French domestic demand surprisingly weak in 2Q17 – ING

Julien Manceaux, Senior Economist at ING notes that French GDP growth was stable at 0.5% QoQ in 2Q17, but 2Q17 performance is mostly due to net exports while domestic demand still needs to be revived.

Key Quotes

“Figures published this morning show that French GDP grew by 0.5% QoQ for the third quarter in a row, bringing GDP growth to 1.6% , its fastest since 2011. This result is mainly explained by the rebound in net exports while domestic demand disappointed even pessimistic expectations. Private consumption growth barely picked up in 2Q17, from 0.1% to 0.3% QoQ. Only 3 of the last 10 quarters saw private consumption growth above 0.5% despite the fact that consumer confidence has slowly been recovering since 2015 and is now at levels not seen since 2007. The outlook for 2017 remains positive though as unemployment is showing more signs of deceleration which, as confidence surveys show, is now felt by households. But so far it has failed to materialize in hard consumption data and, at this stage, it is still hard to see private consumption growth overtaking its 2016 growth level (1.8%) in 2017.”

“Besides, higher consumer confidence and the level of interest rates allowed for housing investments to continue their recovery: posting their 8th quarter of positive growth (+1.0% QoQ). This contributed to total investment growth in 2Q17, which came out positive at 0.5% QoQ. After the rebound registered in 4Q16 and 1Q17 (+0.7% and +2.1% QoQ respectively), business investment slowed in 2Q17 to 0.5% QoQ. Business confidence remains elevated with PMIs standing firmly above 50.0, in positive territory for production growth and order books filled like before the crisis. This still could translate into higher hiring intentions if the labour market reform promised by President Macron brings more flexibility.”

“Finally, net exports posted their biggest contribution to GDP growth in years (+0.8ppt) as exports rebounded by 3.1% QoQ while imports were impacted by the low level of domestic demand. We expect external trade to be a lighter drag on GDP growth in 2017 than in 2016, when euro strength favoured strong import growth while exports were struggling, especially given lower global demand. However, the recent appreciation of the euro, if sustained, could increase the drag again.”

“All in all, French growth – having slowed from 1.2% in 2015 to 1.1% in 2016 - is set to rebound to 1.5% in 2017. Afterwards, if the new Government can take profit from the accelerating recovery to implement reforms, GDP growth could accelerate towards 1.7% in 2018. This would help in compensating for the effects of spending cuts and would increase the chance of exiting the "excessive procedure" France has been in since April 2009.”