France's GDP grew by 0.6% q/q in Q1, a better-than-expected outcome (consensus: 0.4% q/q). This is the largest quarterly increase in GDP since Q2 13 and the second-largest in four years. The carryover for 2015 annual growth at the end of Q1 reached 0.7%, a level consistent with annual growth overshooting the official government forecast of 1%.
According to the numbers released this morning by INSEE, and in line with expectation, households' consumption was the main growth driver on the demand side (+0.8% q/q). Investment was also in line with bleak forecast of -0.2% q/q, mostly as a result of a further decline in housing investment (-1.4% q/q), but business investment in manufacturing products rebounded sharply (+1.2% q/q), which represents the positive surprise of this data release.
Inventories contributed 0.5% to quarterly GDP growth, mostly as a result of an opposite move in Q4 14, while exports came out weaker than expected; therefore, net trade contributed negatively (-0.5%), probably due to the slowdown in global economic activity, in particular in the US and China.
On the supply side, growth was driven by a large rebound in manufacturing (+1.3% q/q after +0.1%) and, to a lesser extent, production in the service sector, while the construction sector remained the weak spot (-1% q/q), estimates Barclays. Although this release is good news for France, analysts do not believe it marks the beginning of a strong and sustainable rebound in economic activity.
Some payback in Q2 is expected as the boost to consumption from lower oil prices should moderate. French growth is likely to remain in line with or slightly below trend this year (forecast is unchanged at 1.2%, but some upside risk to this projection is observed) as the drag stemming from tight fiscal policy and labour market weakness is likely to abate only gradually.
Despite a stronger-than-expected rebound in economic activity, nonfarm payrolls in the private sector were down 0.1% q/q (-13.5 k), bringing the annual decline to 68.5k. Rather than boosting demand for labour, the rebound in economic activity has benefited productivity, a normal evolution during an economic upswing. Monthly wage growth accelerated from 0.1% q/q in Q4 to 0.5% q/q in Q1, and the annual increase was down from 1.3% y/y to 1.2% y/y.
