Resurgent French Economy Propels Eurozone to Strongest Growth in a Decade -- 2nd Update

By FeaturesDow Jones Newswires

A revival of the French economy has helped the eurozone clock its strongest growth in a decade, outpacing the U.S. last year, as businesses shake off economic fears that had long gripped the country.

The European Union's statistics agency Tuesday said gross domestic product--the broadest measure of the goods and services produced by the eurozone's 19 member countries--was 2.5% higher in 2017 than in 2016, the fastest growth rate since 2007.

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The eurozone's rise is buoyed by a turnaround in a core economy that used to be one of its chief laggards: France.

The French economy accelerated in 2017, growing by 1.9% to record its strongest year since 2011. That may mark the end of half a decade of French inertia that has kept unemployment close to 10% and held back the broader European recovery.

Firms and investors say the election of French President Emmanuel Macron and his first steps to cut red tape and taxes are unleashing pent-up demand. Investment in France by nonfinancial companies rose 4.3% in 2017, the fastest increase in a decade.

At business travel agent Travel Planet in the northern city of Lille, customers were managing their travel expenses from one day to the next before Mr. Macron's election in May, said Chief Executive Tristan Dessain-Gélinet. After the vote, he said, clients began reserving travel four to five months into the future, a rare level of commitment in the industry. By the end of 2017, revenues at his 100-strong company were up over 50% from 2016 at around EUR100 million ($123.8 million).

"When people have come close to the abyss, they revise their way of seeing things," said Mr. Dessain-Gélinet.

The speed of Mr. Macron's decrees to loosen labor laws turbocharged confidence, companies say. In a booming construction sector, large firms switched from hiring equipment to investing in their own diggers and trucks, said the head of JCB France Françoise Rausch. The French unit of the construction-equipment maker expects to have slightly outpaced growth in its sector of around 19% to 23% in 2017.

"People think it's rational, but there is always a psychological and subjective side to investment which is based on a belief in the future," Ms. Rausch said.

The acceleration in France has helped offset cooling in Spain, the eurozone economy that has grown most rapidly over recent years. Figures also released Tuesday showed the eurozone's fourth-largest member slowed slightly in 2017, growing by 3.1% in 2017 compared with 3.3% in 2016.

Over the longer term, the eurozone faces a number of more fundamental challenges. Its population is aging and growing slowly, while almost a fifth of its young people are still without work. In a report last week, the International Monetary Fund warned that was bad not just for economic growth, but for the political health of the currency area. Governments have large debts, and the repair of the banking system still has some way to go.

"There's a bit of a feeling that we've had a rough ride and now the sun is up again," said Dutch Finance Minister Wopke Hoekstra in an interview with The Wall Street Journal. The challenge is...to use the momentum we have now to continue with reforms because at some point in time the next crisis will come."

The European Central Bank has already celebrated the year as having marked a transition from crisis "recovery" to a more normal "expansion." Business surveys suggest the economy has started 2018 on an even stronger note, but it faces a number of potential stumbling blocks, including the ECB's efforts to wind down crisis-era stimulus policies, as well as the possibility of U.S. measures designed to reduce its trade deficit with the currency area.

The eurozone's large trade surplus may also be a longer-term problem. Higher exports aided growth last year, and the eurozone's current-account surplus--or the excess of its earnings from the rest of the world over its payments--rose to EUR386.1 billion in the 12 months through November from EUR375.1 billion in the same period a year earlier.

Its surplus in trade is attracting the attention of President Donald Trump, who threatened action to respond to what he said were "very unfair" trade policy toward the U.S. If the U.S. were to implement trade restrictions against Europe that were "very much to their detriment," the eurozone's recovery could weaken.

For now, French officials say the upswing is giving France greater clout on the European and global stage. At the World Economic Forum in Davos last week, Mr. Macron struck an uncharacteristically confident pose for a French leader, proclaiming "France is Back" and demanding business leaders and heads of state overhaul the rules of global trade.

His government plans more economic overhauls this year to remove barriers to growth for small French companies and help them compete in export markets. In an interview at the Alpine resort town, French Finance Minister Bruno Le Maire brimmed with optimism, saying: "The message I wanted to convey here in Davos is very clear: it is only the beginning of the story."

The Macron government say it is too soon to judge the effectiveness of the sweeping labor overhauls the president signed in September. The latest figures from France's national statistics bureau Insee show unemployment actually rose slightly after the summer, reaching 9.7% at the end of the third quarter.

But some French companies are already praising one of the pillars of the change: A cap on how much labor courts can order companies to pay to employees hit by layoffs.

At engineering firm Ametra Group, which employs about 600 people in France, chairwoman Anne-Charlotte Fredenucci plans to expand her hiring plans in the country after taking on around 80 new staff in 2017.

"If we hadn't had the election of Emmanuel Macron and the policies that followed. I think we clearly would not be in a position to recruit 100 people in 2018," she said.

Stephen Fidler contributed to this article.

Write to Paul Hannon at paul.hannon@wsj.com and William Horobin at William.Horobin@wsj.com

(END) Dow Jones Newswires

January 30, 2018 09:02 ET (14:02 GMT)

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