French first-quarter growth slowdown tests ECB optimism

© Reuters. People walk on the esplanade of La Defense in the financial and business district of La Defense, west of Paris

By Leigh Thomas

PARIS (Reuters) - French economic growth slowed slightly more than expected at the start of the year, official data showed on Friday, a day after the European Central Bank played down concerns of softness in the broader euro zone economy.

The INSEE statistics agency said in a first estimate that the euro zone's second-biggest economy grew 0.3 percent in the first three months - the slowest rate since the third quarter of 2016.

That marked a slowdown from 0.7 percent growth recorded in the final three months of last year and was slightly below economists' average forecast for 0.4 percent in a Reuters poll.

Slower business investment and exports in the face of a stronger euro were the main drags on the economy in the first quarter, a breakdown of the data showed.

French Finance Minister Bruno Le Maire said the growth slowdown came as no surprise after the exceptionally strong end to 2017.

"I think growth is solid in Europe and sustainable but we all know their are some clouds on the horizon," he said on the sidelines of a meeting with EU counterparts in Bulgaria, citing the risk of a trade war and interest rate increases.

The European Central Bank sought to calm concerns about a slowdown in the euro zone economy on Thursday with sources telling Reuters policymakers were keen not to upset investors' expectations that its stimulus program would end this year.

French inflation data offered ECB central bankers some relief on Friday, showing consumer prices rose the most in five and a half years in April to 1.8 percent, just below the ECB's 2.0 percent target.

Weak inflation had been the main justification for the ECB's 2.55 trillion-euro ($3.08 trillion) stimulus program.

SOFT PATCH

Capital Economics economist Jessica Hinds said that the slowdown was likely to prove a blip, forecasting the French economy would grow 2.3 percent this year and next after expanding 2.0 percent in 2017.

"Granted, the activity surveys have softened since the start of the year. But they are still consistent with quarterly GDP growth of about 0.6 percent," Hinds said in a research note.

"And investment is set to grow at a decent pace thanks to President (Emmanuel) Macron’s pro-business approach. Meanwhile, the continued improvement in the French labor market points to solid growth in consumer spending," she added.

Consumer spending growth, traditionally the main motor of the French economy, grew only 0.2 percent in the first quarter despite exceptionally cold temperatures boosting energy consumption in February.

Meanwhile businesses slowed investment growth to 0.5 percent from 1.6 percent in the previous three months while overall production of goods and services slowed to only 0.3 percent from 0.9 percent.

Manufacturing production fell particularly sharply, down 1.1 percent as companies such as carmaker Renault (PA:RENA) and pharmaceutical group Sanofi (PA:SASY) said the euro's strength had hit their sales.

As a result, exports swung from a sharp increase in the fourth quarter to a slight decrease in the first three months of 2018. Since imports were flat, foreign trade had no impact on overall growth, INSEE said.

($1 = 0.8286 euros)