French growth suffered a downward revision on Friday, just days before the government puts together its final budget ahead of presidential elections next year. France's economy contracted by 0.1 percent in the second quarter, the Insee statistics agency said, revising an initial estimate of zero growth. This adds a layer of uncertainty to ambitious growth and deficit targets that President Francois Hollande's team reaffirmed only on Tuesday as campaigning for 2017 presidential elections gets under way.
The revision, which shows both consumers and businesses held back spending in April through June, highlights France's difficulties in combining spending boosts in the run-up to the presidential vote with the need to bring the French deficit in line with eurozone rules. Hollande has not said whether he is seeking re-election, but if he does, his economic record will be key, including France's stubbornly high unemployment rate. Finance Minister Michel Sapin, reacting to Friday's revision, said he stood by his 1.5 percent growth forecast for this year and next.
"All of this does absolutely not put in question the growth forecasts of around 1.5 percent for 2016 and 2017," he told a news conference in Berlin. Growth of that size is instrumental for the government's tax and spending plans as well as honouring the promise to Brussels to bring the public deficit back under the EU limit of 3.0 percent of gross domestic product (GDP). The French economy grew by 0.7 percent in the first three months of the year. However Insee's revised data Friday showed households trimmed spending by 0.1 percent in the second quarter, after having spent 1.1 percent more in the first quarter.
Investment by businesses fell 0.2 percent after a 1.3 percent rise in the first quarter. "Taking into consideration public spending, overall domestic demand (excluding stocks) provided no contribution to GDP growth in the second quarter of 2016," said Insee, noting it had provided a 0.9 percent boost at the start of the year. A source at the finance ministry told AFP that GDP growth in the first two quarters meant that 1.1 percent annual growth was already in the bag.
But economists expressed doubts whether the remaining 0.4 points can be found easily in the remaining two quarters. Early indications for France's third-quarter performance are "relatively mediocre", said Alexandre Mirlicourtois, director at economic think tank Xerfi. "After all is said is done, it's hard to imagine 1.5 percent growth for this year," he said. The French economy appears set to post slight growth in the third quarter, with the Banque de France saying earlier this month it expects a 0.3 percent expansion.
But Ludovic Subran, chief economist at Euler Hermes, said France will need 0.4 percent growth in the current quarter and the next to reach the government's full-year objective, above the current Bank of France forecast. But there was a bright spot on Friday, contained in a key survey by data monitoring company IHS Markit. While Markit's preliminary September Composite Purchasing Managers Index (PMI) report was disappointing for the eurozone as a whole, France came out well compared to its peers. The PMI index for France came in at a 15-month high at 53.3 points after 51.9 in August. "The data raise hopes of a firmer GDP print for the third quarter after growth ground to a halt in Q2," Jack Kennedy, Senior Economist at IHS Markit, said in the statement.
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