In a more uncertain environment, French growth is expected to show resilience
The French economy experienced a marked slowdown at the beginning of 2018, with average quarterly growth of 0.2% during the first half of the year after an average 0.7% throughout 2017. This slowdown affected all the components of demand, particularly exports and household investment, but also business investment and, to a lesser extent, household consumption.
Activity then improved a little in the second half of 2018 with quarterly growth of 0.3% despite the disruption caused at the end of the year by the gilets jaunes (yellow vest) protests. This trend should continue over the coming quarters. Based on the Banque de France’s business survey published on 11 March, we estimate GDP growth of 0.3% for the first quarter of 2019. During the rest of 2019, French economic activity is expected to be affected by weak demand from its trading partners, but should nevertheless benefit from the strong rebound in household purchasing power and consumption, sustained by the fall in oil prices at the end of last year and the significant budgetary measures (the MUES measures, a draft law to introduce the mesures d’urgence économiques et sociales (MUES – emergency economic and social measures), see below) voted into law in December 2018. Quarterly GDP growth is therefore expected to gain momentum between mid and end-2019.
Annual average GDP growth is expected to be 1.4% in 2019, down slightly from 2018 (1.5%). Essentially, this apparent slowdown in annual average terms reflects far slower momentum at the beginning of the year: at the end of 2017, the carry-over effect for 2018 was 1.0% compared with an end-2018 carry-over effect for this year of only 0.4%. However, over the full year, momentum should be markedly more favourable: economic activity should expand by 1.7% year on year in fourth quarter 2019 compared with growth of only 0.9% at end-2018 (see Chart 1 above).
Beyond 2019, the outlook should remain favourable as the output gap is likely to narrow from the beginning of 2020 as a result of slightly-above-potential GDP growth, and the expansion in activity should settle at a quarterly rate of around 0.3-0.4% in 2020 and 2021. Annual average GDP growth is expected to be 1.5% in 2020, driven by strengthened foreign demand for French goods and services, and therefore exports, during the year.
These projections incorporate the quarterly national accounts published by Insee on 28 February, which cover the period up to the fourth quarter of 2018. They are based on the technical and international environment assumptions used in the Eurosystem March projection exercise, for which the cut-off date is 12 February. They also take account of the government measures included in the 2019 budget law, and in particular the emergency economic and social measures (MUES) approved by the National Assembly on 21 December 2018, which were not taken into account in our December projections.
Since our December projections, support from foreign demand is expected to be less significant in the short term but this is counterbalanced by a sharp upward revision of the outlook for household purchasing power
The slight downward revision to our GDP growth projections for 2019 to 2021 compared to our December 2018 publication is the result of contrasting trends.
First, the technical and international environment assumptions present less favourable activity in our partner countries in the short-term, although it will again pick up momentum in 2020 (see Chart 2). It is thus expected that foreign demand for French exports will only rise by 3.1% in 2019 after 3.6% in 2018, with a marked slowdown in extra-euro area demand in particular. Due to the orientation of its foreign trade, France is however expected to be less exposed to the downturn in global economic activity than some of its trading partners (see Chart 3). Growth in foreign demand for French exports should strengthen again in 2020 at 3.7%. Moreover, the French economy should benefit from the past slight depreciation in the exchange rate and particularly from the fall in oil prices at the end of 2018, which is expected to boost household purchasing power and corporate margins.
French economic activity should also be sustained from the beginning of 2019 through to 2020 by the expected effects of the government’s MUES measures (see above and Box 1).