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French growth slowdown tests ECB optimism

By Leigh Thomas
French growth slowdown tests ECB optimism

By Leigh Thomas

PARIS (Reuters) - French economic growth slowed slightly more than expected at the start of the year, adding to signs of a temporary slowdown in the euro zone a day after the European Central Bank played down concerns of softness.

Growth data from Austria and Spain and euro zone consumer and business morale, meanwhile, painted a mixed outlook for the 19-nation bloc.

The ECB 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 programme would end this year.

France's INSEE statistics agency said in a first estimate on Friday 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.

Meanwhile, Austria reported that growth eased marginally to 0.8 percent in the first quarter and Spain saw the third straight quarter of 0.7 percent growth.

Against that backdrop, Capital Economics European economist Stephen Brown said the Austrian, French and Spanish growth estimates suggested data for the whole euro zone on Wednesday would show growth slowed to 0.4 percent from 0.7 percent.

"While disappointing in light of last year’s strong expansion, a quarterly gain of 0.4 percent would be no disaster and surveys suggest that growth will pick back up," Brown said in a research note.

The European Commission's economic sentiment indicator offered some assurance that any slowdown would only be temporary with business managers and consumers reporting better than expected business morale.

Likewise, German jobless data on Friday sounded a positive note, with the number of people out of work in Europe's biggest economy falling by 7,000 and the unemployment rate steady at 5.3 percent.


FRENCH BLIP

French Finance Minister Bruno Le Maire said France's growth slowdown, driven by weaker business investment and exports in the face of a strong euro, 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.

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 (2.2 trillion pound) stimulus programme.

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

"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 labour 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.

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.




(Reporting by Leigh Thomas; Additional reporting by Francesco Guariscio in Sophia; Editing by Richard Lough and Toby Chopra)

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