France: 2016 ends with strong growth

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1 ECONOMIC RESEARCH DEPARTMENT France: 2016 ends with strong growth With Q4 growth of 0.4% q/q, the French economy ended 2016 on a positive note. At 1.1%, average annual growth was virtually the same as in 2015 (1.2%). The lack of acceleration is due in part to a series of temporary factors that strained activity, especially exports. This feeble performance nonetheless masks the 1.9- percentage point contribution of final domestic demand, which was lifted by an upturn in consumer spending as well as corporate and household investment. This sheds a more favourable light on growth. This latter also benefits from a positive carry-over effect due to the strong Q figure and from similar growth prospects in Q This increases the chances that annual average growth will accelerate slightly this year, to 1.3% according to our estimates. In Q4 2016, the French economy grew at a quarterly rate of 0.4% (q/q) according to preliminary INSEE estimates. After a mild 0.2% increase in Q3 GDP, growth rebounded as expected. It fell slightly short of our estimates (0.5% q/q) but the pace of growth is still twice as strong as the previous quarter. For the full year, the economy grew at an average annual rate of 1.1%, down slightly from the 1.2% reported in 2015 after adjusting for seasonal fluctuations and working days (1.2% and 1.3%, respectively, without adjusting for the number of working days). Robust growth in Q Looking at the GDP breakdown, French Q4 growth was robust. Final domestic demand and net exports made positive contributions of 0.6 points and 0.1 points, respectively. As expected, the change in inventory made a negative contribution of 0.2 points, which appears mild after a very positive contribution in Q3 (0.7 points, see chart 1). All of the components of final domestic demand contributed to its strong contribution to growth. Household consumption rebounded strongly, up 0.6% q/q, which is slightly higher than the long-term average of 0.5% This rebound follows two quarters in which household consumption barely budged Breakdown of French growth Contribution to growth of the components of GDP, q/q, percentage points Household consumption Public consumption Corporate investment Household investment Change in inventory Foreign trade GDP growth 1,2 0,9 0,3 0,0-0,3 - -0,9 Chart 1 0,0 0,4 0,2 T T T T T T T T Source: INSEE (+0.1% q/q each quarter). It was fuelled by a strong rebound in household spending on goods (+0.9% q/q vs. -0.4% previously) while the consumption of services held at roughly the same pace (+0.3% q/q after +0.4%). This corresponds to the average growth rate observed over the past four years. Yet the Q4 rise in consumer spending on goods is not as strong as the quarterly data show when we have a look at the corresponding monthly changes: after increasing 0.8% m/m in October and 0.6% in November, household spending on goods suffered an unsurprising but nonetheless sharp correction in December (-0.8% m/m). Public expenditures continued to increase at a fairly rapid pace (+0.4% q/q). Total investment increased 0.8% q/q, a significant acceleration compared to the third quarter (0.3%), thanks to an even stronger-than-expected rebound in corporate investment (1.3% q/q after 0.1% q/q in Q3) and another expected acceleration in household investment (+0.9% q/q after +0.7% q/q). The only sour note was public investment, which contracted 1.1% q/q 1. In addition to the stronger-than-expected upturn in corporate investment, exports were the other positive 1 Given the large revisions to this component of GDP in the recent past, we do not tend to give much importance to any variations. Moreover, public investment accounts for only 3.4% of GDP. -0,1 0,2 0,4 economic-research.bnpparibas.com Hélène Baudchon 1 st February

