France: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, November 9, 2021
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- Published: November 9, 2021
Mission summary and key messages
- France experienced one of the deepest COVID shocks in Europe but has seen a strong recovery supported by robust policy measures and high vaccination rates.
- Continued downside risks justify a supportive fiscal stance in 2022 focused on investment to raise medium-term growth and reduce scarring.
- From 2023 onward, France should pursue gradual expenditure-based fiscal consolidation to rebuild buffers and put public debt on a firmly declining path, while protecting critical investments for the green and digital transitions.
- Reforms are needed to boost international competitiveness, productivity growth, worker skills, and equitable opportunities for youth.
- The financial sector has performed well through the crisis, but vigilance is warranted.
Economic outlook and near-term risks
- Vaccination and public-health measures:
- 88 percent of adults vaccinated.
- Measures cited include vaccine or test-linked health pass for participation at most public venues and compulsory vaccination for certain jobs.
- Recent economic performance:
- Output contracted by 8.0 percent in 2020.
- Economy nearly regaining its pre-crisis level by 2021Q3.
- Investment recovering more quickly than consumption and already exceeds its pre-crisis level.
- Employment is robust and the unemployment rate has remained relatively stable.
- IMF staff forecasts and projections:
- Revised up the 2021 GDP growth forecast to around 6¾ percent in 2021.
- 2022 growth expected to moderate to 3.7 percent.
- Headline inflation projected to increase to about 2 percent this year but drop to 1.7 percent by next year.
- Unemployment rate forecast to decrease to 7.8 percent in 2021.
- Risks to the outlook:
- Downside risks: increasingly virulent strains, waning vaccine effectiveness, persistent supply-chain bottlenecks, and disorderly transformations causing inefficient labor and capital allocation.
- Upside risks: faster rundown of accumulated savings or stronger demand recovery in hard-hit sectors.
Fiscal policy for the recovery and medium-term consolidation
- Crisis support and current stance:
- Total envelope for crisis and recovery measures for 2020–22 about 28 percent of 2020 GDP.
- Authorities have begun to scale down and focus support as the crisis ebbs.
- 2022 policy guidance:
- A moderately expansionary fiscal stance is warranted; additional stimulus should be targeted on supply-side measures to boost potential growth.
- Support investment policies in France Relance and NextGen EU; France 2030 could boost innovation but its governance should include significant independent private sector component.
- Fiscal policy should remain flexible and provide targeted additional relief if downside risks materialize.
- Energy-price response and social protection:
- IMF staff view recent inflation from energy prices as largely transitory and support targeted and temporary transfers to vulnerable households (e.g., revalorisation du chèque énergie).
- Advise against broad-based transfers and long-lasting price-control measures; cut in electricity taxes, cap on gas prices, and indemnité inflation should remain strictly temporary.
- Further expansion of the chèque énergie would be appropriate if energy prices rise further.
- Medium-term fiscal consolidation path:
- Under unchanged policies, fiscal deficit would remain above 3 percent of GDP and debt-to-GDP would keep increasing.
- Recommend gradual adjustment to reach pre-crisis medium-term objective (MTO) of a 0.4 percent of GDP structural deficit before the end of the decade.
- This target would require a cumulative fiscal effort of about 4¾ percentage points of GDP over seven years, assuming no further major shocks.
- Suggested profile: average annual reduction in the primary structural deficit of around 0.6 percent of GDP over 2023-26 and around 0.8 percent of GDP per year in the medium-term until the MTO is met.
- Composition of adjustment:
- Concentrate on reducing the growth rate of current public expenditure while allowing room for needed investment (e.g., France Relance, NextGen EU).
- Pursue planned reforms in pensions, unemployment insurance, and the civil service.
- Trim tax expenditures that hinder climate objectives, reduce overlaps between levels of government, and simplify/unify social support schemes to improve targeting and incentives.
- Future revenue from higher carbon pricing could help finance environmental investments and compensation for vulnerable households.
- Fiscal rules and oversight:
- IMF staff calculations: a limit on expenditure growth of 1.7 percent per year (compared to 2.4 percent under the baseline) would achieve the recommended adjustment path.
- Fiscal rule should be multiyear at the general government level, include a mechanism to monitor deviations, and strengthen the Fiscal Council (HCFP).
- France should not wait for European action to implement its own fiscal rule.
Financial sector stability and macroprudential policy
- Banking sector performance:
- Banking sector withstood the crisis well and provided ample credit, reflecting healthy capital and liquidity positions and policy support.
- Widespread corporate defaults have not materialized, but some delayed, sector-specific solvency risk could emerge as emergency supports phase out.
- Banks should monitor asset quality, proactively engage with viable but challenged corporates (drawing on options including the prêt participatif), and deploy provisions and capital buffers as needed.
- Monitor conglomerate intragroup transactions and consider concentration thresholds to limit risk from highly indebted firms.
- Adjust incentives to reduce extraordinary contingent liabilities of the State as recovery firms.
- Macroprudential stance:
- Broadly appropriate but may require tightening if debt-driven asset valuation risks increase.
- Support timely re-activation of the counter-cyclical capital buffer—possibly in 2023—conditional on the recovery unfolding at least as quickly as under staff’s projections.
- Risks from the real estate market require continued vigilance: real estate price growth accelerated in 2020; household debt to income remains elevated.
- If trends continue, fine tuning borrower-based measures or deploying complementary measures may become appropriate.
Structural reforms, labor market, competitiveness, and the green transition
- Labor market and skills:
- Short-time work scheme prevented large-scale employment losses and preserved employment relationships.
- Labor market conditions tightening, vacancies rising, while long-term unemployment remains high.
- Policies should alleviate skills shortages by combining job-search assistance with training programs.
- Support programs in the 2022 budget: contrat d’engagement for youth out of work and education; mesures pour le développement des compétences et l’insertion dans l’emploi to boost training.
- Address educational disparities and strengthen school-to-work transitions to distribute growth dividends equitably.
- Competitiveness and product markets:
- France stabilized export performance but further improvement is needed.
- Recommend product market reforms to ease regulation and entry barriers in non-tradable service sectors.
- Foster innovation via human capital investment and funding for basic research, including in sectors at the technological frontier.
- Properly designed France 2030 program could contribute.
- Climate policy and green transition:
- IMF staff welcome authorities’ push for carbon neutrality; objective enshrined in French law since the 2019 Climate and Energy Law.
- EU’s “Fit for 55” policies increase ambition toward EU carbon neutrality by 2050.
- Recommend additional and strengthened green policies, including adequate carbon pricing with mitigating measures for low-income households.
- Leverage French firms in automobiles, power generation, and aeronautics to establish technological lead in green energy generation and zero emission transportation.
- Worker training and skills matching are critical to facilitate the green transition without employment losses.
France: Staff Concluding Statement of the 2021 Article IV Mission (November 9, 2021).