So far so good
Growth and inflationSince the beginning of 2018, although it has been slow, French growth has set itself apart by its stability, a sign of its resistance to downward pressures. In Q1 2019, real GDP rose by 0.3% q/q, in line with expectations, which we believe is good news given the rather mixed economic indicators at the time. The upward revision of the Q4 2018 growth figure (from 0.3% to 0.4% q/q) provided more good news[1], while the stability in the domestic demand contribution (0.4 percentage points in Q1 2019 as in Q4 2018) is another positive factor. This stability was driven by a small but encouraging acceleration in consumer spending (up 0.4% from 0.3% q/q) offset by a similarly small deceleration in total investment (up 0.5% from 0.6% q/q) and public consumption (up 0.2% from 0.4% q/q). From one quarter to the next there was a mirroring of the effects of the changes in inventory contribution (negative then positive to the tune of -0.2 of a point and then +0.3 of a point) and net exports contribution (positive then negative at +0.3 of a point and -0.3 of a point respectively). Payrolls gains also remained on a positive trend, rising 0.4% q/q in Q1 2019.
Growth prospects for Q2 are a little less mixed than in previous quarters thanks to the uptrend in confidence surveys. Their improvement remains limited and fragile. The return from slowdown to expansion territory of INSEE’s new ‘business confidence clock’ is described as hesitant[2]. These developments are nonetheless positive, particularly when contrasted with the less encouraging signals on the German economy. The difficulties of France’s main trading partner will not be without their consequences for the French economy, but for the time being this latter is coming out quite well.
Confidence surveysSince the trough at the start of this year, France’s composite PMI has gained 5 points (having lost 11 points in 2018), taking it to 52.7 points in June. This increase has been based on improving conditions in services (up 5 points to 52.9 in June) and to a lesser extent in manufacturing (up 2 points to 51.7 in June). The fact that the German composite PMI figure is similar (at 52.6) hides a significant, unusual and unsettling divergence between the manufacturing number (45) and that in services (55.8). As far as national surveys of business confidence are concerned, the INSEE composite index is rising whilst the German Ifo is declining (the former is up 4 points since the start of the year; the latter down 2 points). At 106, the INSEE index is significantly higher than the reference average of 100. This level is consistent with a quarterly growth rate of 0.5% to 0.6%. The most encouraging improvement has come in consumer confidence: in June, after six consecutive monthly increases, total gains of 14 points took it to 101, finally moving it (just) above its reference average of 100 for the first time since April 2018.
The positive signal from surveys has been tempered by the more mixed picture from the activity data available for April and May. However, our nowcast model suggests that whether on the basis of soft data or hard data, Q2 growth is estimated at just 0.3% q/q. This fits with our forecast as well as the INSEE one while the Bank of France has just revised down its estimate, from 0.3% to 0.2% q/q. In our scenario, growth is expected to remain stable at this rate of 0.3% q/q for the sixth quarter in a row, whilst, to continue the comparison, German growth is expected to be zero or slightly negative (from 0.4% q/q in Q1).
Seizing the moment
Reform of the unemployment benefits systemThis pattern is matched by prospects for the next few quarters, with French growth expected to maintain this rate of 0.3% q/q. Average annual growth is expected at 1.3% in 2019 and 1.2% in 2020. The cornerstone of this resilience remains the expected rebound in consumer spending, dragged along by rising purchasing power. On this point, from 2019 on, the exception is likely to become the rule and consumer spending’s contribution should be again greater than total investment’s one, after two years where the situation has been the other way round.
However, uncertainties remain over the rebound in consumer spending, and more specifically over its scale. The upturn in consumer confidence is a good sign, but for the time being, the hard data are not showing the same vigour. We continue to believe that this is only a matter of time. The reaction of consumer spending to increased purchasing power is not immediate. And the relatively high proportion of constrained expenditure, which has little or no sensitivity to changes in purchasing power in the short term, could further slow the reaction time and limit the reaction itself[3]. This said, by relaxing the constraint on revenue, the additional purchasing power is likely to have a significant stimulus effect on compressible, discretionary spending.
Time is moving on, however: the rebound in consumer spending cannot take too much longer to feed through or the expected GDP growth will not materialise. The importance of the timing of this rebound refers more globally to the good timing of the measures to support households’ purchasing power. We believe that these measures are well-timed and that, when combined with the ones to support businesses, their support to domestic demand should help offset, and perhaps more than compensate for, the slowdown in external demand. Even so, there is still a risk that this support will prove ill-timed, and that its benefits will pass unnoticed – all the more so if the external headwinds prove stronger than expected, making it harder to demonstrate the effectiveness of the economic policy adopted.
