France

Oxford Economic Country Briefings, Jul 2, 2008

Highlights and Key Issues

* GDP growth in Q1 was revised to 0.5% from 0.6%, with a good performance in the business sector partly offsetting stagnating consumer spending. We now see GDP growth averaging 1.6% in 2008, and expect it to moderate further to 1.5% in 2009 as a result of subdued consumer spending and the effects of the slowdown in global activity.

* Although household consumption picked up in May, this good performance is likely to be repeated in the coming months - household confidence fell for the 12th month in a row in June. Consumer spending growth should be weak in Q2, and we expect it to slow to 1.4% in 2008 as a whole from 2.5% in 2007.

* Industrial production rebounded in April - its annual growth rising to 3.2% from 0.7% while business confidence was unchanged in June and remains above its long-term average. Although activity is likely to slow over the next few months, prospects for investment remain relatively good - we expect investment growth of 3.8% this year after a revised 4.9% figure in 2007.

* Inflation rose to 3.3% in May, mainly the result of a sharp rise in energy prices. High food and energy prices are likely to keep inflation above 3% over the next few months, continuing to erode consumers' purchasing power, before it eases again.

Overview

GDP growth of 0.5% in QL..

* Quarterly GDP growth in Q1 was revised to 0.5% from an original estimate of 0.6%, but still up from 0.3% in 2007Q4. Domestic demand held up reasonably well, as a solid performance in the business sector partially offset weak household consumption. Meanwhile, the external sector made a positive contribution to growth despite a rise in imports, as export growth rebounded strongly to 3.2% in Q1.

* A slowdown is expected in 2008Q2 following the solid performance in Q1, as consumer demand in particular remains weak and the effects of weaker global activity and the strong euro start to show through - leading to another year of net external trade acting as a drag on growth. But overall the slowdown of the economy is expected to be relatively modest, with investment in particular remaining relatively solid and consumer spending picking up progressively from the second half of the year. We expect GDP growth to slow to 1.6% this year from 2.1 % in 2007 and see it moderating further to around 1.5% in 2009, with consumer spending growth picking up only slowly.

...but consumer spending stagnates

* The revised data show that consumer spending stagnated in Q1, reflecting households' pessimism. And consumer confidence has continued to weaken, falling for the 12th consecutive month in June as higher energy and food prices continued to erode purchasing power. And although household consumption picked up in May, this good performance is not expected to be repeated over the next few months as growth was led by the car sector, which tends to be volatile, and the textiles sector, probably the result of the later than usual improvement in weather conditions. And as real income growth is expected to be limited by wage moderation, with measures aimed at supporting household purchasing power and increasing flexibility in the labour market having only a limited effect, growth of consumer spending is likely to remain subdued over the next few months.

* However, higher savings accumulated in 2007 and relatively low unemployment should help to sustain consumer spending. The unemployment rate fell to 7.2% in Q1 - its lowest level since 1983 - although employment growth is likely to be moderating given the slowdown in activity. This, combined with an easing of inflation from end-2008, should result in a gradual recovery in consumer spending - we expect it to grow 1.4% in 2008 overall.

Business sector holding up

* Industrial production rebounded unexpectedly in April rising by 1.4% after a 1úll in March and with annual growth rising sharply to 3.2% from 0.7%. Meanwhile, the lnsee business confidence indicator was unchanged in June and remains above its long-term average despite falling in recent months. However, effects from the strong euro and weaker global demand are becoming increasingly evident and activity is likely to slow over the next few months.

* But despite the slowdown of activity, investment should hold up quite well as capacity utilisation is high. Quarterly investment growth was solid at 0.8% in 2008Q1 and, although a deceleration is expected, particularly in the construction sector, we expect growth to average 3.5% in 2008 as a whole, albeit down from 4.9% in 2007.

Inflation up to 3.3% in May

* Prices rose by 0.5% in May, up from the 0.3% rise in April, mainly as a result of higher energy prices - which increased by 4.1%. This lifted annual inflation to 3.3% from 3% in April, hitting its highest level in more than 15 years. Meanwhile, core inflation, which is less volatile, remained unchanged at 2%. As food and energy prices continue to rise, headline inflation is likely to remain above 3% over the next few months, continuing to erode households' purchasing power, before easing slightly during the course of 2009.