By Ingrid Melander
PARIS (Reuters) - Weak consumer spending and business investment brought France's economy to a standstill in the first quarter of the year, raising doubts over the government's growth forecast and its pledge to meet EU deficit targets.
Separately, the International Monetary Fund saw "major risks" of slippage in efforts by President Francois Hollande's government to shave a total 50 billion euros off France's high public spending over the next three years.
The flat growth reading highlighted the divergent paths of the euro zone's two largest economies as European powerhouse economy Germany on Thursday posted a relatively healthy 0.8 percent growth in the first quarter.
France will now need 0.5 percent growth each quarter to meet a government forecast of 1 percent growth for 2014, Natixis Asset Management chief economist Philippe Waechter estimated, warning that would be hard to achieve.
"France's public finance plan has been built on the one percent growth forecast. If we don't achieve it France will not meet its (debt and deficit) targets for 2014 and 2015," he said.
"France is trailing the rest of Europe," BNP Paribas' Dominique Barbet concluded.
Inventory changes and public spending were the only factors keeping the euro zone's second-largest economy from contracting while export growth slowed markedly, suggesting France is failing to benefit from a better global environment.
Socialist President Francois Hollande's government has enacted some modest reforms aimed at boosting the growth potential of the economy while setting out savings to cut the public deficit, but its room for manoeuvre is limited.
Hollande's popularity has been hammered by his failure to keep an election pledge to bring down unemployment. Thousands of public sector workers protested on Thursday a decision to freeze their salaries to yield savings for the state budget. Schools and transport were seen being hit by the one-off strike.
Having hiked taxes since coming to power in 2012, Hollande earlier this year pledged to phase out 30 billion euros in payroll tax on companies to make them more competitive, and has also offered tax relief for low-income households.
But in its annual report on the French economy, the IMF questioned whether cutting taxes while making tens of billions in savings during a period of subdued growth was viable.
"Achieving the deficit objectives while delivering on the tax cut commitments leaves no room to deviate from the announced expenditure reductions," it warned.
"The major risks are that the initial plans may be diluted in sequential annual budgets and that cuts in transfers to local governments may be compensated by unsustainable cuts in investment, higher taxes or higher debt."
MARKETS UNFAZED
Earlier, the government issued a decree allowing it to block foreign takeovers of French firms in "strategic" sectors. The EU warned it could contravene rules on free capital movement and France's main employer group said it was a bad idea.
But none of this stopped France from seeing strong demand and falling yields at a medium-term debt auction on Thursday, with investors shrugging off the disappointing GDP data in their search for a better yield than German bunds.
Asked to react to Thursday's data, Finance Minister Michel Sapin told Europe 1 radio that French growth would be "more than zero" in 2014 overall. He referred to the government's existing one percent target but did not explicitly reaffirm it.
An INSEE statistics office annual revision of national accounts - this time enhanced by a one-off change of base and new EU calculation rules - brought the government better news with updated debt and public deficit estimates.
France's economy totalled 2.1137 trillion euros in 2013, with the GDP level raised by just over 3 percentage points by the new calculation.
(Additional reporting by Leigh Thomas and Yann Le Guernigou; editing by Mark John and Toby Chopra)