French Economic Growth Deals Macron Tailwind for Reforms

(Bloomberg) -- France's economy expanded for a fourth straight quarter, ending years of stop-start progress and giving President Emmanuel Macron momentum as he tries to push through crucial reforms.

The 0.5 percent expansion in the three months through June matched the pace of the previous two quarters and was driven by exports and investment. Net trade made the biggest contribution in more than seven years.

With political clouds having cleared thanks to Macron's election win and tax cuts implemented by predecessor Francois Hollande taking hold, consumer confidence is near the highest in a decade, while business confidence is at the strongest level since 2011. Yet, economists warn that the long-delayed rebound won't last unless the new 39-year-old president manages to successfully implement his economic reform program.

“This is a natural catch-up because unlike other big European countries France hasn't had one good year for the past five years,” said Ludovic Subran, chief economist at Euler Hermes in Paris. “Everyone is thrilled that France is back but it doesn't mean it's out in front, it has simply returned to the pack.”

The growth in the quarter matched the forecast of economists in a Bloomberg survey. From a year ago, the economy expanded 1.8 percent.

Insee said French GDP grew 1.4 percent in the first six months. That's as much as the European Commission forecast for the entire year. 

Spain, which pushed through reforms during the euro-zone sovereign-debt crisis, is expected to grow 2.8 percent this year. The country reports second-quarter GDP at 9 a.m., as does Austria. A preliminary reading for the 19-nation bloc is due on Tuesday.

Labor-Market Revamp

Macron has promised to deliver the first stage of his labor-market revamp by Sept. 21. The plan is to give companies more say on issues such as fixing working hours and pay, put limits on severance pay and simplify labor relations. At the same time, his government is seeking to squeeze the budget deficit below 3 percent of GDP and keep it there, while also cutting taxes, by slashing public spending by 20 billion euros ($23.4 billion) in 2018.

Those plans have helped lift business confidence to its highest since June 2011, with Insee's production outlook indicator at its highest level since 2001. That optimism could fall back if reforms are flubbed.

“Our medium to long-term forecast is that France may be in for a golden decade in the 2020s similar to what Germany had following its labor market reform in 2004,” said Florian Hense, a European economist at Berenberg Bank in London. “But we need to see the reforms enacted and implemented first. And we think that the confidence indicators have probably reached a plateau so there is reason to be cautious in the second half of 2017.”

While euro-area growth appears to be firming, price pressures aren't strong enough to get inflation to the European Central Bank's goal without help from record-low interest rates and continued bond buying. The Governing Council intends to discuss the future path of quantitative easing -- provisionally scheduled to run until the end of this year -- in the autumn.

“France can be a game changer for the euro zone,” Hense said. “With the big political risks out of the way, there is a major push in sentiment for the euro zone in general but we see that unfolding gradually over the next couple of years.”

--With assistance from Andre Tartar and Barbara Sladkowska

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss, Jana Randow