French GDP growth revised up to 0.6% q/q in Q1

A second estimate released by the National Institute of Statistics and Economic Studies (Institut national de la statistique et des études économiques: INSEE) shows France's GDP growing by 0.6% quarter on quarter (q/q) during the first quarter of 2016. This is up from a "flash" estimate of 0.5% q/q released in April. Moreover, the growth rate during the first quarter was the strongest in a year.

Internal demand, excluding inventory changes, was the main driver of the quarterly growth in the economy during the first quarter. It added 1.0 percentage points to the change in demand. On the other hand, inventory changes and net foreign trade made negative contributions of 0.2 percentage points each.

The upward revision was driven by higher real investment, which is now estimated to have grown by 1.6% q/q (up from a previous estimate of 1.0% q/q). Exports are also seen stagnating during the first quarter, as opposed to a contraction of 0.2% q/q in the preliminary estimates. But the trend for private consumption has been revised down (1.0% q/q, down from 1.2% q/q), while imports, which have a negative impact on the growth rate, are now estimated to have increased by 0.6% q/q (up from 0.5% q/q).

Consumption of goods edges downwards in April

Figures also released by the INSEE show consumption of goods (which represent around one third of total consumption) declining by 0.1% month on month (m/m) in April. Consumption of durables rose at a solid pace in April, as strong consumption of household durables more than offset a fall in car sales. Energy consumption also increased at a robust, although decelerating, pace. However, consumption of food products declined for the second month in a row and at a pace not seen since April 2013.

Outlook and implications

IHS expects activity to decelerate during the second quarter. Many of the temporary factors that drove private consumption during the first quarter will not be present during the second quarter (consumption was driven by the reversal of some of the negative factors during the fourth quarter of 2015, such as unseasonably mild weather and the Paris terrorist attacks in November). The modest decline in consumption of goods in April supports our view that total consumer spending is likely to moderate markedly during the second quarter.

Moreover, strikes and road blockages in recent week over the government's labour reform bill will likely affect economic activity during the second quarter. Energy production – including water supply and mining – accounts for around 3% of France's total real value added. Transport strikes and problems with fuel supply are also likely to have a negative impact on small businesses, although the extent is difficult to quantify. The often violent demonstrations may also take their toll on business and consumer confidence. The economic repercussions would be even higher if the strikes lead to blackouts, although we estimate that the probability of this is low. Images of road blockades and riot police using water cannon and firing tear gas, widely reproduced by international media, could also damage France's tourist sector, which is still recovering from the terrorist attacks in Paris last November. This impact is likely to be amplified by the timing of the strikes, just before the crucial summer holiday period. On the other hand, concerns about fuel shortages are prompting sharply increased purchases for precautionary reasons, which could lift growth during the second quarter.

Excluding the impact of the strikes, there are increasing signs that underlying economic activity is gaining momentum. Unemployment, measured by the number of jobseekers, declined for the second successive month in April. Business and consumer confidence rose to a four-month high in May, while "flash" composite purchasing managers' index (PMI) improved to a seven month high (although it still points to modest activity levels). Domestic demand will be supported by very low inflation (indeed, inflation has been negative during the three months to April). The football European Championship taking place in many French cities in June and July will also boost activity. Moreover, nominal wages have picked up in recent quarters. They rose by 2.0% year on year (y/y) during the final three months of 2015, the strongest pace since mid-2012. Investment should also continue its gradual recovery over the coming months. It will be supported by improving credit conditions, as shown in the last Bank Lending Survey published by the Bank of France. Commercial interest rates continue to be extremely low and in recent months there has been a particularly welcome (although modest) fall in the interest rates applied to new loans to small and medium-sized companies. The survey also showed increasing demand for credit from non-financial companies in February. Nevertheless, investment spending will be limited by a modest economic recovery and still muted business confidence levels.

We also expect net foreign trade not to be a major contributor to growth during the rest of this year. Although the euro has remained competitive, it has appreciated against the US dollar and the British pound since the start of 2016. Moreover, the impact of a weak currency (by historical standards) is being eroded by the fact that many other currencies, particularly in emerging markets, have also depreciated markedly against the US dollar. Unspectacular global growth will also limit export growth during the rest of the year.

The main downward risks to our growth forecasts are potential further terrorist attacks in France, the continuation and intensification of the strikes, and a UK exit from the European Union (a referendum will take place in June 2016), or a collapse in global growth. However, there are also upward risks to our forecast. In particular, domestic demand may be stronger than currently projected if confidence improves significantly over the coming months. In this scenario, consumers would be more willing to diminish their savings and spend more, while firms would increase their investment spending and hire more.