By William Horobin
PARIS -- French growth slowed in the first quarter, indicating President Emmanuel Macron's economic honeymoon is coming to an end and raising questions over the long-term strength of the eurozone's recovery.
Gross domestic product in the eurozone's second-largest economy expanded only 0.3% in the first three months of the year from the final quarter of 2017, statistics agency Insee said Friday. Throughout 2017, quarterly growth had been consistently above 0.5% and clocked 0.7% in the final quarter.
The French growth figures are the latest source of concern for policy makers in the eurozone after tumbles in industrial output, softer consumer spending growth and declining confidence levels. A prolonged soft patch would dash expectations the currency bloc is on track to repeat the bumper growth it recorded in 2017.
Signs of weakness at the start of 2018 come as the eurozone also faces growing headwinds from volatile currency swings, rising raw material prices and the possibility of a trade war if President Donald Trump doesn't extend exemptions from steel and aluminum tariffs next week.
On Thursday, the European Central Bank put off a decision on the future of its giant bond-buying program as officials want to better understand a recent slowdown before taking any fresh steps to phase out easy money.
In France, which accounts for a fifth or eurozone activity, growth in business investment slowed to 0.5% quarter-on-quarter in the first quarter from 1.6% at the end of 2017. Investment in manufactured products fell 0.9%. Consumer spending -- the traditional motor of France's economy -- rose only 0.2% in the first quarter. French exports declined 0.1% quarter-on-quarter and trade overall made a zero contribution to French growth.
For now, French policy makers are playing down the significance of the slow start to the year.
"The underlying momentum remains solid and broad-based, and we interpret recent data as reflecting a temporary pullback from the very strong and above-trend pace recorded in the second half of last year," Bank of France chief François Villeroy de Galhau said in a speech in New York last week.
French economic growth jumped to 2% in 2017, a surge compared with recent annual growth rates around 1%. Businesses say Mr. Macron's election on an overtly pro-business platform and his speedy action to decree changes to labor laws awakened so-called animal spirits. That, combined with the cuts to payroll taxes by the previous government, set the conditions for businesses to catch up on years of delayed investment and hiring.
The strong growth was a boon for Mr. Macron's government. A rise in tax revenues helped bring the budget within European limits for the first time in a decade and unemployment fell below 9% at the end of the year.
But many French companies now warn they are struggling to keep pace with demand as they lack capacity and skilled workers. Since hitting decade-highs at the start of 2018, measures of business confidence have steadily declined. Capacity utilization rates are at decade-highs over 85% and 42% of employers in manufacturing are reporting difficulties recruiting, recent statistics show.
At machine component manufacturer Redex, 60 miles south of Paris, chief executive Bruno Grandjean extended deadlines for many orders to 14 weeks from eight weeks previously and put his 250 staff to work overtime and Saturdays to try to match strong foreign demand. But that system has reached a limit as it becomes too difficult to manage recuperation days and there are legal limits on overtime. It takes time, Mr. Grandjean says, to hire and train new staff.
Redex also urgently needs new machinery. Instead of buying a new machine, Mr. Grandjean hopes to get a second hand-machine sooner, but even then it may not arrive until September.
"French industry is a bit like a burned forest. To replant an industry and grow our businesses we need time," Mr. Grandjean said.
Bottlenecks are also appearing in services as employers lack workers with top qualifications. As French employers scramble to recruit, they are increasingly turning to recruitment firms. Revenues at OpenSourcing, a firm in the Paris region, are up 40% in the first quarter after a 30% increase last year, says chief executive Sebastien Canard. In some sectors, like business development, the shortage of skilled workers is pushing up starting salaries by as much as 20% compared with 2016 in some areas. That makes it difficult for some companies to adjust.
"We have to explain to companies that recruiting in 2018 is nothing like in 2015 and 2016," Mr. Grandjean said. "We also need to hire," he added.
Write to William Horobin at William.Horobin@wsj.com