France experienced a growth slowdown in H1 2018. Growth in Q1 (+0.2% q/q) was the weakest since Q2 2016; and Q2 2018 is set to be weak again: we expect +0.3%. The main reason is the impact of the unexpected rise in inflation (2% y/y in May) driven by higher oil prices. Household purchasing power was on the downside in Q1 (-0.6% q/q) and should decrease in Q2 as well. Corporates had to lower their output as a result of subdued demand and saw their margins stalling at 31.9%, since they felt renewed downward pressures on their selling prices. However, June business confidence data show some genuine improvements. First, the expected production in the automotive sector recovered quite fast, suggesting that past high inventories were reduced. Also, the construction sector saw a recovery in terms of overall confidence. Moreover, we expect inflation to reach its peak in July. Then, household purchasing power (and consumption) should recover somewhat and drive GDP growth higher. Overall, we stick to our growth forecast of +1.8% in 2018.
