France: GDP growth stalls in Q2 on weak domestic demand
August 26, 2016
The French economy came to a standstill in the second quarter. According to comprehensive data released by the Statistical Office (INSEE) on 26 August, the French economy registered flat growth in Q2 over the previous quarter in seasonally-adjusted terms, undershooting market expectations of a 0.3% expansion. The reading matched the preliminary estimate released by INSEE and represents a sharp deceleration from Q1’s one-year high of 0.7%. On a year-on-year basis, the economy expanded 1.4% in Q2, matching the previous quarter’s print. Q2’s reading represents a setback for President François Hollande, who had claimed that the economic recovery was gaining momentum, and deals a blow to his reelection aspirations.
Q2’s result was driven by a sharp slowdown in domestic demand, which was weighed down by a stagnation in private consumption and a contraction in fixed investment. A series of one-off factors such as floods and massive strikes dented demand. Overall, the contribution of domestic demand to economic growth dropped sharply from 1.0 percentage point in Q1 to a revised 0.1 percentage point in Q2 (previously reported: 0.0 percentage point contribution).
Looking in more detail at the individual components of domestic demand, private consumption dropped in Q2 to a flat reading over the previous quarter from a 1.2% expansion in Q1. The 2016 UEFA European Championship soccer tournament failed to provide much impetus to the economy since most of the tickets had been purchased in Q1. Consumers also spent less on accommodation, food and transport due to adverse weather conditions and a slump in tourism revenue following last year’s terrorist attacks. Fixed investment swung from a 1.3% expansion in the first quarter to a revised 0.2% contraction (previously reported: -0.4% quarter-on-quarter) in the second quarter of the year, marking the worst reading in a year. The protests over a period of months against the contentious labor reform bill staved off investment and resulted in a sharp drop in manufactured goods. Investment in construction and services firms contracted while it slowed sharply in the manufacturing sector. Lastly, government consumption in the second quarter remained stable at the 0.4% print observed in the first quarter of this year.
Turning to the external sector, it made a positive contribution to the economy as exports of goods and services declined at a softer rate than imports: exports contracted 0.1% in Q2 (Q1: -0.4% qoq) while imports swung from a 0.5% increase in the first quarter to a sharp 2.0% drop in the second quarter (previously reported: -1.3% qoq), marking the biggest contraction in seven years. On the one hand, weakening overseas demand, particularly from Asia, dragged down on export revenues despite a low EUR/USD exchange rate. On the other hand, imports of goods and services were dragged down by weakening domestic demand and destocking by firms. Taken together, the external sector’s net contribution to economic growth improved from minus 0.2 percentage points in Q1 to plus 0.6 percentage points in Q2 (previously reported: 0.3 percentage point contribution).
Overall, the country’s weak economic growth poses a significant challenge to the government. The 2016 budget envisaged growth of 1.5%, which France needs to lower its fiscal deficit and comply with EU regulations. In addition, the government had hoped for stronger growth in order to be able to lower taxes on households and small and medium enterprises ahead of next year’s election. Despite the weak result, the government claimed in late August that it would manage to lower taxes and still achieve 1.5% growth in 2016, but there are growing concerns among analysts that the government might derail its fiscal consolidation plan to attract votes from an austerity-weary electorate.