French growth confirmed at 0.3% q/q in Q4, while consumer confidence continues to decline in March

A third estimate released by the Institute of Statistics and Economic Studies (Institut National de la Statistique et des Études Économiques: INSEE) shows French GDP growing by 0.3% quarter on quarter (q/q) during the fourth quarter of 2015. This is unchanged from the second estimate released in late February. On a year-on-year (y/y) basis, GDP increased by 1.4% during the fourth quarter, which was the strongest annual rate in four years. The INSEE now estimates the economy to have grown by 0.4% q/q during the third quarter of 2015, up from a previous estimate of 0.3% q/q. As a result, growth in 2015 as a whole has been revised from 1.1% to 1.2%.

Households' purchasing power and firms' profit margins continue to improve in the fourth quarter

Households' purchasing power rose by 0.4% q/q during the fourth quarter, following a rise of 0.9% q/q during the previous quarter. Nominal wage growth accelerated from 0.4% q/q to 0.6% q/q (1.9% y/y, its largest increase in more than three years), while social benefits in cash increased by 0.5% q/q (they had grown by 0.3% q/q during the previous quarter). Meanwhile, taxes on income and wealth rose by 2.0% q/q, following a contraction of 1.3% q/q during the third quarter. Households' saving rate increased from 15.5% to 15.9% during the third quarter, its highest level since the second quarter of 2011.

Meanwhile, the figures show non-financial firms' profit ratio rising for the second successive quarter during the last three months of 2015. It stood at 31.4%, up from 31.1% during the previous period. The profit share ratio sat at its highest level since the first quarter of 2011. Profits were boosted by lower energy prices. This more than counterbalanced the negative effect of real wage growth standing above productivity gains.

French consumer confidence falls to a seven-month low in March

France's seasonally adjusted consumer confidence index sits at 94 in March, according to seasonally adjusted figures released by INSEE. The index had stood at 95 in February and 96 in January. Previously, consumer confidence had gradually been trending upwards since reaching 80 in mid-2013. The index had reached an eight-year high in January, although March's reading is the weakest in seven months. Moreover, the index remains below its long-term average of 100.

In March, households were more pessimistic about their future financial situation and the outlook for the standard of living in France. The index measuring households' major purchasing intentions over the coming 12 months, which had reached a four-month high in January this year but then contracted in February, remained unchanged in March. The index measuring unemployment expectations fell from February's five month high, although it still remained elevated. Meanwhile, households' inflation expectations have edged upwards in February, rising to a seventeen month high, although they still stand slightly below their long-term average.

Outlook and implications

IHS estimates growth to stand at a similar level during the first quarter of 2016. We expect private consumption, which was hit by unseasonably mild weather and the after-effects of the terrorist attacks in Paris during the third quarter, to rebound at the start of the year. This view is underpinned by a strong increase in the consumption of goods (which represent around one-third of total consumption) in January. They rose by 0.6% month on month (m/m), following an increase of 1.0% m/m in December. Consumption will continue to be sustained by very low inflation – prices fell by 0.2% y/y in February. This is helping to counterbalance the negative impact of elevated unemployment, although we do expect some stabilisation in labour market conditions in 2016. Although declining confidence is not good news for consumption prospects, it has not been strongly linked to spending in recent quarters.

Domestic demand should also be supported by a modest rebound in investment, which fell during the previous two years. Credit conditions have improved recently, while improving profit margins and the modest economic recovery should also help to sustain investment spending. However, there is a risk that concerns about a difficult external environment and a sluggish recovery at home may result in investment being weaker than we currently forecast for the year. These concerns were reflected in a fall in business sentiment in March. The backtracking by the government on some of the most contested points included on the labour reform bill expected to be discussed in parliament next month could have some negative impact on business confidence in April.

On the external front, the competitive euro (despite its appreciation experienced this month) should help to sustain exports to countries outside the Eurozone. However, the effect of a weak euro should be limited given that many currencies – particularly in emerging markets – have also lost ground against the US dollar. Weaker than currently projected external demand is a key risk to our forecast. Not only might concerns about China's economy have a detrimental impact on exports and confidence, but a potential exit of the United Kingdom from the European Union (a referendum on this will take place in late June) is also likely to hit activity.

Regarding the first quarter of 2016, the big question is: how large will the negative contribution from inventories be? We do expect domestic demand, excluding stocks, to make a positive contribution to the economy, while net exports should also help to support growth during the first three months of the year. Our March forecast sees GDP rising by 0.3% q/q during the first quarter and by 1.3% in 2016 as a whole.