France: 2016 ends with strong growth - Microsoft...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

economic-research.bnpparibas.com Hélène Baudchon 1st February 2017 1

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 Q4 2016 figure and from similar growth prospects in Q1 2017.

■ 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 Q4 2016

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

(+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/q1. 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.

■ 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

Chart 1 Source: INSEE

0,6

0,0

0,4 0,2

0,6

-0,1

0,2

0,4

-0,9

-0,6

-0,3

0,0

0,3

0,6

0,9

1,2

T1 2015 T2 2015 T3 2015 T4 2015 T1 2016 T2 2016 T3 2016 T4 2016

DIRECTION DES ÉTUDES ÉCONOMIQUES

economic-research.bnpparibas.com Hélène Baudchon 1st February 2017 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 Q4 2016 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

factors2

. 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

conditions3

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 2015. 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.

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 2016.

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 2016.

2017: towards slightly stronger growth?

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 carry-

over due to the strong Q4 2016 figure, and from the prospects

for similar growth in Q1 2017. 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 long-

term average for the first time since 2007. 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 2017.

■ Confidence surveys are picking up ▬ INSEE composite business climate index [LHS] ▬ Composite PMI [RHS] --- INSEE composite consumer confidence index [LHS]

Chart 2 Sources: INSEE, Markit

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

economic-research.bnpparibas.com Hélène Baudchon 1st February 2017 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.

Hélène Baudchon

[email protected]

■ Upsurge in inflation ▬ Headline inflation ▬ Core inflation

Chart 3 Source: INSEE

-1

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1

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-1

0

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1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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