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The gap between France and its European neighbours will widen unless the country introduces fresh economic reforms, the International Monetary Fund (IMF) has warned.

The IMF called on France to lower its labour costs and halt tax hikes to boost both growth and its competitiveness.

In its annual assessment, the IMF also forecast France's economy would contract slightly more than forecast.

It said GDP would fall 0.2% this year.

``We see deep structural issues affecting growth potential in France due to loss of competitiveness,'' said Edward Gardner, the chief of the IMF's mission to France.

Shrinking economy

The IMF expects the French economy to shrink 0.2% this year, down from a previous estimate of 0.1%. It predicts economic growth of 0.8% in 2014, just below its previous prediction of 0.9% growth.

Mr Gardner praised two recent reforms in France: a tax credit that reduces payroll taxes for companies paying low salaries and a change to employment law aimed at reducing the cost of firing staff.

But he added: "We also consider them to be really initial steps of a process that needs to be deepened and broadened.''

Last week, the European Commission, gave France two years to trim its budget deficit from 3.7% of gross domestic product at the end of 2012 to 3%.

The IMF also said that it expected French unemployment would continue to rise, despite French President Francois Hollande's vow to reduce it 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," Mr Gardner added.

Unemployment in France, the Eurozone's second largest economy after Germany, currently stands at 11%.