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Economic data point to a slower contraction in France and a possible recovery in the country’s economy, along with its related ETF, next year. But France still has some hurdles to cross.

In the annual Article IV assessment of the French economy, the IMF was pleased with the French government’s implementation of fiscal stimulus and shoring up the banking system, reports Tom Barkley for The Wall Street Journal.

The IMF warns of additional deleveraging in the financial sector and French authorities agree with the need for publicly disclosed stress tests. Further bank losses and write-downs are still possible with bank balance sheets riddled with toxic debt.

The country’s economic contraction is estimated to slow this year; previous forecasts put the decline at 3.0%. Also, economy is expected to grow 0.4% in 2010. The government’s main fiscal challenge is to consolidate its public finances since France is heading toward unsustainable debt.

The IMF states that falling tax revenues in France will lead to “uncomfortably high fiscal deficits,” and more stimulus plans should be small, writes Lesley Wroughton for Reuters. Lower output could drop tax revenues in 2009/10 and will increase the country’s deficit.

Further exacerbating the situation is the Eurozone increase in unemployment, which could weaken private consumption. Unemployment is at a 10-year high.

  • iShares MSCI France Index (NYSEARCA:EWQ): up 2.4% year-to-date

ETF EWQ

Max Chen contributed to this article.

Source: Future Brightening for France and Its ETF, But Is It Enough?