Five Charts on France’s Economic Outlook

IMF News, July 23, 2019

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After the French economy expanded by 2.3 percent in 2017, growth declined to 1.7 percent last year, due to slowing global growth and some one-off domestic factors.
Economic activity remained relatively more resilient compared to France’s peers, and the labor market continued to improve gradually.
Growth is expected to reach 1.3 and 1.4 percent this year and next, and gradually converge to its long-term potential level of 1.5 percent by 2021, supported by ongoing tax relief and structural reforms.
Risks have risen, related to a disorderly Brexit, trade tensions, and a softening of activity in the euro area.

The government has been working on a broad and ambitious policy agenda with a number of key labor market, product market, tax, and education reforms enacted over the last 18 months.
Further reforms of unemployment benefits, civil service, pensions, and healthcare are expected this year.
Future policies should continue to address remaining structural challenges: high public debt and spending, rising private sector indebtedness, high structural unemployment, and sluggish productivity.

France’s public debt has been consistently rising over the last four decades, increasing by 80 percent of GDP since the 1980s to reach close to 100 percent of GDP at end-2018.
The rise in debt reflects the inability of successive governments to take full advantage of good times to reverse the spending increases undertaken during downturns.
Having legislated significant tax relief in the coming years to support investment and purchasing power, the government must prioritize spending reforms to reduce its debt level and rebuild fiscal space to prepare for the next downturn.
The upcoming reforms of unemployment benefits, civil service, and pensions should help, but need to be complemented with additional measures to reduce France’s spending ratio, which has increased rapidly over the last decades to the highest level among OECD countries.
Possible measures highlighted:
- Streamlining corporate tax expenditures and subsidies.
- Rationalizing spending on medical products and hospital services.
- Improving the allocation of resources in education.
- Better targeting social [spending] to those most in need and streamlining administrative costs.
- Merging small municipalities and eliminating overlaps between the local and central government.

Structural unemployment remains very high, especially for youth, low skilled, and non-EU migrants, while productivity growth is sluggish.
Recent and upcoming labor code, apprenticeship and training, and unemployment benefit reforms should support labor force participation and increase opportunities for vulnerable groups.
Resolute implementation, careful monitoring of effects and their deepening if outcomes fall short of expectations will be essential.
Complementary measures that could generate synergies, increase resilience, and support living standards:
- Ease the administrative burden on start-ups.
- Foster competition in regulated professions, retail trade and sales.

This year’s Financial Sector Assessment Program (FSAP) for France concludes that the authorities made notable progress in supporting financial stability, especially through proactive macroprudential policies to address risks, especially arising from increased corporate debt.
Safeguarding financial stability will require continued close monitoring and preparedness to make further use of macro and microprudential policies if risks remain or intensify.
Given the global significance and complexity of France’s financial system, further steps to build resilience include:
- Further integration of supervisory monitoring and oversight at the group level.
- Strengthening liquidity-risk management within financial groups.
- Ensuring adequate liquidity buffers in all currencies.

Source: IMF NEWS – Five Charts on France’s Economic Outlook, July 23, 2019.