France: Economic growth steady in Q2 as Macron's reform program is on the horizon
July 28, 2017
The French economy continues to perform reasonably well. According to the first estimate released by the Statistical Office (INSEE) on 28 July, GDP expanded 0.5% in a seasonally-adjusted quarter-on-quarter basis. In annual terms, the economy jumped from a 1.1% expansion in Q1 to 1.8% in Q2, an almost six-year high. The quarterly print, which matched FocusEconomics estimates, marks the third consecutive 0.5% expansion. It also put an end to a sequence of recent volatility in quarter-on-quarter growth where expansions were often followed by sharp decelerations. Q2’s increase was driven by a notable recovery of the external sector and steady growth in the domestic economy, which puts the economy on track to achieve the growth objective of 1.6% outlined by the government in early July.
The external sector rebounded strongly on the back of soaring exports and softer growth in imports. Exports swung from a 0.7% decline to a strong 3.1% expansion. Increased overseas demand for transport equipment and refined petroleum products drove the increase in exports which expanded at the fastest pace in seven years. Growth in imports slowed to 0.2% due to a decline in purchases of refined petroleum and other industrial material. Overall, the external sector contributed 0.8 percentage points to growth in the second quarter, contrasting the 0.6 percentage point deduction observed in the preceding quarter.
The domestic economy had a muted performance, contrasting the external sector. Private consumption, which constitutes over 50% of the French economy, expanded a soft 0.3%. Although the reading marked a slight acceleration from Q1’s 0.0% increase, private consumption growth was dented by a pronounced slowdown in services, particularly in restaurant and accommodations as the tourism sector continues to reel from the impact of last year’s terrorist attacks. Fixed investment, on the other hand, decelerated notably (Q1: +1.4% quarter-on-quarter; Q2: 0.5% qoq). The decline largely reflects a base effect as a tax deduction scheme on investment expired in April. Lastly, government consumption accelerated from 0.3% to 0.4%.
The big question that remains is whether economic growth will continue to hold up in the upcoming quarters. President Macron’s reform program is expected to kick off in September with the highly-contentious and controversial labor reform. His ambitious agenda and France’s combative labor unions will inevitably clash with unknown economic consequences. Former president François Hollande’s labor reform bill resulted in a sharp decline in industrial production in the second quarter of last year and was partly behind the economic contraction observed in the same quarter. The president faces a balancing act between his electoral promise of steady and strong growth in the short-term and passing the reforms necessary to unleash faster growth in the medium- and long-term.