French Growth Accelerates, Germany Slows, and English Headwinds

France GDP grows 0.6% in first quarter of 2015, above estimates of 0.4%.  Lower oil prices and a weaker euro helped exports, driving a higher growth rate than the European country has seen for two years. Some analysts believe this could be the beginning of a recovery after three years of stagnation.

France GDP grows 0.6% in first quarter of 2015, above estimates of 0.4%.  Lower oil prices and a weaker euro helped exports, driving a higher growth rate than the European country has seen for two years. Some analysts believe this could be the beginning of a recovery after three years of stagnation.

Others believe the French government may also be able to lower its budget deficit, which is at 3.8% of GDP, as a higher growth rate and stronger domestic consumption drives tax revenues. With imports up 2% and construction seeing a slight recovery, although still falling, many economists believe domestic demand is set to accelerate. However, jobless claims, which recently hit a record, are a headwind to growth, and the French government said it would need to hit a target of 1.5% growth for the country to see its unemployment rate fall.

One analyst at an investment bank in London said in a report that the country could see its deficit fall and unemployment rise in 2016 as this GDP growth rate accelerates throughout the year. Citing improving exports, growing demand at home, and a robust tourism sector, the note saw growth rising to over 1% by 2016.

Germany Growth Slows

Despite its western neighbor’s strength, Germany saw weakness in the first quarter of the year, as GDP rose by just 0.3%, below expectations of 0.5% and a sharp fall from the 0.7% growth saw in the last quarter of 2014.

Competitiveness with other Eurozone countries has driven German exports both within and outside of the European Union, but Germany has seen exports weaken. According to Destatis, “exports of goods and services were slightly up at the beginning of 2015 compared with the fourth quarter of 2014,” although imports saw a “stronger increase” as household consumption and business investment rose.

Bank of England Inflation Outlook

In the United Kingdom, the Bank of England released its inflation report, noting that inflation is likely to reach its 2% target in two years. The BoE also cut its forward growth expectations from 2.9% annual GDP growth to just 2.5%, noting that the “legacies of the financial crisis are the persistent headwinds which continue to weigh on the UK economy.”

The central bank also noted inflation is rising, with a 0.6% increase in prices likely for 2015. Consumer prices expect to rise at a much higher rate, at 2% annually.

More worryingly, the bank also cut its productivity growth expectations to just 0.25%, adding that the bank is “even more conservative” in its expectations for productivity growth in the country. Flattening productivity gains have long worried British economists, who believe the GDP gains the country have posted are unsustainable in the long term if productivity does not improve.

BoE Governor Mark Carney noted the weak data would encourage the bank to raise interest rates slowly, despite a rise in inflation that is set to continue into 2016. The current economic climate requires “levels of bank rates to remain below average historical levels for some time to come.”