OECD Economic Outlook – June 2022: France

128 

France After a strong rebound in 2021, real GDP is projected to grow by 2.4% in 2022 and 1.4% in 2023. The early 2022 COVID-19 wave, the war in Ukraine, supply chain disruptions and elevated energy prices have dented economic prospects. Headline inflation is expected to reach 5.2% in 2022 and 4.5% in 2023, lowering household purchasing power and consumption growth. The decline in business and household confidence, weaker global economic conditions and high uncertainty will hold back investment and exports. Wages will accelerate, owing to high labour-market shortages and minimum-wage indexation. With slowing employment gains, the unemployment rate will progressively rise to 8%.

Fiscal policy will gradually become less supportive. The temporary freeze in regulated energy prices, subsidies and cash transfers have smoothed the initial energy price shock, but unconditional energy price cuts should end as expected by end-2022 and fiscal support should become more targeted. A swift and efficient implementation of the ambitious recovery and investment plans would support more sustainable growth and green investments. It should help raise the employment rate, whose level is persistently low.

Putting in place a credible medium-term consolidation strategy with clear prioritisation is key to ensure fiscal sustainability and spending efficiency in a context of rising debt service payments.

The recovery has lost steam The high incidence of COVID-19 cases, rising energy prices and the war in Ukraine halted the rapid rebound in GDP in early 2022. Despite historically-high employment rates, large accumulated savings and the lifting of COVID-19 sanitary restrictions, surging energy prices, declining real wages and consumer confidence have dented households’ consumption and investment. Consumer prices were up by 5.8% in the year to May, as energy price growth reached 29% and price pressures are broadening to food, manufacturing products and services sectors. Yet, the pass-through of inflation to wages remains limited so far.

France 1 Inflation has cut real disposable income gains

Growth is slowing down

Y-o-y % changes 6 5

Index 2019Q4 = 100 110

Real gross disposable income

105

Headline price index

4 100

3 2

95

1

90

0 Total investment

-1

GDP

-2 -3

Private consumption

2019

2020

2021

2022

2023

0

0

2020

2021

2022

2023

85 80 75

Source: OECD Economic Outlook 111 database.

StatLink 2 https://stat.link/am1byf

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 1: PRELIMINARY VERSION © OECD 2022

 129

France: Demand, output and prices 2018

2019

2020

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

2022

2023

Percentage changes, volume (2014 prices)

Current prices EUR billion

France

2021

2 364.5 1 273.9 550.1 541.4

1.9 1.8 1.0 4.1

-7.9 -6.8 -4.0 -8.4

6.8 5.3 6.4 11.4

2.4 2.4 2.2 1.1

1.4 1.3 0.3 1.8

2 365.5 23.2

2.2 0.0

-6.6 -0.2

6.9 -0.3

2.0 -0.1

1.2 0.0

2 388.6 750.7 774.8 - 24.1

2.1 1.6 2.4 -0.3

-6.7 -17.0 -13.0 -1.1

6.6 8.6 7.8 0.1

1.9 7.7 5.9 0.4

1.1 5.7 4.4 0.3

_ _ _ _ _ _ _ _ _

1.3 1.3 0.6 8.5

2.8 0.5 0.6 8.1

1.3 2.1 1.3 7.9

2.2 5.2 3.4 7.5

3.2 4.5 3.5 7.8

Household saving ratio, gross (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition⁴ (% of GDP) Current account balance (% of GDP)

14.7 20.6 18.2 15.9 15.2 -3.1 -8.9 -6.4 -5.4 -4.7 123.4 145.8 137.9 139.5 140.3 97.3 114.7 112.6 114.1 114.9 -0.3 -1.9 -0.6 -2.1 -2.8

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.

4. The Maastricht definition of general government debt includes only loans, debt securities, and currency and deposits, with debt at face value rather than market value.

Source: OECD Economic Outlook 111 database.

StatLink 2 https://stat.link/itgxq0

France 2 Inflation has broadened Y-o-y % changes 6

← Headline price index

5 4

The labour market has tightened Y-o-y % changes 30

Energy price index →

20 15

2

10

1

5

0

0

-1

-5

-2

-10 2019

2020

% of employment 2.5

25

← Core price index

3

-3

% of labour force 10

2021

2022

2023

-15

9

2.0

8

1.5

7

1.0 ← Unemployment rate Vacancy rate¹ →

6

2017

2018

2019

2020

2021

2022

0.5

1. Missing data for 2020Q1.

Source: OECD Economic Outlook 111 database; Insee; and Ministry of labour (Dares).

