GDP growth in France was 1% in Q3 versus 1.1% in the first quarter and 1.4% in the second (annual rate). The carry over for 2019 at then end of the third quarter is 1.2%. If growth is again at 1.2% in the last quarter then GDP will have grown by 1.3% on average over the year after 1.7% last year. The chart shows a rapid rise in activity since the beginning of the recovery in 2013 with a trend at 1.45%. We also note the particular character of the year 2017 during which the expansion had an exceptional character (2.4%). Since the last quarter of 2017, the annualized average growth is only 1.25%. It is this figure that is probably closest to the capacity of the French economy.
Domestic demand is at the heart of this expansion, while foreign trade contributes negatively. A sharp rise in imports was observed while exports continue to grow. The rise in imports comes after a negative figure in Q2. There is a catch-up effect. The rise in consumption has been stable on average since the beginning of the year at around 1.2%. It was at 1.3% for Q3 to compare with 1.5% in Q1 and 0.9% in Q2. Investment rose 3.8% after 2.1% in Q1 and 5.1% in Q2. These two components are at the heart of French growth. Note the continued growth of business investment despite a mediocre international environment. This may result from the temporary improvement of margins (double CICE effect and lower expenses in 2019) and a proactive economic policy in 2020 to support domestic demand. It is most encouraging. The slowdown in housing investment is worrisome but in line with what is happening in the private real estate market. The market is less dynamic with housing starts declining.
This internal dynamic reflects the economic policy that supports domestic demand to limit risk on growth. The increase in purchasing power resulting from the various bonus and the drop in the housing tax and the increase in employment, that will be seen again in the third quarter (November 8), are as much support for this internal demand. This promotes business investment. The dynamics of the economy is not excessive. There is no strong upside on growth however the risk of rupture is limited. This is essential in a risky international context
> GDP figures for the second quarter in the US (29), Germany (27), Italy (30) and France (29) will give details on the composition of growth in all these countries, providing a better understanding of the current situation. This will be particularly important at this stage of the business cycle, notably because there are fears of recession in Germany and Italy.
> Many surveys on economic activity. IFO in Germany (26), climat des affaires in France (27) and Business confidence in Italy (28). Risk of a weaker index in Germany and in Italy after the political mayhem seen in August.
> Consumer confidence in the UK (30), one month after Boris Johnson has been appointed as prime minister. Consumer confidence in the US (August 27) will bring details on the labor market dynamics at a moment where the situation is changing in the US (Markit index for the manufacturing sector at 49.9 in August) > CPI figures in the Euro Area for August and in the US for July that will bolster central banks in their will to become more and more accommodative.
>The Chinese GDP growth number for the second quarter (July 15). During the first three months of the year growth was at 6.4% It should be lower as monthly date on industrial production and imports show a poor momentum. >Retail sales and Industrial production in the US (July 16). They will show the strength of the US economy. These will be important benchmark that may influence the Fed’s strategy. Powell just mentioned this week that there was no improvement despite the strong labor market report. Associated to these numbers, the Fed’s beige book (July 17) will highlight the Fed’s perception of the economy at a regional level. > The NY Fed (July 15) and the Phylli Fed (July 18) indices on economic activity will also provide data on the business cycle strength.
>ZEW index in Germany (July 16). A weak number following weak numbers in recent months may force the government to adopt a more proactive economic policy. > Employment numbers in the UK (July 16) and CPI in the UK (July 17) Weaker numbers on employment are still to come and will be seen after this summer with the strong slowdown expected in the manufacturing sector.
Growth resumes in the Eurozone. For the EA, it is 0.4% and for Spain 0.7%. Even Italy is recovering and returning to positive territory. France disappoints. Despite strong measures taken on purchasing power, political uncertainty penalizes activity. It could last
French GDP growth decelerated slightly in the first quarter of 2019 even though the rounded figure stands at 0.3% (non-annualized) as in the previous two quarters. Despite the stimulus measures announced at the end of 2018, growth has not been boosted by the increase in households purchasing power. Achieving the government target at 1.4% for 2019 on average would require growth of 0.43% in each of the remaining three quarters. It’s ambitious.
The annual change in activity is 1.1% in the first quarter, well below the trend observed since the 2013 recovery at 1.4%. After the acceleration of 2017, resulting from the very buoyant global environment, the growth of the French economy can not deviate from the figure of its potential growth estimated generally between 1.2 and 1.3%. For the moment, the measures implemented by the government are not able to go beyond this and this is worrying in a context where the sharp rise in the price of gasoline is a threat to the purchasing power that would penalize consumers’ demand.
Contributions to quarterly GDP growth are easy to remember. Domestic demand contributed 0.3%, inventories increased GDP by 0.3%, while net exports slowed growth with a contribution of -0.3%.
The important point is the slight acceleration of household consumption whose contribution goes from 0 in Q4 2018 to 0.2% in the first quarter. This is barely above the average observed since the recovery (0.15%) while government measures explicitly targeted consumption. Government spending is growing at a slower pace, and this is the same for investment, whose contribution is decreasing marginally, notably because of the contraction of household investment. On the corporate side, the investment is a little stronger than in the last quarter of 2018 and that’s good news. However, this remains very limited (see the graph in appendix). This is insufficient to instil a solid dynamic into the cycle of the French economy.
The bad surprise comes from foreign trade whose pace is less robust than the monthly figures suggested until February. The contribution is frankly negative even if the contribution of imports is less negative than in Q4 2018. Exports stagnate and penalize growth. The French economy is also penalized by the world trade slowdown.
The accumulation of stocks has driven growth upward. Its pace in the second quarter will depend on the dynamics of demand. If this strengthens stocks will continue to fill. On the other hand, if the demand is lower, because the price of gasoline increases a little too fast, then companies could reduce these stocks which would penalize the profile of the activity.
The French GDP for the first quarter of 2019 will be published Tuesday morning at 0730. After a figure of 0.3% (non annualized figures according to the French tradition) over the last three months of 2018, the consensus is at 0.3%. My expectation is that 0.3% would rather be the bottom of a range between 0.3 and 0.5%. During the first three months of the year, there was a clear improvement in industrial production (+ 1.2% carryover for Q1 at the end of February against -0.4% in the last quarter of 2018). There is also a recovery in the pace of the business climate survey. In the last quarter of 2018, this index fell by 2.1 points compared to the previous quarter, whereas it stabilized over the first three months of the year. It should also be noted that household consumption is slightly positive when it contracted in the last quarter of 2018. Finally, foreign trade could have a neutral impact, with exports (in value) growing a little faster than imports but Given the deficit, the contribution will be close to neutrality. The big unknown is about business investment. Capital goods orders are shrinking rapidly, suggesting a lower capital expenditure despite the stabilization of business surveys. Looking at the industrial production and surveys, GDP is expected to pick up slightly in Q1 at 0.4%. If business investment is less dynamic than expected then it will converge to 0.3%. If all goes well (the services sector momentum is improving in the INSEE survey, if the investment is more robust than expected and consumption accelerates in March) then the figure of 0.5% could be reached.
The UK GDP growth was at +0.4% during the second quarter (1.5% at annual rate). The carry over growth for 2018 at the end of the second quarter is 1%.
I have updated my graph on the deviation from the pre-referendum trend. There is no catch up while Eurozone countries are still above the trend. The impoverishment of the United Kingdom after the referendum continues. Not sure it was a good idea for the Bank o England to increase its main rate this month. The increased uncertainty on the Brexit negotiation will not allow a rapid reversal as uncertainty is the main enemy of long term investments, those which improve productivity.