out that the financial situation of households and firms remained relatively sound, however, and could "more easily translate into an increase in demand."
"The French economy can also rely on a high household saving rate, first rate global enterprises, positive demographics, a strong scientific research capacity, and high quality public infrastructure," the report added.