French Economy Unexpectedly Cools in Setback for Euro Area

(Bloomberg) -- French economic growth unexpectedly slowed in the second quarter, adding to risks for a euro area already shaken by a manufacturing slump and frailties in its largest economy, Germany.

France was expected to show greater resilience as it’s less exposed to the slowdown in international goods trade and more reliant on domestic demand that President Emmanuel Macron tried to turbo-charge with a 17 billion-euro ($19 billion) stimulus. Despite the tax cuts, announced in response to the Yellow Vests protests, consumer spending growth weakened.

The second-quarter expansion of just 0.2% -- below economists’ 0.3% estimate -- is another blow for policy makers already fighting fires in other parts of the euro area. European Central Bank President Mario Draghi, expected to loosen monetary policy again in September, has warned that the outlook is getting “worse and worse.”

The economic slowdown is being felt across multiple countries and regions. Sweden’s economy unexpectedly shrank in the second quarter, and industrial production in Japan plunged in June.

For the euro area, the French figures may be just one disappointment in a gloomy week. Data Wednesday are expected to show growth in the region slowed by half to 0.2%. The German economy probably contracted, according to the Bundesbank.

French growth was driven exclusively by domestic demand, with company investment and public spending accelerating. Net trade didn’t make a contribution, while inventories weighed on output.

The government saw reasons for optimism. Junior economy minister Agnes Pannier-Runacher said investment will drive future growth and job creation, and also noted that some of Macron’s tax cuts for households won’t kick in until early 2020.

“At this stage, there is no reason to be anxious about our pace of growth,” she said on French television LCI.

That confidence may be undermined if manufacturing weakness infects the rest of the French economy. Sentiment in the sector dropped to a six-year low in June as automotive, plastics and electronics production slumped, according to a recent Bank of France survey.

“This year is less buoyant than last year given all the economic uncertainties. There is less visibility,” Legrand Chief Executive Benoit Coquart, chief executive of electrical equipment maker Legrand SA said Tuesday after the company published first-half results.

--With assistance from Harumi Ichikura and Fercan Yalinkilic.

To contact the reporter on this story: William Horobin in Paris at whorobin@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana Randow

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