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By Anna Willard
PARIS, Feb 13 (Reuters) - France's economy contracted at the fastest pace in 34 years in the fourth quarter, sending the budget deficit to a record and setting the economy up for a poor 2009 as companies slashed jobs.
Gross domestic product contracted 1.2 percent in the fourth quarter, data from national statistics office INSEE showed on Friday, slightly worse than expectations of a fall of 1.1 percent following a 0.1 percent rise in the third quarter.
The economy grew just 0.7 percent last year, the weakest rate since 1993. "The first quarter will be difficult," Economy Minister Christine Lagarde told RTL radio. "We will have a difficult year."
The data tallies with other depressing reports from around Europe. Germany registered its worst quarterly GDP contraction since 1990 and Spain posted its largest quarterly fall in 15 years, pushing it into recession.
A separate report showed job creation fell 0.6 percent quarter-on-quarter, or 0.7 percent year-on-year as French firms laid off workers to take account for a drop in business.
Carmaker Renault on Thursday scrapped its profit targets, dropped its dividend, slashed output and warned that the crisis would change the landscape of the car industry.
The company also said it expected to reduce its headcount by 9,000 this year, through voluntary departures, around half of which would be in France.
SCEPTICS
President Nicolas Sarkozy has channelled 26 billion euros into investment projects to try to stem the economy's decline, and pumped billions of euros of loans into banks to shore up their balance sheets and encourage them to start lending.
But he has struggled to convince a sceptical public that he chose the right strategy. Over a million people protested earlier this month, complaining his package did nothing to save jobs and help consumers.
After the protests, Sarkozy announced 6.5 billion euros to help the car sector. In a bid to please the French public, it obliges the companies to keep jobs in France but this has angered other countries who accused him of protectionism.
Sarkozy argues that stimulus measures to target consumers will not help the French economy as the money is often spent on imported goods on shop shelves or goes into savings.
The data also showed that consumption, which accounts for almost two thirds of GDP, was not the main problem in the economy last year. It climbed 0.5 percent in the fourth quarter while business investment plunged 1.5 percent.
EXPORTS COLLAPSE
Exports tumbled 3.7 percent.
"It is the steepest decline on record since 1978, so there is something really nasty going on there," said Bank of America economist Gilles Moec. "There has been a weakness in French exports for quite a while but this was not because of external demand but the French lack of competitiveness. Now it is really magnified by the downturn in external demand."
Sarkozy also has to consider deteriorating public finances when he is thinking about new stimulus steps. A third report showed the 2008 budget deficit grew to a record 56.2 billion euros from 34.7 billion euros a year earlier.
"If you look (at 2008 data) public investment was actually extremely low and that is going to be reversed in 2009 so there will be a lot more deficit but that is a lesser problem," said Xerfi economist Alexander Law. "At the moment it is extremely urgent to put the fire out."
(Reporting by Anna Willard, Veronique Tison, Crispian Balmer, Tamora Vidaillet and Estelle Shirbon; editing by David Stamp)