France must step up reforms to liberalise its economy and lower labour costs to get back to growth and improve its competitiveness, the International Monetary Fund has said.
The IMF said the euro zone's second-largest economy would start turning around in the second half of the year.
It halved its 2013 forecast for number one economy Germany yesterday based on uncertainty in other euro zone economies, including neighbouring France.
In its report on France, the IMF slightly trimmed its forecast to see the economy contract by 0.2% this year from a previous -0.1% forecast. It said the French economy would grow by 0.8% next year, from a previous 0.9% forecast.
"Following three years of substantial fiscal adjustment, there is scope to moderate the pace of consolidation going forward, provided the effort is concentrated on the expenditure and backed by continued structural reforms," it said in a regular review of France.
The Fund stressed that France must increase competition in product and services markets to improve its competitiveness, while focusing budgetary efforts on containing expenditure.
"A powering up of the reforms launched by the government in the last six months is needed to close this gap," the report after one of its regular missions to the country stated.
"Other instruments should be found to lower the effective cost of hiring young workers, if not through the wage through an easing of contractual work arrangements,'' it added.
The IMF said that the balance sheet repair of banks had continued at a sustained pace and overall risks to financial stability have abated considerably. ''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,'' it added.
France says it will eke out 0.2% growth this year but the European Commission and most economists have already said they see it shrink slightly, with the Commission projecting a 0.1% contraction.
France entered a shallow recession in the first three months of the year as the economy contracted by 0.2% because of weak exports, investment and household spending.
