IHS Global Insight Perspective | |
Significance | French GDP growth during the first quarter of 2011 has been revised from 1.0% quarter-on-quarter (q/q) to 0.9% q/q as private consumption growth was weaker than previously estimated. |
Implications | Nevertheless, the figures still show that the economy grew robustly during the first quarter. Indeed, this was the strongest performance since the second quarter of 2006. |
Outlook | IHS Global Insight expects activity to decelerate over the coming quarters. All in all, we see GDP growth averaging 2.0% in 2011, following expansion of 1.4% in 2010. |
The National Institute for Statistics and Economic Studies (INSEE) has revised its estimate of French GDP growth for the first quarter of 2011. Output is now estimated to have increased by 0.9% quarter-on-quarter (q/q) during the period, down slightly from a previous estimate of 1.0% q/q. The revision was triggered by lower estimates of household consumption spending. GDP growth during the fourth quarter of 2010 has been confirmed at 0.3% q/q. Despite the downward revision, growth was still strong during the first quarter. Indeed, the figures show the sharpest quarterly rise in activity since the second quarter of 2006.
Growth during the first quarter was driven by healthy domestic demand. Domestic demand (excluding inventories) and changes in stocks contributed 0.6 and 0.7 percentage point, respectively, to the total change in demand during the period. On the other hand, net foreign trade shredded 0.4 percentage point from growth, owing to a surge in imports.
Domestic Demand Rises Strongly
Domestic demand was the main engine of growth during the first quarter of 2011. Private consumption grew by 0.4% q/q during the period. This is down from a previous estimate of 0.6% q/q, and equals the rise in consumption recorded during the fourth quarter of 2010. During the first quarter, consumers still enjoyed relatively low—albeit rising—inflation and improving credit conditions. The labour market also improved during the first quarter of the year. The number of jobseekers, which had risen by 23,700 during the fourth quarter of 2010, fell by 42,500 during the first quarter of 2011. Meanwhile, the non-seasonally adjusted monthly unemployment rate remained at 9.6% during the first two months of the year, the lowest reading since the third quarter of 2008. Going forward, IHS Global Insight expects private consumption to lose some momentum during the coming quarters. Although the situation in the labour market has improved, it remains fragile. This is illustrated by figures released yesterday (28 June) by the Ministry of Labour showing that the number of jobseekers rose by 17,000, or 0.7% month-on-month (m/m), in May. This was the first increase since December 2010. Moreover, the sub-indices measuring employment levels in Markit's purchasing managers' surveys for the manufacturing and service sectors also suggest that employment creation in the private sector is likely to be muted during the rest of the year. At the same time, households' purchasing power is being dented by sluggish wage growth, higher taxes, and rising inflation. Indeed, figures released by the INSEE reveal that households' purchasing power rose by just 0.2% q/q during the first quarter, down from increases of 0.6% q/q and 0.4% q/q during the third and fourth quarters of 2010, respectively. Meanwhile, households decreased their saving rate from 16.1% in the fourth quarter of 2010 to 15.9% during the first quarter of 2011. We currently expect private consumption to rise by 1.4% in 2011, unchanged from the growth rate in 2010.
Investment spending was also dynamic during the first quarter of 2011. Specifically, it increased by 1.2% q/q (up slightly from a previous estimate of 1.1% q/q), following rises of 0.5% and 0.9% q/q during the fourth and third quarters of 2010, respectively. The increase in investment during the first quarter was the strongest since the third quarter of 2010. Private business investment was particularly strong during the first quarter, rising by 1.9% q/q. General government investment—which had contracted sharply during previous quarters—rose by 1.4% q/q during the first three months of this year. Finally, household investment went down by 0.2% q/q. The rise in total investment during the first quarter was in line with expectations. The strong first-quarter investment figures were partly a rebound from a weather-hit fourth quarter of 2010. We expect investment to continue to be healthy during the coming quarters, although the pace of growth may decelerate vis-à-vis the first quarter. Business confidence has improved significantly recently, while the latest bank lending survey published by the Bank of France shows that banks have relaxed their credit criteria and are expected to continue to do so over the coming quarters. Despite investment posting its fourth consecutive quarterly increase during the first quarter, the level of investment was still around 10% below its peak during the first quarter of 2008.
Net Exports a Drag on Growth
Despite a strong increase in exports, net foreign trade was a drag on growth during the first quarter. Exports rose by more then previously estimated (1.8% q/q versus 1.4% q/q), following increases of 0.7% q/q and 2.0% q/q during the two previous quarters. However, strong domestic demand led to a sharp acceleration in imports, which grew by 3.0% q/q—revised up from 2.7% q/q. Forward-looking indicators suggest that exports have performed well during the second quarter, despite the less accommodative euro.
Outlook and Implications
Forward-looking indicators suggest that activity levels should remain healthy. However, the strong first-quarter performance is unlikely to be repeated during the rest of the year, and there are signs that the economy has already decelerated during the second quarter.
In particular, we expect private consumption to moderate. Inflation has picked up in recent months and this is expected to continue to hit households' purchasing power. As previously mentioned, the labour market has improved lately. However, unemployment remains relatively high. Tighter fiscal policy is also likely to limit private consumption expenditure, while there is a risk that the events taking place in Greece may dampen business and consumer confidence, weighing down on domestic demand. Export growth is also likely to moderate going forward. A strong euro should also weigh down on the external competitiveness of French exports outside the Eurozone. Global growth is also expected to decelerate during the coming quarters, providing a further blow to exports. Finally, stocks are unlikely to repeat their strong contribution during the second quarter.
We currently expect the French economy to grow by 2.0% in 2011 as a whole, following an increase of 1.4% in 2010.