French Economic Growth Slowdown Casts Doubt on Strength of Eurozone -- 2nd Update

French economic growth slowed at the start of the year, but the Spanish economy gained momentum, a mixed signal at a time of cautious optimism about the outlook for the eurozone's so-far modest recovery.

French gross domestic product expanded 0.3% quarter-on-quarter in the three months through March after growing 0.5% at the end of 2016, statistics agency Insee said. Economists polled by The Wall Street Journal had forecast a 0.4% increase.

The slightly weaker-than-expected growth rate came as the country braced for a high-stakes presidential election that puts France at a crossroads between deeper economic integration in the eurozone, or retreat.

During the campaign, candidates vowing to implement tough economic reforms and keep France in the eurozone have sparred with antiestablishment rivals threatening to pull France from the currency area.

Investors at times sold French assets as they fretted over the strong poll numbers for two euroskeptic candidates: National Front leader Marine Le Pen and far-left contender Jean-Luc Mélenchon.

Despite the high level of political uncertainty, total investment rose 0.9% quarter-on-quarter, driven by a 1.3% rise in business investment. Consumer spending still eked out 0.1% growth quarter-on-quarter despite a 3.8% tumble in spending on energy amid mild weather. But overall growth was held back by a 0.7% quarter-on-quarter decline in exports.

After the first round of voting in France's election Sunday, the field of candidates was trimmed to two: Ms. Le Pen and pro-European centrist Emmanuel Macron. Mr. Macron garnered the most votes in the first round and polls show him winning the second round handily, with around 60% of the vote.

With Austria's economy also slowing slightly, the French performance casts some doubt over the strength of the eurozone economy in the first quarter. Business surveys have pointed to a pickup in growth during the first quarter, and have been cited by the European Central Bank as evidence that the recovery is becoming more "solid." Official figures for gross domestic product in the currency area will be released Wednesday, but there was more encouraging news Friday as the central bank reported a pickup in lending to households and businesses during March.

Separate figures showed Spain's economy grew by 0.8%, a pickup from the 0.7% recorded in each of the two previous quarters.

Spain's economy has been the fastest-growing among the eurozone's larger members for more than two years. It expanded by 3.2% in both 2015 and 2016. The country's central bank expects that pace to slow to 2.8% this year as certain tailwinds, such as low oil prices and pent-up consumer demand, ease.

Spain's economic revival has been cited by eurozone policy makers as a lesson for other members--such as France and Italy--that have struggled to escape a low-growth rut. Speaking Thursday, European Central Bank President Mario Draghi once again urged governments to undertake needed overhauls.

"The implementation of structural reforms needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost productivity and potential output growth," he said.

The ECB has long complained that government inaction has made it difficult for it to do its job, which is to keep the inflation rate just below 2%. Figures released Friday showed the annual rate of inflation was in line with that objective in April, having risen to 1.9% from 1.5% in March.

However, that reflected higher prices for vacation and other services over the Easter period that are unlikely to persist over coming months, and policy makers still aren't convinced inflation will stay at their target over coming years.

One motor of Spain's overall recovery has been growing exports. The number of Spanish companies that regularly export has increased by 30% during the last five years to around 50,000, a strategic shift to seek clients abroad that is unlikely to reverse course.

SEAT, a Spanish car manufacturer owned by Volkswagen Group, exported more than 80% of the vehicles built at its plant in Martorell near Barcelona.

"The Spanish government has really taken the necessary measures to increase productivity," Joachim Hinz, SEAT financial planning director, said.

Spain revamped some of its labor laws and restructured its banking sector after it took EUR41 billion in European Union funds in 2012 to bailout troubled lenders pushed to the brink by a property boom-gone-bust.

Nina Adam

, Paul Hannan and Todd Buell contributed to this article

Write to William Horobin at William.Horobin@wsj.com and Jeannette Neumann at jeannette.neumann@wsj.com

(END) Dow Jones Newswires

April 28, 2017 05:54 ET (09:54 GMT)