PARIS (MNI) – French economic growth is likely to recover in 2Q,
bolstered by growth in the services, the Bank of France said Tuesday,
confirming its previous GDP growth forecast of +0.5%.

The central bank had underestimated the slowdown in 1Q GDP growth
to +0.1% by 0.3 point. The national statistics institute Insee, which
had forecast 0.2% growth for 1Q, expects +0.3% in 2Q.

The Bank of France’s survey from May showed a slight pick-up in all
industry sectors except for transport equipment, where stagnant orders
led to a drop in output. The overall capacity utilization rate edged up
half a point from April to 76.2%, still roughly six points below the
long-term average.

Order books remained overall “close to normal levels” and finished
goods inventories were at desired levels, the central bank commented.
“Short-term forecasts point towards stable levels of production,” it
said.

However, contrary to analysts’ expectations, the bank’s sector
climate indictor, based on the latest three months’ results, slipped
another point in May, returning to December’s level of 101, just above
the long-term average of 100.

In the services, growth was “robust”, still driven by the recovery
in temporary work and by an improvement in IT services, the BoF said.
Still, the sector climate index remained below-par at 96, despite a
two-point rise on the month.

“The outlook for activity indicates a more moderate increase in
activity over the coming months,” the bank said.

Comparable signals can be gleaned from Insee’s sector surveys.
Industry morale continued to recover in May and firms’ near-term
production outlook was close to long-term averages, pointing to moderate
growth in the coming months.

Insee’s services survey gave similar results, with sentiment
approaching the long-term average and prospects for a pick-up in
activity in the months ahead.

The PMI polls remain quite upbeat, despite some cooling in
manufacturing, where the output component fell back to 57.1 in May from
March’s recent peak of 60.1 and order growth slowed to 57.4 from a heady
59.3 in April. The services PMI jumped 1.8 points in May to a 44-month
high of 61.4, with new business still surging at 59.6 after 60.0 in
April.

The principle risk for the medium term is private consumption, the
traditional motor of French growth. Spending on manufactured goods has
been heading south since public incentives for new car purchases were
cut back in January, falling 1.9% in 1Q and another 1.2% in April. These
trends are in line with Insee’s projections and need not jeopardize its
forecast for a modest pick-up in 2Q GDP growth.

Still, with wage gains at a decade low, unemployment still trending
higher and public income supports being cut back, consumption could well
remain anemic for some time after stagnating in 1Q. Consumer sentiment
eroded to a 12-month low in May, as mounting inflation worries weighed
on expected family finances and living standards.

–Paris newsroom +331 4271 5540; e-mail: stephen@marketnews.com

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