French, Italian Economies Shrink in Blow to Europe’s Recovery

(Bloomberg) --

The French and Italian economies unexpectedly shrank at the end of 2019, casting a shadow over expectations the euro area was on a firmer footing.

France’s strike-ridden economy contracted 0.1% amid a decline in exports and a huge drag from companies using up stocks rather than increasing production. Italy’s GDP fell 0.3%, the most in almost seven years.

Neighboring Spain fared significantly better at the end of last year, reinforcing its position as one of Europe’s outperformers. Faster-than-anticipated growth of 0.5% was driven by buoyant exports and a strong increase in services.

France’s unexpected contraction is a sting for Macron, who’s already facing mass protests and strikes against his pension reforms, and which have disrupted household spending. His government has repeatedly pointed to France’s relative strength in Europe as a sign his reforms of taxes and labor laws are working.

Finance Minister Bruno Le Maire blamed the poor results on disruptions in ports, the rail network and fuel deposits and highlighted resilient consumption and business investment.

“This temporary slowdown does not call into question the fundamentals of French growth, which are solid,” he told reporters in a statement. “We are nonetheless particularly vigilant of international uncertainties.”

Consumer spending contracted 0.3% in December, when the impact of the strikes was the most acute. Households cut back on expenditures for clothes, home furnishings and food, statistics from Insee showed.

On a quarterly basis, household consumption and business investment recorded their weakest performance of the year.

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“Our central scenario is for growth to rebound to 0.3% in 1Q before increasing to 0.4% from the following quarter. But the risks are tilted to the downside.”

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France’s slump takes away from the more upbeat mood emerging about Europe recently. Surveys have suggested that the rot has been stemmed for now, and growth in the region could improve in 2020.

The European Central Bank has already been striking a more positive tone, highlighting that risks to the outlook have become “less pronounced.” More signs of improving momentum came Thursday when the European Commission reported a marked rise in sentiment in January, led by manufacturing and construction.

There’s still plenty that could test the European economy’s resilience.

Trade risks have returned to the fore with the U.S. renewing threats last week to raise duties on imports of cars from the EU, and France only narrowly avoiding American tariffs on wine and cheese in a dispute over digital taxation. New risks are also emerging, notably including how much the spread of the deadly coronavirus drags on the Chinese and global economies.

French cognac maker Remy Cointreau has already sounded a note of caution over the impact of the virus on its business in China. The company ditched its guidance for the year.

At home, French companies are also facing headwinds from prolonged transport strikes. Retailer Casino Guichard Perrachon SA pointed to the disruption as a reason for cutting its profit forecast earlier in January, and the tourism sector is also expected to suffer.

GDP figures for the whole of the euro area will be published later Friday. Economists expect growth to have slowed to 0.2% in the fourth quarter.

In the U.S., the economy grew at a 2.1% annualized pace in the fourth quarter, matching the previous period, though consumer spending growth weakened and business investment declined.

--With assistance from Barbara Sladkowska, Zoe Schneeweiss, Giovanni Salzano and John Follain.

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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