OECD Economic Outlook May 2019, Country Notes: France by OECD

 135

France Economic growth is projected to be 1.3% in 2019-20. Global economic conditions will weigh on exports, but tax cuts and the impact of the social emergency measures are holding up disposable income and consumption. Supportive financing conditions and higher business profit margins will moderate a deceleration of investment. Ongoing labour market reforms will also help job creation and promote inclusiveness. The unemployment rate will decline towards 8.5% at the end of 2020, while core inflation will strengthen only slightly. The budget deficit will progressively decline, despite a temporary increase due to a tax credit reform in 2019. Even so, consolidation efforts remain limited, and a further reduction in non-priority spending is needed to firmly reduce the public debt-to-GDP ratio and to lower taxes. In addition, continuing to strengthen early childhood education and up-skilling programmes, as well as reducing the excessive use of short-term contracts, would generate more inclusive growth. Further opening up regulated professions would also increase economic dynamism and employment. Economic activity is resilient Internal demand is supporting growth. Household purchasing power has risen sharply. Employment gains have remained strong and the lowering of the housing tax, higher in-work benefits and some cuts in social contributions have taken effect. Consumer price inflation has eased following the oil price decrease in late 2018. The unemployment rate has declined and dependence on subsidised jobs and short-term contracts has diminished. Wage growth has gathered pace and shortages for high-skilled jobs are increasing. After a weak end of 2018, durable goods consumption is increasing and household confidence is recovering, but the household saving rate remains high.

France 1 The labour market is improving gradually % of labour force 12

Fiscal measures are set to boost consumption temporarily

Y-o-y % changes 5

Real private consumption

← Unemployment rate

Y-o-y % changes 4

Real household gross disposable income¹

Nominal wages →

3 2

0 9

2 0

2007

2009

2011

2013

2015

2017

2019

-1

2007

2009

2011

2013

2015

2017

2019

-2

1. Four-quarter moving average. Source: OECD Economic Outlook 105 database. StatLink 2 https://doi.org/10.1787/888933934356 OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION © OECD 2019

136 

France: Demand, production and prices 2015

2016

Current prices EUR billion

France GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1

2 198.3 1 188.5 523.4 472.6 2 184.5 26.4 2 210.9 672.2 684.8 - 12.6

Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate3 (% of labour force) Household saving ratio, gross (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2018

2019

2020

Percentage changes, volume (2014 prices)

1.1 1.9 1.4 2.7 2.0 -0.4 1.6 1.5 3.1 -0.5

2.3 1.1 1.4 4.7 2.0 0.2 2.2 4.7 4.1 0.1

1.6 0.9 1.0 2.9 1.4 -0.4 0.9 3.3 1.2 0.6

1.3 1.4 0.8 2.0 1.4 0.0 1.3 2.7 2.7 0.0

1.3 1.5 0.4 1.8 1.3 0.0 1.3 2.7 2.7 0.0

0.2 0.3

0.7 1.2

0.9 2.1

1.2 1.1

1.2 1.3

_ _ _ _ _ _ _ _ _

2017

0.6 0.5 0.9 0.7 1.1 10.1 9.4 9.1 8.7 8.5 13.7 13.8 14.0 14.7 14.4 -3.6 -2.8 -2.5 -3.2 -2.3 124.5 123.3 122.7 124.1 124.5 98.3 98.5 98.5 99.8 100.3 -0.8 -0.6 -0.3 0.0 0.1

1. Contributions to changes in real GDP, actual amount in the first column. 2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco. 3. National unemployment rate, includes overseas departments. Source: OECD Economic Outlook 105 database.

StatLink 2 https://doi.org/10.1787/888933935363

France 2 Oil prices are a key driver of inflation

Public debt is set to remain at a high level

Harmonised indices

Maastricht definition

Y-o-y % changes 4

Inflation

France

Core inflation¹

Euro area

% of GDP 110

100

90 0

-1

2007

2009

2011

2013

2015

2017

2019

2007

2009

2011

2013

2015

2017

2019

1. Index of consumer prices excluding food, energy, alcohol and tobacco. Source: OECD Economic Outlook 105 database. StatLink 2 https://doi.org/10.1787/888933934375

 137 Public consumption has continued to grow at a moderate pace, and local governments’ investment has rebounded. Housing starts have continued to weaken, and home sales have stabilised, albeit at a high level. Business investment, notably in intangible assets, has been robust, as the business climate and financing conditions remain supportive. Exports have been held up by substantial deliveries in the shipbuilding and aeronautical sectors, despite an overall deceleration of external demand.

Additional reforms would help make growth more inclusive The fiscal deficit will increase due to a large one-off business tax reduction in 2019 but is then set to decline to 2.3% of GDP in 2020. Measures to reduce the tax burden for households and firms and higher in-work benefits will broadly compensate for lower current public expenditures, as well as increases in tobacco taxes. These measures will also enhance employment incentives and boost economic performance. However, public debt will remain historically high. Additional efforts to cut inefficient and non-priority spending are key to make room for the ongoing tax reductions, rebuild fiscal buffers and put public debt on a firmly declining path. The effective use of targeted expenditure reviews will be particularly important to reduce overlap in sub-central governments’ responsibilities and to identify areas where there is room to rationalise public administration. Systematically reviewing tax expenditures and low-revenue taxes, while taking into account their benefits for low-income households, would also promote economic activity and a more redistributive tax structure. The recent reform agenda will help improve inclusiveness, skills and job quality. The implementation of the 2017 labour reforms will better align firm-level wage and productivity developments and encourage hiring on open-ended contracts. The additional financing for the training of low-skilled and unemployed workers, the overhaul of vocational training and the increased focus on apprenticeships will improve skills and ensure better job matches. Pro-business measures (the PACTE law) will also ease firm entry and growth. The rapid implementation of health care and pension reforms could also foster inclusiveness and longterm growth. Yet, social mobility remains weak and employment rates are low for many disadvantaged groups. Further efforts are needed to ease the labour market entry of low-skilled youth, reduce the excessive use of short-term contracts, and improve access to high-quality early education and social mobility, as well as to ensure better training and longer careers for older workers. Moreover, continuing to increase competition in some service sectors would strengthen employment and productivity growth.

Internal demand will drive growth Economic growth is projected to remain at 1.3% in 2019-20. Lower household taxes, the impact of the emergency measures on low-wage earners and retirees, still favourable financing conditions and lower oil prices will all raise household purchasing power and private consumption. This will also support a slow recovery in housing investment. The labour market for skilled workers will remain tight, in line with declining employment gains. However, weaker trade momentum will weigh on exports and business investment. Ongoing labour market and fiscal reforms will sustain business investment and exports. Consumption growth might turn out stronger or weaker than expected, as the impact of ongoing tax changes on saving behaviour is hard to predict. The effects of lower taxes and social charges on businesses, and the temporary improvement of their financial situation in 2019, could lead to stronger-than-expected investment which would raise economic activity. However, businesses may prefer to lower their debt instead, which would weaken growth. Renewed financial market turbulence, trade uncertainty and a disorderly Brexit could also reduce exports and investment, while the historically high level of private debt reduces margins of adjustment for households and firms.