France: Economic growth languishes in 2016 despite strong Q4 reading
January 31, 2017
The French economy closed 2016 on a strong footing. According to the first estimate released by the Statistical Office (INSEE) on 31 January, GDP growth ticked up from a soft 0.2% seasonally-adjusted quarter-on-quarter expansion in Q3 to 0.4% in the final quarter. The print, which matched FocusEconomics’ Consensus Forecast, reflects an across-the-board improvement in all components of GDP and suggests that the French economy is gaining traction after two disappointing quarters. Despite Q4’s growth, annual growth slowed to 1.1% in 2016 (2015: +1.2%) as the economy continues to reel from the impact of terrorists attacks and was beset by many challenges such as massive strikes that brought the country to a standstill.
Q4’s recovery was underpinned by a strong performance of the domestic economy. Growth in private consumption accelerated form a 0.1% expansion over the previous quarter in Q3 to a stronger 0.6% increase. Growth was buttressed by increased expenditure on engineered goods such as cars, and higher gas and electricity consumption owing to unseasonably low temperatures. An improving labor market, low interest rates and inflation as well as strong consumer confidence readings throughout the quarter also supported growth. Fixed investment recorded a strong recovery on the back of increased investment by households and non-financial corporations which benefitted from the ECB’s expansionary monetary policy. (Q3: +0.2% quarter-on-quarter; Q4: +0.8% qoq). Optimism among French businesses reached a pre-crisis high in Q4 which helped push fixed investment to its best result in 2016 since 2007.
The external sector rebounded strongly and made a positive contribution to growth after deducting 0.7 percentage points in Q3 (Q4: +0.1 percentage points). Exports expanded at the fastest pace in six quarters thanks to growing demand in transport equipment. In contrast, growth in imports slowed considerably (Q3: +2.5% qoq; Q4: 0.8% qoq).
The strong quarterly print offers a glimmer of hope that the economy will shift into higher gear in 2017. Lower unemployment and rising wages will help offset growing inflation and keep private consumption solid. Strong credit growth and high optimism among French consumers and businesses should also act to boost growth. Nevertheless, the economic outlook is under pressure. Geopolitical and international economic uncertainty is expected to increase further as Brexit negotiations start and growing protectionist sentiment could disrupt existing trade flows. Likewise, the 23 April presidential elections will have vast economic consequences in the medium- and long-term. All leading candidates have fundamentally different views on the directly in which to steer the economy in order to break the country’s anemic growth cycle. France’s economic framework could change drastically since EU-membership, the size of the public sector, and the role of the government in the economy are among the main issues at stake.