French economy to grow 0.6% this year, INSEE says

INSEE forecasts sluggish 0.2% quarterly growth for the French economy through 2025, citing weak manufacturing and public sector austerity. Full-year 2024 growth is projected at 0.6%, below the government's 0.7% target, potentially complicating deficit reduction efforts; inflation is expected to average 1%. While household consumption is projected to rise 0.7% this year, supported by purchasing power gains, weak foreign trade is expected to drag on growth.

Analysis

France's economic outlook, as projected by national statistics agency INSEE, indicates a sustained period of sluggishness, with quarterly growth anticipated at 0.2% from Q2 2024 and extending through 2025, primarily driven by weak manufacturing activity, characterized by flat output and poor order books, alongside public sector fiscal tightening. For the full year 2024, GDP growth is forecast at 0.6%, a significant slowdown from 1.1% in the previous year and below the government's 0.7% estimate, thereby posing a challenge to achieving the targeted budget deficit of 5.4% of economic output. Concurrently, inflation is expected to average a low 1% (or 0.8% using the EU-harmonised method) for 2024, influenced by lower power prices and a telecom price war. Household consumption, traditionally a key growth driver, is forecast to rise by 0.7% this year, aligning with purchasing power gains; however, consumer caution is suggested by a persistently high savings rate of 18.2%. The composition of growth highlights underlying weaknesses: domestic demand's contribution is set to moderate to 0.5 percentage points in 2024, while external trade will detract 0.7 percentage points from growth, a sharp reversal from its 1.3 percentage point positive contribution in the prior year, reflecting a pessimistic outlook for the nation's trade balance.

Key Decisions for Investors

• Investors should exercise caution regarding exposures to French domestic cyclicals, particularly within the manufacturing sector, given forecasts of flat output and weak demand through 2025.
• The projected 0.6% GDP growth for 2024, falling short of the government's 0.7% target, may heighten fiscal pressure and necessitate close monitoring of potential policy shifts impacting specific sectors or overall market sentiment.
• Persistently low inflation and a high household savings rate of 18.2% suggest that consumer discretionary spending may remain subdued despite purchasing power gains, potentially favoring investments in defensive consumer staples or companies capitalizing on value-seeking behavior.
• The significant negative contribution from external trade signals potential headwinds for French exporters and companies reliant on robust international commerce; therefore, a thorough assessment of international exposure within portfolios is advisable.