French FinMin “Vigilant” After Economy Unexpectedly Contracts In Q1

“We remain vigilant, without giving in to being alarmist,” said French Finance Minister Roland Lescure on social media after the Gallic nation saw its economy unexpectedly shrink at the start of the year.

French gross domestic product fell 0.1% in the three months through March, the first quarterly contraction since the COVID pandemic, raising concerns over its resilience to the fallout from the Iran war.

Statistics office INSEE had initially reported zero growth for the quarter, but a sharper decline in consumer spending than expected was “an unpleasant surprise”, said Dorian Roucher, the agency’s head of forecasting.

He noted in particular “very bad figures for home renovations: it’s rare to see this sector decline so much”, Roucher told journalists, with overall construction spending down 1.7 percent.

Consumer spending overall was dented by the surge in fuel prices since the Iran war throttled Gulf oil and gas shipments, falling 0.2 percent after rising 0.3 percent in the fourth quarter of last year.

Business investment fell 0.4%.

Trade made a negative contribution as exports dropped 3.5%.

“The recession risk is fairly high,” said Mathieu Plane, director of the French Economic Observatory, calling the GDP reading “worrying”.

As Bloomberg reports, the revision follows a series of indicators suggesting the euro area’s second-largest economy is increasingly hobbled by rising oil prices since the conflict in the Middle East erupted in late February.

Consumer confidence has dropped to the lowest in more than three years, business activity slumped in May and firms are increasingly planning to raise prices.

A separate report Friday from Insee showed household spending in April fell 0.5%.

FinMin Lescure claimed that the sluggishness at the start of the year was partly due to uncertainty over a delayed budget that had made businesses and households hesitant to invest.

However, INSEE’s Roucher said that “the most likely scenario at this time is not a new GDP decrease”, though he cautioned that “we can expect the shock to spread” throughout the economy.

France awaits Friday a sovereign credit review from Standard & Poor’s, which cut its rating to A+ last October on risks that government spending would remain high.