French consumer demand and delivery of concrete reforms in the country are key to Euro Area GDP growth, Goldman Sachs argued today:

“The recent update of our forecasts took a ‘cautiously optimistic’ stance towards the Euro area macro outlook. If the current reasonably robust pace of recovery is to be maintained into the second half of 2017, we need to see a further strengthening of domestic demand underpinned by a revival of ‘animal spirits’ among consumers and firms.

In recent quarters, area-wide domestic demand has grown more rapidly than Euro area real GDP, for the first time since the start of the financial crisis in 2008. Prima facie, this bodes well for the resilience of the recovery.

The prospects for continued sustained growth of domestic demand in Germany and Spain are good, owing to their status as ‘early reformers’. By contrast, we are skeptical that ‘animal spirits’ can revive in Italy, in large part because such reform measures are absent.

In this context, France will play a key role in determining whether a more self-sustaining area-wide growth outlook — one that is less dependent on macroeconomic policy support — can emerge in the coming quarters.

To make such a contribution, France needs not only the improved economic and business sentiment that we have seen since the presidential election, but also delivery of concrete reforms that expand productive capacity. Otherwise the country-to-country macro imbalances at the heart of the Euro area — whereby France contributes disproportionately to area-wide aggregate demand while Germany contributes disproportionately to area-wide output — will intensify.”