France Holds Pace as Spain Posts Fastest Growth Since 2017

(Bloomberg) -- Economic growth held pace in France and accelerated in Spain to the fastest since 2017, easing pressure on the European Central Bank to ramp up stimulus for the euro region.

French consumer spending, boosted by French President Emmanuel Macron's tax cuts after the Yellow Vest protests, buoyed the euro area's second-largest economy enough in the first quarter to repeat its 0.3 percent growth at the end of 2018. Spanish expansion picked up to 0.7 percent, exceeding economists' estimates.

The euro strengthened after the data to be little changed on the day, trading at $1.1189 at 10:12 a.m. Paris time.

Resilience in France and a pickup in Spain provides a brightening picture for the euro-area economy after a slowdown that was alarming enough to prompt the ECB to reactivate its stimulus stance. The region has struggled with a downturn in trade and a slump in manufacturing that has pushed confidence down to the lowest level since 2016 and already means Germany, the largest economy in the bloc, will trail France this year.

The slowdown has left the ECB hoping for a rebound later in the second half to avoid having to add more stimulus beyond pledges it made in March to provide banks with more cheap loans and keep rates at record lows for longer.

Stuttering Recovery

Other data out on Tuesday showed Austria's economy matched France's performance, holding pace with expansion of 0.3 percent in the first quarter, while Lithuania's grew by 1 percent. Preliminary growth numbers for the euro area and Italy are also due.

In contrast to Europe's stuttering recovery, the U.S. economy accelerated markedly in the first quarter. China, however, showed some signs of weakness Tuesday as a gauge of the manufacturing sector fell in April.

France's relative strength comes in part from its relative weakness: with a smaller share of export markets, it's buffeted less by trade tensions. Macron's tax cuts have also proven fortuitous, coming at a time when demand in the rest of the euro area wilted.

Still, there were signs of France suffering from a trade slowdown. Export growth nearly ground to a halt in the first quarter after a surge at the end of 2018. Investment also slowed, rising only 0.3 percent, amid weak household demand.

French companies stepped up spending and reported resilient sales at the start of the year, even as many have cautioned that the outlook remains uncertain. Sales at Valeo SA beat expectations in the first quarter, but the car-parts maker expects global automotive production to be at best flat in 2019 in what Chief Executive Jacques Aschenbroich described as “a particularly unstable economic and geopolitical environment.”

Spain has consistently outgrown the 19-country region since the start of 2018. A gradual fall in unemployment and higher wages have given a sustained boost to consumer spending, a motor of the economy, offsetting weaker export demand.

However, Spain's quarter-on-quarter acceleration was also due in part to greater investment in machines and other equipment.

What Bloomberg's Economists Say:

“We forecast growth will slow to 0.5 percent a quarter from 2Q19, as supply constraints start biting. Today's strong readings and a more stable political outlook following the success of the Socialists in Sunday's election may cause us to raise our forecasts.”

Maeva Cousin, euro-area economist
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The economy is set to expand 2.2 percent this year, twice the pace of the euro area, according to official estimates. Elections on Sunday put Socialist Prime Minister Pedro Sanchez on track for a second term, an outcome that should support growth in the short term.

Other Data Today:

• German unemployment fell 12,000 in April, more than economists expected, to a record low of 2.22 million. The labor agency said demand for workers continues to be very high.
• Italian joblessness slipped to 10.2 percent in March, the lowest since August.
• In France, consumer spending unexpectedly declined in March, while inflation accelerated to 1.4 percent.

--With assistance from Barbara Sladkowska and Fercan Yalinkilic.

To contact the reporters on this story: William Horobin in Paris at whorobin@bloomberg.net;Jeannette Neumann in Madrid at jneumann25@bloomberg.net

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

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