Can France Sustain its Recent Spending Growth

The weak euro has increased the cost of non-oil imports to the economy – hence deflation has eased but the higher import prices represent a ‘tax’ on consumers. However, the decline in the oil price had more impact on household real incomes than did the rise in other import prices, so oil prices falling by more than the euro in late 2014 caused the pick-up in French consumption spending, an effect that may now be waning. Meanwhile, France’s highly indebted corporate sector will gained from the decline in borrowing costs created by the ECB but the marginal effect of this may also be waning. Finally, we note that the recovery in the credit data at the end of last year seems to have lost momentum. It may therefore be difficult for France to maintain its recent – already patchy – recovery, particularly as the marginal impact from lower oil prices dissipates.