2 surprise of these preliminary Q4 growth estimates. Indeed, exports accelerated even more vigorously than expected (+1.1% q/q vs. +0.5% q/q the previous quarter) and surpassed import growth (+0.8% q/q). As a result, net exports made a slightly positive contribution to growth for good reasons. In comparison, France s Q growth (+0.4% q/q; annualised quarterly rate of +1.7%) was close to but slightly lower than the Eurozone print (+0.5% q/q), which continues to be driven by Spanish growth in particular (+0.7% q/q). France s performance is also not that far from US growth (+0.5% q/q; +1.9% in annualised terms). The shortfall is slightly bigger compared to UK growth, which continues to be surprisingly buoyant (+0.6% q/q). Full-year 2016 growth: less weak than at first glance The French economy grew at an average annual rate of 1.1% in 2016, which is significantly below the Eurozone result (1.7%) and also below 2015 growth (1.2%). Granted, the differential between the two years is insignificant, but the lack of an acceleration is disappointing given the favourable combination of low oil prices, interest rates and exchange rates. The absence of an upturn can be attributed to several growth shocks that left their mark during the year. Strong first-quarter growth (+0.6% q/q) was followed by a sharp payback in the second quarter (-0.1%) and then a mild rebound in the third quarter (+0.2% q/q). The robust Q4 performance (+0.4% q/q) was not strong enough to restore an even keel. These fluctuations can be blamed on a series of temporary factors 2. Early in the year, growth was bolstered by the anticipated ending of the extra-depreciation measure (initially scheduled to expire in April 2016, it was finally extended for another year) and by early purchases of television sets prior to the UEFA Euro 2016 championships and to the switchover to the digital terrestrial television (TNT) standard. The disappearance of these factors triggered an economic backlash that was accentuated by labour unrest and the blocking of refineries during several weeks in May and June. The grain industry was also hit by unfavourable weather conditions 3 in the spring (which explains why agricultural production plunged by nearly 6% in 2016) while the aeronautics sector experienced supply problems and shipment delays. The troubles in these two sectors are partly to blame for France s poor export performance in 2016, with average annual growth of only 0.9%, compared to 6% in This 2 No visible signs of the 14 July 2016 terrorist attack in Nice could be seen in the national Q3 accounts, notably for spending on hotel & restaurant services and transport. Any negative effects were probably offset by a catching-up movement after the sharp decline in these spending categories reported in the second quarter. 3 Temperature variations in general also play a role in the volatility of economic data, through their impact on household spending on energy. For instance, the energy bill rebounded strongly in first-quarter 2016 after contracting sharply the previous quarter due to unseasonably warm temperatures. The cold wave experienced in January 2017 is also expected to trigger a big increase in energy spending this month, which could push up growth for the whole Q1. Confidence surveys are picking up INSEE composite business climate index [LHS] Composite PMI [RHS] --- INSEE composite consumer confidence index [LHS] Chart comes on top of a moderation in global demand for French exports and the structural weakness of French competitiveness. This poor export performance also explains why net exports made such a negative contribution to growth last year (-0.9 points), which is the main reason for the sluggish pace of French GDP growth in This weak overall performance masks the 1.9-point contribution of final domestic demand, while the change in inventory s contribution was nil. Besides, final domestic demand made a much bigger contribution to growth compared to 2015 (1.3 points), thanks notably to the acceleration in household consumption (to 1.8% from 1.5%), corporate investment (to 4.3% from 2.7%) and household investment (to 1.5% from -0.8%, the first annual increase since 2011) over the period. These trends shed a much more favourable light on French growth in : towards slightly stronger growth? Sources: INSEE, Markit The mixed impression left by the weak 2016 growth figure must be put into perspective given its specific composition and strong performance at the last quarter of the year. Moreover, growth has become more solid, if not more vigorous, thanks to the turnaround in the job market, the construction sector and corporate balance sheets. We have pushed back our hopes for a slight upturn in growth until 2017, with average annual GDP growth estimated at 1.3% 4. Growth expectations in 2017 also benefit from a positive carryover due to the strong Q figure, and from the prospects for similar growth in Q The uptrend in business confidence surveys supports this outlook. The improvement in consumer confidence is encouraging for the same reasons (see chart 2). The composite household confidence index rose 1 point to reach 100 in January, at last returning to its longterm average for the first time since This improvement is based on a more favourable households assessment of past changes in living standards in France, of the unemployment outlook and of their future personal financial situation. 4 See Ecoweek n 17-04, France: could growth be stronger in 2017 than in 2016? 27 January economic-research.bnpparibas.com Hélène Baudchon 1 st February

3 Although the beginning of the year is looking rather upbeat, the year 2017 has no shortage of obstacles. The biggest is the current upturn in inflation in the wake of higher oil prices. Although the inflation pick-up has been fairly gradual until now, it suddenly surged according to January s preliminary figures. Headline inflation rose to 1.4% year-on-year in January, compared to 0.6% in December (see chart 3). Core inflation is still extremely mild, and the big surge in headline inflation can be attributed in part to a negative base effect. Nonetheless, the trend is there. Inflation is still not very high, but its acceleration will cut into household purchasing power gains and curb consumer spending, which in turn risks curtailing growth as a whole. Upsurge in inflation Headline inflation Core inflation Chart 3 Source: INSEE Hélène Baudchon helene.baudchon@bnpparibas.com economic-research.bnpparibas.com Hélène Baudchon 1 st February

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