France: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, May 23, 2024
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- Published: May 23, 2024
Mission summary and context
- IMF mission led by Manuela Goretti with Stephen Ayerst, Roberto Piazza, Iulia Teodoru, and Maryam Vaziri conducted discussions during May 13-22 for the 2024 Article IV Consultation.
- A strong and timely policy response cushioned the impact of the pandemic and the energy crisis, but the crisis response and slower-than-expected recovery caused a sizable fiscal underperformance in 2023, reducing fiscal space amid rising investment needs for the green and digital transformation.
- Labor market performance has remained robust, although labor productivity remains below its pre-COVID trend.
- Authorities have shifted focus to rebuilding fiscal buffers and achieving a sustainable modernization of the economy; substantial additional efforts, compared to staff’s current policy baseline, will be needed over the medium term, starting in 2024.
- Reforms of the pension and unemployment benefit systems have started to yield results.
- Authorities’ proactive efforts to strengthen financial stability have supported resilience of the French banking system.
Economic outlook
- Growth projections:
- Real GDP growth projected at 0.8 percent in 2024 and to gradually reach 1.3 percent by 2025.
- Over the medium term, potential growth projected to reach 1.3 percent, before decelerating towards 1 percent in the long run as the population ages.
- Inflation projections:
- Average inflation projected at 2.3 percent for 2024 and 1.8 percent for 2025.
- Core inflation will decline more slowly as real wage growth remains positive in 2024-25.
- Risks and uncertainty:
- Recession risk measure has been receding but risks remain from escalating geopolitical fragmentation or an abrupt global slowdown.
- Upside risks: faster return of household saving rate to pre-pandemic levels, stronger consumption, business investment from digital and green transitions, and stronger export performance.
- Downside risks: social tensions and political fragmentation could delay fiscal consolidation and reform efforts.
Fiscal policy: reducing debt while modernizing the economy
- Current policy baseline and debt projections:
- Under current policies (only legislated and clearly specified measures), staff projects the overall deficit at 5.3 percent of GDP in 2024 and declining modestly to 4.5 percent in 2027.
- The authorities’ Stability Program targets a 2.9 percent deficit by 2027; key spending reforms and review measures underpinning that adjustment remain to be identified.
- In the absence of further measures, debt would rise to 112 percent of GDP in 2024 and increase by about 1½ percentage points a year over the medium term.
- Recommended additional consolidation:
- Additional new measures of about 0.4 percent of GDP will be needed in 2024 to bring the deficit to 4.9 percent of GDP (of which 0.3 percent of GDP have already been announced in the Stability Program (PSTAB)).
- Meeting the government’s consolidation goal of bringing the deficit below 3 percent of GDP by 2027 would require a substantial structural primary effort of nearly 3 percent of GDP during 2025-27, on top of the recommended additional effort in 2024.
- Staff’s debt sustainability analysis indicates the recommended fiscal path would significantly reduce medium-term risks and allow France to reach its debt-stabilizing primary balance by 2027.
- Policy design guidance:
- Identify a well-specified and credible package of measures to underpin consolidation, focusing on targeted measures to lower current spending given already high levels of taxation.
- Continue and deepen broad-based spending reviews to target pockets of inefficiency while preserving room for growth-friendly investment.
- Specific measures: better targeting unemployment benefits and support schemes for workers and enterprises; redesign tax expenditure to increase economic efficiency while reducing fiscal costs.
- Contain the increase in the public sector salary bill by reducing overlaps between levels of government and greater reliance on automation and digitalization.
- Involve local governments more in the consolidation effort.
- Maintain and strengthen the role of the High Council of Public Finances in evaluating macroeconomic and budgetary forecasts and ensuring realism and internal consistency with EU fiscal rules.
- Timing and macro interaction:
- Improving financial conditions as monetary policy eases can mitigate contractionary impact of fiscal tightening.
- Exiting the Excessive Deficit Procedure (EDP) is expected to be initiated later this year, with a target exit by end-2027 as currently planned by the authorities.
Maintaining financial sector stability
- Banking sector resilience:
- Despite a marked credit slowdown, the preponderance of fixed-rate loans has shielded non-financial corporate and housing mortgage segments from tighter financial conditions.
- French banks have not benefited from record-high profits seen in many European peers; nevertheless, liquidity and solvency positions remain robust with adequate capital and liquidity buffers.
- Recent macroprudential measures: increase in the countercyclical buffer and implementation of the systemic risk buffer against highly indebted firms.
- Recommendation: ensure Haut Conseil de Stabilité Financière (HCSF) has operational independence and sufficient legal powers to respond flexibly and proportionately to new risks.
- Housing market:
- Housing market undergoing an orderly downward adjustment; higher mortgage rates have dampened affordability and demand while housing prices have corrected downward.
- Non-performing loans (NPLs) in housing mortgages remain low given prevalence of fixed-rate mortgages at 99 percent of total and long maturity of 23 years on average.
