French Recession Unexpectedly Ends In Q2

The French economy unexpectedly grew in the second quarter on higher government spending and global demand, ending four straight quarters of economic contraction.

According to the Paris-based statistical office INSEE, the economy grew 0.3% sequentially in the second quarter, while economists were looking for a 0.3% decline. This unexpected growth was partly due to the narrowing of the foreign trade balance. In the first quarter, GDP was down 1.3%, downwardly revised from the initial estimate of 1.2%.

Foreign trade contributed 0.9 points to GDP growth in the second quarter as exports rose 1%, reversing the 7.1% fall in the first quarter, while imports decreased at a milder pace.

Household consumption rose 0.4%, faster than the 0.1% rise seen in the first quarter. General government’s consumption expenditure increased 0.5% in the second quarter. In contrast, total gross fixed capital formation dropped at a slower pace of 1%. Meanwhile, production increased 0.5%, following a 1.9% drop in the first quarter. Inventory changes made a negative contribution of 0.6 points to GDP.

Ahead of the release of the GDP data, Finance Minister Christine Lagarde told RTL radio that the data is very surprising. After four negative quarters, France is coming out of the red.

The International Monetary Fund said on July 31 that France’s real gross domestic product would possibly drop 3% in 2009, followed by a gradual recovery in 2010. The near-term outlook for the French economy is challenging and the provision of short-term stimulus without derailing medium-term fiscal consolidation objectives would be the main challenge for the country’s fiscal policy.

The French budget deficit had surged to EUR 86.6 billion in June as total expenditure increased to EUR 180.6 billion.

The Eurozone GDP data is due today. The EU16 bloc is forecast to contract at a slower pace of 0.5% sequentially in the second quarter compared to the 2.5% decrease seen in the first quarter.

Data released earlier in the day showed that the German economy exited recession in the second quarter. GDP rose 0.3% sequentially in the second quarter after adjusting for price, seasonal and calendar variations, the Federal Statistical Office said. The economy expanded for the first time since the first quarter of 2008.