Spend, spend, spend

Investment is real star of strong French growth

If shopping were a patriotic duty, French consumers would deserve medals. The biggest quarterly rise in their spending in more than a decade helped the euro zone's second biggest economy grow by a surprisingly robust 0.5 percent in the first quarter. Even so, the real star may not be consumption, but another ingredient of GDP: investment.

French household spending surged 1.2 per cent in the first three months of the year, the biggest quarter-on-quarter rise since the end of 2004, the national statistics office said on April 29. True, there was a bounce in energy consumption as temperatures returned to seasonal norms, but there was also a nationwide shopping spree on household goods, cars, and clothing that meant consumption was by far the largest contributor to growth.

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Such profligacy might not be sustained. For one thing, it came after a particularly frugal fourth quarter, when household spending fell 0.1 per cent. Moreover, there may be less cash stashed away under the mattress. French households' savings rate rose to 15.9 per cent in the fourth quarter of 2015 from 15.4 per cent in the third. Private sector economists expect the more detailed GDP data that will be released in the coming months to show savings were drawn down to more normal levels.

By contrast, a pickup in business investment, which rose 1.6 per cent in the first quarter, has stronger foundations. Coming after a healthy increase in 2015, the latest jump in investment confirms companies are confident enough to increase spending on plants, machinery and the like. The ultra-low interest rates engineered by European Central Bank chief Mario Draghi have no doubt helped. Efforts by President Francois Hollande's centre-left government to cut employers' social security charges have also probably given firms more leeway on investment.

Confidence to invest could eventually translate into confidence to hire, which would in turn buoy consumption. But, the fly in the ointment is planned labour reform. Introducing too much flexibility might make workers more insecure and crimp spending. Change too little and employers might think twice before taking on new workers. What drives French growth will depend on Hollande's choice.