Key Takeaways
- France's Q2 GDP growth was revised down to 0.0%, missing the estimated 0.2% expansion as the eurozone's second-largest economy stagnated.
- Inflation accelerated in August, with the EU-harmonized CPI rising to 2.7% Y/Y, exceeding analyst expectations of 2.6%.
- Total payrolls contracted by 0.1% in the second quarter, marking a downturn from the flat growth seen in the previous period.
- Consumer spending provided a rare bright spot, jumping 0.5% M/M in July, significantly outperforming the flat (0.0%) growth forecasted by economists.
- Morgan Stanley issued major sector rating changes for European equities, downgrading Telecoms and Paper & Packaging while upgrading Chemicals.
The French economy faced a challenging second quarter as official data revealed a complete stall in growth. Final GDP figures for Q2 came in at 0.0% on a quarterly basis, a downward revision from the previous 0.2% growth rate. On a year-over-year basis, the economy expanded by just 0.5%, falling short of the 0.7% estimate.
The labor market also showed signs of cooling, with total payrolls dropping 0.1% in Q2. This decline was led by the private sector, where payroll growth remained stagnant at -0.1%, matching the previous quarter's contraction. These figures suggest that the high-interest-rate environment is beginning to weigh more heavily on corporate hiring and retention.
Inflationary pressures unexpectedly picked up in August, complicating the European Central Bank's path forward. The EU-harmonized Consumer Price Index (CPI) rose to 2.7% Y/Y, up from 2.4% in July. On a monthly basis, prices climbed 0.8%, driven largely by seasonal shifts and energy costs, surpassing the 0.7% consensus estimate.
Despite the broader stagnation, French households showed surprising resilience in mid-summer. Consumer spending in July rose by 0.5% M/M, beating the 0.0% expectation. This follows a revised 0.6% increase in June, suggesting that internal demand remains a critical pillar of support for the economy even as industrial and employment metrics soften.
In the equity markets, Morgan Stanley (MS) shook up sector allocations for European investors. The bank downgraded the European Telecoms sector to Equal Weight from Overweight and lowered the Paper and Packaging sector to Underweight. Conversely, analysts upgraded the European Chemicals sector to Equal Weight, citing a shift in valuation and cyclical recovery potential.
Geopolitical tensions also remain in focus as Iran’s Foreign Minister signaled that a return to diplomacy with the U.S. is contingent on mutual respect and the recognition of Iran's rights. The minister emphasized that "pressure doesn't work," suggesting that any easing of energy-related sanctions—which could impact global inflation—remains a distant prospect.
Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications.