The latest data show that the French economy performed worse than previously estimated during the second quarter as private consumption and fixed investment declined during the period.
Implications | Falling private consumption and stocks led to a modest fall in French activity during the second quarter of 2016. |
Outlook | Although survey evidence has been slightly more solid than expected, hard data available for the third quarter suggest that the economy is unlikely to have rebounded sharply during July–September. |
A third estimate released by the National Institute of Statistics and Economic Studies (Institut national de la statistique et des études économiques: INSEE) shows French GDP contracting by 0.1% quarter on quarter (q/q) during the second quarter of 2016. This is down from a previous estimate of stagnation. GDP had grown by 0.7% q/q during the first three months of 2016. On a year-on-year (y/y) basis, the economy rose by 1.3% during the second quarter, down from growth of 1.4% during the previous quarter.
The revision to the second-quarter GDP growth rate was mainly driven by a weaker-than-expected performance from private consumption. Households' spending, which had originally been estimated to have stagnated during the second quarter, declined by 0.1% q/q. The estimates for gross fixed capital spending and public consumption remained unchanged at -0.2% q/q and +0.4% q/q, respectively. This meant that domestic demand, excluding stocks, made a negative contribution of 0.1 percentage point to the economy. Previously, it was said to have made a neutral contribution. Meanwhile, the contribution of net foreign trade to the quarterly change in activity remained unchanged at 0.6 percentage point, despite exports of goods and services performing slightly better than previously estimated. Change in stocks made a negative contribution of 0.7 percentage point to the economy during the second quarter.
Q/Q, SA | Y/Y | |||||
|---|---|---|---|---|---|---|
Q2 2016 | Q1 2016 | Q4 2015 | 2013 | 2014 | 2015 | |
GDP, total | -0.1 | 0.7 | 0.4 | 0.6 | 0.7 | 1.2 |
Domestic demand | 0.0 | 0.9 | 0.4 | 0.5 | 0.6 | 1.3 |
Private consumption | 0.0 | 1.1 | 0.0 | 0.6 | 0.7 | 1.5 |
Public consumption | 0.4 | 0.4 | 0.4 | 1.5 | 1.2 | 1.4 |
Gross fixed investment | -0.2 | 1.3 | 1.2 | -0.7 | -0.4 | 0.9 |
Exports | 0.2 | -0.4 | 0.6 | 1.9 | 3.4 | 6.0 |
Imports | -1.8 | 0.2 | 2.2 | 2.2 | 4.8 | 6.4 |
Note: Seasonally adjusted data | ||||||
Source: INSEE© 2016 IHS | ||||||
Households' purchasing power rises at slower pace, but firms' profit margins decline during Q2
Households' purchasing power increased by 0.2% q/q during the second quarter, following a rise of 0.6% q/q during the previous quarter. Nominal wage growth decelerated from 0.8% q/q to 0.4% q/q (2.3% y/y, unchanged from the first quarter), while social benefits in cash went up by 0.3% q/q. Meanwhile, taxes on income and wealth rose by 0.4% q/q, following an increase of 0.7% q/q during the first quarter. Households' saving rate rose from 14.4% to 14.8%.
Meanwhile, the figures show non-financial firms' profit ratio falling for the first time in the past four quarters. It stood at 31.7%, down from 32.1% during the previous quarter. The profit share ratio during the first quarter had been the highest since the fourth quarter of 2008. According to the INSEE, firms' profit margins were hit by weaker labour productivity and the rebound in oil prices vis-à-vis the first quarter. The fall in the profit ratio was limited by lower employer contributions.
Outlook and implications
The revised second-quarter figures are unlikely to result in a revision to IHS's forecasts for 2016. We currently expect GDP growth to average 1.3% this year, up slightly from 1.2% in 2015.
Although survey evidence already available for the third quarter has looked relatively upbeat, hard data have disappointed. Consumption of goods, which accounts for around one-third of total consumption, fell by 0.2% month on month (m/m) in July, suggesting that consumer spending is unlikely to have rebounded strongly during the third quarter. Moreover, industrial production fell by a stronger-than-expected 0.6% m/m in July, also pointing to weak industrial sector activity during the period. On the other hand, the Markit France Composite PMI has improved to a 15-month high in September (led by the service sector), while business confidence has also improved this month.
These factors fuel hopes that the economy may pick up some momentum in the second half of the third quarter and during the final months of the year. Indeed, fundamentals for consumers remain benign, with households' purchasing power boosted by low inflation and improving wage growth. Moreover, measures put in place in recent times to provide some flexibility in the labour market are seen driving a gradual decline in the unemployment rate, while extremely accommodative monetary policy should also help to support activity. Nevertheless, we still expect activity to be limited by a tough labour market (despite its recent stabilisation) and muted external demand. We also see the aftershocks of the Brexit vote in the UK having a negative impact on the economy, particularly once the British government formally starts EU exit negotiations, via lower demand from the UK and the appreciation of the euro against sterling. Uncertainty surrounding the presidential elections in France, scheduled for April and May next year, is also expected to have a negative impact on activity during the first half of 2017. All in all, we see growth decelerating to 0.8% in 2017.