StatLink 2 https://stat.link/iwmto6 OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 1: PRELIMINARY VERSION © OECD 2022

130  The war in Ukraine has exacerbated increases in commodity and food price growth and renewed manufacturing supply disruptions. Though France’s direct exposure to shortages of energy supplies from Russia is limited, wholesale energy prices have increased further since the onset of the war. Business surveys point at historically high supply constraints in industrial and construction sectors, further rises in producers’ prices, and high uncertainty. By end-April, 70 000 refugees from Ukraine received a living allowance in France and the authorities expect 30 000 additional refugees to come.

The resilience and recovery plans are supporting growth Fiscal policy is assumed to remain supportive in 2022 and shift to consolidation in 2023. The budget deficit narrowed to 6.4% of GDP in 2021 due to strong revenue growth and the phasing-out of most COVID-19-related spending. To respond to the current commodity and energy price spikes, gas and electricity charges have been temporarily capped, vouchers for poorer households’ energy consumption increased and an additional one-off means-tested transfer has reached 38 million people. The government also temporarily cut road fuel taxes, increased targeted conditional subsidies for businesses and extended state-guaranteed loans through its resilience plan. The direct support measures amount to EUR 27 billion (1.1% of GDP) and are set to be phased out in early 2023. In addition, the already-planned EUR 10.5 billion business tax cut and hiring subsidies are supporting firms and jobs. Housing and corporate income tax cuts, as well as higher funding for the health and education sectors, are also supporting household income and business profit margins.

Monetary and financial conditions remain favourable, supporting domestic demand, though monetary policy is assumed to become less accommodative over 2022-23. The implementation of the Next Generation EU plan is supporting growth in France (France will receive EUR 40 billion of European grants) and in its main trading partners. The 2022 resilience plan has pushed forward funding for housing renovation and insulation. Government guaranteed loans and subsidies for highly-affected firms will limit the impact of the war in Ukraine and the energy crisis on business liquidity. Car and energy investment subsidies for households are targeted on green alternatives, and will raise durable goods consumption and housing investment. Higher public investment in infrastructure and digitalisation, as well as additional financing for training programmes, are expected to improve productivity and more durable growth.

Domestic demand growth will slow Growth is projected to slow to 2.4% in 2022 and 1.4% in 2023. Inflation will weigh on household’s purchasing power and pent-up demand will decelerate, despite the lifting of COVID-19 sanitary restrictions, a tight labour market and the temporary freeze of regulated energy prices. The pass-through of high energy prices, with renewed pressures due to the impact of European embargo on Russian oil in 2023, high labour shortages and the indexation of the minimum wage will push upwards core inflation and wages. As demand in trading partners softens and supply bottlenecks persist, exports will rise only slowly from their current low levels. Yet, business investment is set to remain resilient, as accommodative financing conditions and the support from the recovery and resilience plans will partly compensate reduced profit margins, high uncertainty and softer global demand. The budget deficit and public debt are projected to remain high relative to GDP, with debt (Maastricht definition) remaining close to 115% of GDP in 2023.

Worsening geopolitical tensions, supply bottlenecks and labour shortages could lead to higher-thanexpected inflation and lower domestic demand and growth in France and her main trading partners. Activity in some sectors, such as transport equipment, travel and tourism services, would be particularly affected.

On the upside, further fiscal support could raise domestic demand, as the authorities envisage increases in pension and public wages, a new subsidised food scheme and prolonged energy-related measures in 2022-23. Stronger-than-expected pent-up domestic demand and spending of large accumulated savings,

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 1: PRELIMINARY VERSION © OECD 2022

 131 a swift use of European recovery funds and a faster-than-projected recovery in the international tourism sector could also raise growth.

Supporting more sustainable and long-term growth Unconditional energy price support measures, notably tax cuts, should be phased out by end-2022, as planned, as they have high fiscal costs and create economic distortions. To dampen the effects of persistently high geopolitical tensions and energy price pressures, additional support to the most vulnerable households and firms should be contemplated instead, provided they are well targeted and temporary. As geopolitical and price tensions dissipate and growth becomes more entrenched, a mediumterm fiscal strategy to gradually lower public expenditures and increase their efficiency should be firmly implemented to raise growth and improve medium-term fiscal sustainability. It should build on a strengthened fiscal framework, ensuring a more efficient and transparent public spending allocation through spending reviews. Policy steps to broaden progress towards green alternatives and energy savings and ensure a fair transition should also continue. Speeding up housing renovation and energy savings would help the longer-term energy transition and should build on regular evaluations of the related support schemes. Ensuring broad access to lifelong learning for low-skilled and long-term unemployed people, as well as an efficient implementation of quality standards for these programmes, is also needed to support growth and help bring about longer working lives, as foreseen in the planned pension reform. In particular, continuing to strengthen initial education from an early age will be key to ensure more equity.

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 1: PRELIMINARY VERSION © OECD 2022