Weak Q3 Official French GDP Data Significantly Underestimate Real Growth.

The French Goose May Still be fat for Christmas, says NTC Economics

LONDON -- GDP stagnated in Q3, according to French statistical office (INSEE), following a remarkably strong 1.2% increase in Q2. The Q3 data surprised analysts, who were expecting growth of 0.5%*.

But, says NTC Economics, official GDP data are notorious for revisions, and this is INSEE's "flash estimate", which is based on only partial information, such as provisional industrial production and retail sales figures, which are themselves also often revised after first publication.

Strong evidence is now available from the French PMI surveys, produced by NTC, to suggest these preliminary official data significantly underestimated growth in the French economy in Q3:

* The Bloomberg Retail PMI, which has a strong track record of accurately anticipating consumer spending data (see chart 1) signals strong consumption growth in Q3, and - unless the December reading seriously disappoints - signals an even stronger performance in Q4.

* The RBS/CDAF Manufacturing PMI survey dipped only slightly in Q3 after hitting a six-year peak in Q2, and has remained strong in the first two months of Q4. Given the close correlation between the PMI data and INSEE manufacturing data in previous years, the recent PMI data indicate that official production data are likely to be revised up.

* The RBS/CDAF Services PMI survey hit a six-year high in August, and the average monthly reading for Q3 points to faster growth than Q2. Growth has slowed in Q4 but remains consistent with a year-on-year pace of over 2% (see chart 3). As with manufacturing, the strong historical correlation between the PMI and official data suggests that the most recent data on service sector GDP look likely to be revised up (and Q2 revised down).

* NTC's Construction PMI data also indicate buoyant business conditions in Q3 and in the first two months of Q4.

Taken together, the PMI data indicate that quarterly GDP growth was 0.7% in both Q2 and Q3, and probably held steady at this rate in Q4, taking full year growth for 2006 to a healthy 2.7%.

Unlike the estimated and volatile preliminary GDP data, the message from the PMI surveys is clear. The French economy is alive and kicking.

NTC Economics, www.ntceconomics.com