French GDP to show consumption driven recovery

Q3 GDP growth of 0.4% qoq is expected in France (up from 0% in the previous quarter). A batch of hard data even suggests that risks are tilted to the upside. Goods consumption (representing 50% of total consumption) increased by 0.7% qoq whereas industrial output rose by 0.4% qoq. The recovery is mainly be driven by consumption. Real disposable income grew by 1.6% yoy in Q3, owing to low inflation, moderate wage growth and job creations. Net trade of goods is set to make a neutral contribution to GDP in Q3. 

The main uncertainty regards investment prospects. Recent survey suggest that Investment in construction is close to bottoming out, but probably contracted for the ninth quarter in a row in Q3. It is also believed that capex growth will be modest. Indeed, the October INSEE quarterly survey of manufacturing investment showed that business leaders in this sector have revised down their investment expectations for this year from 2% to 1%. They anticipate a modest rebound in investment in 2016, estimated at 3% in value. By historical standards, 3% is low (in 2011, investment expectations reached 14%). 

Looking ahead into 2016, the combination of low oil prices, weak euro and tax cuts is likely to continue to positively affect business confidence and hence capex decision. According to INSEE, gross savings (profits net of taxes, debt services and dividends) already rose from 8.3% of GDP in 2014 to 9.9% in H1 15 (18% in 2015 vs. 2014), a level significantly higher than the historical average (9.3% of GDP)! This ratio should continue improving in H2 2015. However, economic models point to at least one year lag between the improvement in profit margins and capex decision. Moreover, concerns over China and global trade will likely dampen any investment decision.