- It looks like Q4 2016 GDP growth rebounded strongly based on November’s strong figures for output and consumption.
- December’s marked improvement in business confidence indicators points in the same direction, while also signalling favourable prospects in Q1 2017.
- Our nowcasting model estimates Q4 growth at +0.4% q/q based on survey data and at +0.7% based on hard data.
The latest economic indicators paint a positive picture that augurs well for a significant rebound in Q4 2016 growth after a disappointing Q3 performance of +0.2% q/q. Virtually all economic statistics surprised on the upside, starting with industrial output in November, which rose 2.2% m/m, lifted by all business sectors. This brings industrial production carry-over to +1.2% q/q in Q4 2016. Although November’s 0.4% m/m increase in household spending on goods was not as robust as industrial production, it follows on October’s increase of 0.8% m/m. Moreover, the carry-over is just as strong at 1.1% q/q. Goods exports rebounded strongly in November as well (+5.3% m/m in nominal terms), at a much faster pace than imports (+1.9% m/m). Another encouraging trend was the sharp drop in the number of category A job seekers registered with Pôle Emploi in November, down 0.8% m/m. This is the third consecutive monthly decline, a feat that has not been seen since 2007, which brings the year-on-year decline to 3.3%.
December’s business confidence surveys were another positive surprise with a marked improvement in the INSEE and Markit PMI composite indexes, thanks to positive contributions by all business sectors. The INSEE business climate composite index rose to 105, well above its benchmark of 100, and the highest level since 2011. The Q4 average is higher than in Q3, suggesting a visible acceleration in growth (see chart).
The same can be said about PMI. Since August 2016, the composite index has been standing, finally, rather comfortably above the critical threshold of 50, which separates economic expansion from contraction. In December, it hit 53.1, thanks to a nearly 2-point increase in manufacturing PMI (to 53.5) and an increase of just over 1 point in services (to 52.9). The recent improvement in French PMI brought it in line with eurozone levels (composite of 54.4 in December), closing a gap that had fed fears of a French decoupling.
As to household confidence, the news is also encouraging. Granted, the INSEE composite index was unchanged at 99 in December, the same as in November, and is still below the benchmark of 100. Yet like business sentiment, household confidence is trending upwards in a rather robust manner (+3 points since July 2016).
Based on survey data, our nowcasting model estimates Q4 2016 growth at 0.4% q/q. Based on hard data, Q4 growth is even stronger at an estimated 0.7% q/q. Our own forecast is currently 0.4% q/q, but in the light of all the positive economic statistics, there is a high upside risk. The INSEE and Bank of France are also estimating Q4 2016 growth at 0.4% q/q. For the whole year, however, it looks like we cannot count anymore on even the smallest acceleration in growth compared to the 1.2% reported in 2015 (1.3% excluding adjustments for the number of working days). Indeed, with Q4 growth of 0.4% q/q, average annual growth would come to only 1.1% in 2016. Even with Q4 growth of 0.7% q/q, annual average growth would only match the 2015 performance.
If we see the glass as half full however, then we should keep in mind that 2016 is highly likely to end with strong growth. Moreover, the outlook for Q1 2017 also seems upbeat for the moment, based on the improvement in the leading components of business confidence surveys (production prospects in the INSEE and Bank of France manufacturing surveys; difference between the “new orders” and “stocks” components of the manufacturing PMI index; and the “new export orders” component of the same PMI). Q1 growth should also get a boost from the strong increase in corporate investment that is expected before the expiration of the “additional depreciation” measure in April 2017.
The recent series of strong economic indicators can be attributed in part to a technical correction after rather mixed performances. But the euro’s significant depreciation against the dollar since early November (-6%) probably played a role as well. The improvement in the job market, as timid as it may be, is also a major and lasting support factor. As a result, growth looks likely to be more resilient to the current upturn in inflation.
by Hélène BAUDCHON