- Prudent borrower-based lending standards have helped mitigate insolvency risks.
- Commercial real estate (CRE) and non-bank financial institutions:
- Direct bank exposures to CRE are limited, but vulnerabilities in real estate investment funds (REIFs) warrant close monitoring due to growth of REIFs and lower returns heightening liquidity risks.
- French supervisors are closing data gaps and establishing metrics to monitor systemic risk from indirect exposures via NBFIs; authorities should further advance risk-monitoring and encourage liquidity management tools for investment funds.
- New European initiatives to develop macroprudential measures for REIFs and other NBFIs are welcome.
- Climate transition risks for banks:
- Under staff’s climate risk assessment simulating the Fit-for-55 scenario, key systemic banks may be exposed to rising credit losses, estimated to significantly increase over the medium term for the energy-intensive mining, chemical, and manufacturing sectors.
- Results align with past exercises by Banque de France and the ECB; authorities should work with the financial sector to expand analytical capacity for assessing climate risks and enhance resilience.
Accelerating the green transition: price and non-price sectoral policies
- Progress and targets:
- Since 2005, France’s emissions have decreased by 23 percent, with reductions concentrated in power generation, industry, and buildings.
- Authorities’ green transition plan (France Nation Verte) and France 2030 identify new measures to meet key emission-reduction targets, including in high abatement cost sectors.
- Fiscal and policy mix:
- Green spending set to reach about 1.3 percent of GDP in 2024.
- Key sectoral policies include MaPrimeRenov (building renovation subsidies), decarbonization of industry, and subsidies for zero-emission passenger vehicles; schemes include means-tested aspects for affordability and have been fine-tuned to address market failures and target lowest abatement costs.
- Recommendation: complement spending with higher carbon pricing and revenue-neutral schemes (e.g., continuous feebate schemes for non-ETS1 sectors) and gradually phase out reduced rates and exemptions on fossil-fuel taxes to improve cost effectiveness and reduce fiscal costs.
- Additional revenues from higher carbon pricing could be recycled via cash transfers to offset price impacts on lower-income households.
- Over the medium term, consider new charges for road transportation to cover road transport externalities, offset declining fuel tax revenue, and integrate equity and environmental considerations.
Supporting employment and productivity
- Labor market reforms and outcomes:
- Recent labor programs and reforms have increased employment above its pre-pandemic trend and supported real GDP growth.
- France Travail registration and job-seeking support can facilitate labor market integration; strengthening targeting to lower skilled workers can raise reskilling benefits of programs like France Competences.
- Pension and unemployment benefit reforms are supporting labor force participation by increasing work incentives.
- Further reforms could review eligibility and duration of benefits to promote longer and less fragmented careers while retaining adequate coverage.
- Plans to revamp parental leave and increase childcare provision could support female labor force participation, subject to addressing shortages of qualified staff.
- Education, training, and skills for transitions:
- Green transition increases demand for green jobs (benefiting high-skilled workers, displacing low-skilled and specialized workers in carbon-intensive occupations).
- France ranks high in AI preparedness, but AI adoption will unequally impact the workforce.
- Address inefficiencies in education spending to upskill the workforce and close education attainment gaps with peers.
- Active labor market policies should target workers facing skill obsolescence or displacement; initiatives include reform of vocational training (lycée professionel) and training certification/professional qualification (e.g., Qualiopi).
- Efforts to address low STEM enrolment of women and better integrate women in industry (Industri’Elles) are welcome.
- Firm-level incentives:
- Continue reducing regulatory burden and barriers to entry, especially in some service sectors, to improve productivity and business dynamism.
- The Simplification Bill under discussion aims to streamline firm authorization and reporting, with focus on SMEs and digitalization.
- Assess scope for rationalizing tax expenditure for R&D and innovation to focus on highest impact schemes.
Navigating geoeconomic fragmentation and advancing the single market
- Exposure and vulnerabilities:
- Deepening geoeconomic fragmentation poses challenges to France’s growth outlook despite a well-diversified economy and relatively lower dependence on imports of critical intermediate goods from geopolitically distant countries.
- France remains exposed directly and via trading partners to supply disruptions and technological and payments systems fragmentation from geopolitical tensions and reconfigured global trade and investment.
- Policy guidance at national and EU levels:
- Safeguard and deepen the European single market by simplifying cross-border services and recognizing qualifications across member states to foster competition, lower costs, and enhance resilience.
- Renew efforts at the EU and Member State level to deepen capital market integration and harmonize taxes and subsidies to encourage cross-border access to finance and infrastructure investment, including green technologies, and help preserve fiscal space.
- Pursue industrial policies for critical industries cautiously and coordinate closely at the EU level, limiting state intervention to addressing market failures and maintaining a level playing field in a non-discriminatory manner.
Source: France: Staff Concluding Statement of the 2024 Article IV Mission, May 23, 2024.