OECD Economic Outlook November 2019 Country Note, France

 129

France Growth will remain moderate at 1.2% in 2020-21, driven by domestic demand. Resilient job creation, notably for jobs with permanent contracts, tax cuts and the impact of the social emergency measures will raise household disposable income and consumption. Supportive financing conditions and high business profit margins will damp the slowdown in investment, despite weak and uncertain global economic conditions. The unemployment rate will decline slowly towards 8.1% at the end of 2021, while core inflation and wages will strengthen only slightly.

Tax cuts and new social spending will provide some fiscal easing over 2020-21. Even so, the tightening of some social expenditures and decreasing debt-servicing costs are set to reduce the fiscal deficit to 2.1% of GDP in 2021, after the temporary increase due to the tax credit reform in 2019. A reduction in non-priority spending is needed to put the public debt-to-GDP ratio, currently close to 100% (Maastricht definition), on a firmly declining path and sustainably finance ongoing tax cuts for households and businesses. In parallel, the government should continue to pursue structural reforms, including further measures to help low-skilled youth to enter the labour market and improve access to high-quality early education, to generate more inclusive and sustainable growth.

Economic growth has been resilient Household purchasing power has risen sharply, driven in part by the steady lowering of the housing tax, higher in-work benefits and some cuts in social contributions. This has sustained consumption, but also led to a very high saving rate, at close to 15% of disposable income. Strong employment gains have reduced the unemployment rate and dependence on subsidised jobs and short-term contracts. Wage growth remains dynamic and consumer price inflation has moderated with lower oil prices. Household confidence has progressively recovered and spending on durable consumer goods is increasing.

France 1 Household income and consumption growth have risen Y-o-y % changes 3

Weak export prospects will hold back investment Y-o-y % changes 15

Real private consumption Real household gross disposable income¹

% of gross value added 34

10

33

5

32

0

31

2

1

-5

0

30 ← Real business investment

-10

Profit margins² →

-15 -2

2009

2011

2013

2015

2017

2019

2021

0

-20

29

← Exports, volume

-1

2009

2011

2013

2015

2017

28

2019

2021

27

1. Four-quarter moving average.

2. Non-financial corporations; four-quarter moving average.

Source: OECD Economic Outlook 106 database; and Insee.

StatLink 2 https://doi.org/10.1787/888934045354

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019

130 

France: Demand, output and prices 2016

2017

2018

Current prices EUR billion

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

2 232.9 1 210.8 530.2 486.8 2 227.9 18.5 2 246.3 675.6 689.1 - 13.5

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)

2020

2021

Percentage changes, volume (2014 prices)

2.4 1.6 1.5 5.0 2.3 0.2 2.4 4.0 4.1 -0.1

1.7 0.9 0.8 2.8 1.3 -0.3 1.0 3.5 1.2 0.7

1.3 1.2 1.0 3.3 1.7 -0.2 1.5 2.1 2.7 -0.2

1.2 1.5 1.0 1.8 1.4 0.0 1.4 1.1 1.8 -0.2

1.2 1.3 1.0 1.6 1.3 0.0 1.3 2.2 2.3 -0.1

0.5 1.2

0.8 2.1

1.5 1.3

1.0 1.2

1.2 1.3

_ _ _ _ _ _ _ _ _

2019

0.5 0.9 0.6 0.8 1.2 9.4 9.1 8.5 8.2 8.1 13.5 13.8 14.7 14.8 14.6 -2.8 -2.5 -3.1 -2.3 -2.1 123.2 122.5 123.0 123.7 123.9 98.4 98.3 98.8 99.5 99.7 -0.7 -0.6 -0.6 -0.8 -0.8

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 106 database.

StatLink 2 https://doi.org/10.1787/888934046399

France 2 The labour market will slowly improve Y-o-y % changes 3.5

Public debt will remain historically high

% of labour force 14

← Nominal wages

France¹

Unemployment rate →

3.0

% of GDP 110 Euro area¹

12

100 2.5

10

2.0

8

1.5

6

1.0

4

0.5

2

90

80

70

0.0

2009

2011

2013

2015

2017

2019

2021

0

0

2009

2011

2013

2015

2017

2019

2021

60

1. Maastricht definition; four-quarter moving average.

Source: OECD Economic Outlook 106 database.

StatLink 2 https://doi.org/10.1787/888934045373

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019

 131 Business investment, in both services and manufactured goods, has been robust. The reform of a large wage-based tax credit for businesses temporarily increased profit margins in 2019 and financing conditions remain supportive. Yet, manufacturing production and investment expectations have declined. After a strong end of 2018, weak and uncertain global economic conditions, as well as low deliveries in the shipbuilding and aeronautical sectors, have weighed on exports. Public consumption has continued to grow at a moderate pace, and local government investment has rebounded before the municipal elections in 2020. Housing starts have continued to weaken from their 2017 peak, despite a dynamic housing market.

Additional reforms would raise inclusive growth The fiscal deficit increased in 2019 due to the large one-off business tax reduction, but it is set to decline to 2.1% of GDP by 2021. Measures to reduce the tax burden for households and firms, and higher in-work benefits, will provide some welcome support to economic activity and also enhance employment incentives and boost economic performance. However, public debt will remain historically high. Since a part of the deficit reduction relies on lower debt-servicing costs, which may not be durable, further spending cuts, notably in some social expenditures, will be necessary to reduce the public debt-to-GDP ratio over the medium term.

The ongoing structural reform agenda is improving inclusiveness, skills and job quality. The implementation of the 2017 labour reforms, as well as the unemployment benefit reform, are helping to better align firm-level wage and productivity developments, and encourage hiring on open-ended contracts. The overhaul of vocational training and the increased focus on apprenticeships are also improving skills and ensuring better job matches. Pro-business measures (the PACTE law) are also easing firm entry and 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 and to improve access to high-quality early education and social mobility. Merging welfare programmes and in-work benefits – taking into account housing benefits and public housing in household resources – would raise work incentives and inclusiveness. Moreover, continuing to increase competition in some service sectors and lowering barriers to firm growth would strengthen employment and productivity growth.

Additional efforts to cut inefficient and non-priority spending will be key to put public debt on a firmly declining path. A rapid implementation of the planned pension reform could improve equity and mobility while providing higher incentives to delay retirement. Higher training opportunities for older workers and measures to limit in-work discrimination would boost its effectiveness. 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.

Domestic demand will keep driving growth Economic growth is projected to remain at 1.2% in 2020-21. Weak trade momentum will weigh on exports and business investment. However, labour market improvements and fiscal measures will raise disposable incomes. A gradual decline in the household saving rate will support private consumption. This will also underpin a slow recovery in housing investment, even though the local electoral cycle will hold back public and household investment in 2020.

Increasing trade tensions and continued uncertainty about an eventual Brexit would reduce further export prospects and investment. The ensuing worsening of the slump in manufacturing activity and euro area activity would heighten risks of contagion to the French services sector, while the historically high level of private debt reduces margins of adjustment for households and firms. On the upside, a fast and efficient implementation of the ongoing public investment plan could lead to higher investment growth.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019