Significance: French third-quarter GDP growth has been revised downwards from a previous estimate of 0.4% quarter-on-quarter (q/q) to 0.3% q/q. This follows increases of 0.2% q/q and 0.6% q/q during the first two quarters of the year.

Implications: Private consumption and investment were revised downwards. Nevertheless, domestic demand was the mainstay of growth during the third quarter.

Outlook: IHS Global Insight expects growth to remain at moderate levels in 2011. All in all, we currently expect France's economy to rise by 1.5% in 2010 and 1.4% in 2011, following a fall of 2.5% in 2009.

Detailed figures released by the National Institute of Statistics and Economic Studies (INSEE) reveal that during the third quarter of 2010 France's economy grew at a slightly weaker pace than originally estimated. The revised figures show GDP rising by 0.3% quarter-on-quarter (q/q) during the July-September period, down from an original estimate of 0.4% q/q . Growth during the second quarter was also revised down from 0.7% q/q to 0.6% q/q. GDP had risen by 0.2% q/q during the first three months of the year. On a year-on-year (y/y) basis, output increased by 1.7% during the third quarter, following rises of 1.2% and 1.6% during the first and second quarters, respectively.

The third-quarter revision was mainly driven by a weaker-than-originally projected domestic demand. Nevertheless, domestic demand, excluding inventories, continued to be the mainstay of growth during the period, adding 0.5 percentage point to the total change in output. Inventories also added to growth, although their contribution was weaker than during the second quarter. On the other hand, net exports shredded 0.4 percentage point as a result of a surge in imports.

Domestic Demand Continues to Be Healthy Despite Revision

Private consumption growth during the third quarter has been revised downwards from 0.6% q/q to 0.5% q/q, following a rise of 0.3% q/q during the second quarter. Indeed, the fourth quarter's is still the strongest increase in private consumption since the fourth quarter of 2009, when consumers were enjoying strong fiscal stimulus and extremely low inflation. The third-quarter figures are not entirely surprising as short-term indicators had already shown a rise of 1.2% q/q in the consumption of manufactured goods (which account for around one-third of total consumption). Nevertheless, IHS Global Insight believes that private consumption growth will moderate over the coming quarters (although it may remain strong during the fourth quarter of the year). Not only is fiscal policy set to be tightened at the beginning of 2011, but the labour market remains fragile, as shown by the latest monthly unemployment figures.

The investment figures remain unchanged from the provisional estimate. Specifically, investment expenditure, which had been contracting since the first quarter of 2008, rose for the second successive month by 0.5% q/q, down from a rise of 0.9% q/q during the second quarter. Household investment rose by 0.9% q/q (revised down from 1.0% q/q in the provisional figures but up from a rise of 0.2% q/q during the second quarter), while business investment also rose, albeit by a lesser 0.5% q/q (down from 1.2% q/q during the second quarter). Meanwhile, public investment, which had increased by a strong 0.9% q/q during the second quarter, went down by 0.3% q/q (revised from an original -0.2% q/q). Encouragingly, the latest investment survey for the manufacturing sector shows that business leaders expect a strong recovery in investment spending next year. Nevertheless, IHS Global Insight believes that relatively weak demand levels and still challenging credit conditions will put a lid on investment spending growth. Consequently, we expect investment to continue to recover during the coming quarters but at a more moderate rate.

Finally, public consumption increased by 0.3% q/q during the third quarter, unchanged from the previous period.

Exports Stronger Than Originally Projected

The revised figures also reveal that exports performed somewhat better than previously thought during the third quarter. They grew by 2.6% q/q, up from a previous estimate of 2.5%. However, this represents a deceleration from rises of 4.7% q/q and 2.7% q/q during the first and second quarters respectively. Meanwhile, imports rose by 3.9%, revised down from 4.1% q/q. Rising consumption, investment, and stock levels are driving demand for imported goods and services, while many exports also have imported components. We expect export growth to decelerate during the final months of the year as a result of the recent appreciation of the euro and an expected deceleration in global demand.

Households' Purchasing Power Improves in Q3

Alongside the national account figures, the INSEE released its estimates for household disposable income and household account ratios. Wages rose by 0.3% q/q, down from 0.7% q/q in the second quarter, while social benefits in cash also decelerated from 0.8% q/q in the second quarter to 0.8% q/q. On the other hand, taxes on income and wealth, which had increased by 1.1% q/q during the second quarter, waned by 1.3% during the third. Meanwhile, consumer prices moderated from an increase of 0.3% q/q to 0.2% q/q. Therefore, households' purchasing power rose by 0.7% q/q during the third quarter, up from a rise of 0.5% during the previous period. The household saving rate edged upwards from 16.1% to 16.2%.

Outlook and Implications

Going forward, we believe that the recovery will continue to be gradual, as the economy is still facing some headwinds. The latest monthly unemployment claimant figures suggest that, although the worst is now over, the labour market is still fragile. Meanwhile, fiscal policy will be tightened significantly in 2011 to deal with the large fiscal deficit. Although the government has avoided introducing the kinds of draconian austerity measures seen in other Eurozone countries, it is undeniable that fiscal policy will be less supportive of growth going forward. The recent appreciation of the euro will make France's exports less competitive outside the Eurozone, although we are now more optimistic about the outlook for global growth in 2010, which should help to support external demand.

Nevertheless, we believe that activity levels should remain at relatively healthy levels. Consumer confidence has improved steadily recently despite the announcement of a tighter fiscal stance—although this may change once the spending cuts start to bite in 2011—while business confidence has also recovered in past months. Encouragingly, the latest bank lending survey published by the Bank of France suggests that credit conditions have eased somewhat, which should help businesses in need of funding. Meanwhile, although the purchasing managers' indices (PMIs) for the manufacturing and service sectors have worsened in recent months, they remain well into expansion territory, with the sub-indices measuring new business at healthy levels.

Growth during the fourth quarter is seen to remain moderate. During this period, consumer spending may have been boosted by consumers taking advantage of many incentives that will be withdrawn in 2011, particularly for the purchases of automobiles. However, the adverse weather that hit the country in December is certainly expected to dampen some of this impact, as well as hitting the construction sector. Our December forecast sees GDP rising by 1.5% in 2010 and 1.4% in 2011, following a contraction of 2.5% in 2009.