OECD Economic Outlook – December 2021: France

122 

France GDP is projected to rebound by 6.8% in 2021 before growth moderates to 4.2% in 2022 and 2.1% in 2023.

Domestic demand will drive the recovery. Improved labour market outcomes will boost private consumption while the recovery and investment plans will support investment. Exports will gradually catch up as prospects in the aeronautic and tourism sectors improve. Headline inflation has reached a high level, but the temporary freeze of regulated energy prices will reduce the short-term impact of wholesale energy price rises, while persistent labour market slack should temporarily limit pressures for wage increases.

Fiscal support has become more targeted and should be reduced further as the recovery gains traction. A swift and efficient implementation of the ambitious recovery and investment plans would support more sustainable growth, notably through green investments. Enhancing the upskilling and reskilling programmes for workers and supporting the diffusion of digital skills among small firms are key to an inclusive recovery and long-term growth. A reform of the fiscal framework should ensure fiscal sustainability and improved expenditure efficiency through spending reviews and improved expenditure allocation.

Activity has rebounded strongly Thanks to the acceleration of the vaccination campaign and the fall in COVID-19 cases, the authorities eased sanitary restrictions over the summer, allowing a strong rebound in activity. The level of domestic demand increased by 3.8% over 2021Q2 and Q3 and November’s confidence indicators point to a sustained albeit slowing recovery. Despite large activity losses in some sectors (the automotive industry, tourism and transport services), new hires bounced back quickly. As a result, employment and the active population now exceed their pre-crisis levels. The share of workers on the job retention scheme has decreased further to below 3% of private sector employees in September, and job vacancies are historically high.

France 1 Domestic demand is driving the recovery

Some sectors remain heavily affected by the crisis Production indices

Index 2019Q4 = 100 115 110

Index 2019Q4 = 100 140

Real GDP

Manufacture of transport equipment

Real total domestic demand

Hotels and catering, arts and entertainment services

Real general government expenditures¹

Air transport services

120

105

100

100

80

95

60

90

40

85

20

80

2020

2021

2022

2023

0

0 Oct 19

Apr 20

Oct 20

Apr 21

0

1. Deflated by the GDP deflator.

Source: OECD Economic Outlook 110 database; and Insee (2021), Industrial production index (IPI) and services production index (SPI).

StatLink 2 https://stat.link/ho8kvg

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 2: PRELIMINARY VERSION © OECD 2021

 123

France: Demand, output and prices 2018

2019

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)

2021

2022

2023

Percentage changes, volume (2014 prices)

Current prices EUR billion

France

2020

2 364.6 1 272.9 550.0 541.7

1.8 1.9 1.0 4.1

-8.0 -7.2 -3.2 -8.9

6.8 4.8 6.4 12.0

4.2 6.8 1.9 3.7

2.1 2.3 0.3 1.6

2 364.6 23.1

2.2 0.0

-6.7 -0.2

6.8 -0.2

4.9 -0.3

1.6 0.0

2 387.7 751.1 774.2 - 23.1

2.1 1.5 2.4 -0.3

-6.8 -16.1 -12.2 -1.1

6.6 8.2 7.3 0.1

4.5 7.5 8.4 -0.4

1.6 5.9 4.2 0.4

_ _ _ _ _ _ _ _ _

1.3 1.3 0.6 8.5

2.5 0.5 0.6 8.1

0.8 2.1 1.3 7.8

1.0 2.3 1.6 7.6

1.5 1.4 1.4 7.5

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 21.0 19.0 14.7 13.9 -3.1 -9.1 -8.0 -4.9 -3.8 123.5 146.5 146.4 146.4 146.9 97.4 115.1 115.1 115.1 115.6 -0.3 -1.9 -1.0 -2.0 -1.6

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 110 database.

StatLink 2 https://stat.link/4xf65o

France 2 The labour market is improving rapidly

Energy prices have pushed up inflation

Index 2019Q4 = 100 105

Y-o-y % changes 3.5 3.0

90

12 9

1.0

6

Hours worked per employee

0.5

3

Employment

0.0

0

-0.5

-3

-1.0

-6

85

2021

15

Energy prices →

1.5

Real gross wage rate¹

2020

18

← Core inflation²

2.0 95

80

← Headline inflation

2.5

100

Y-o-y % changes 21

2022

2023

0

-1.5

-9

-2.0

-12

2019

2020

2021

2022

2023

1. Deflated by the GDP deflator.

2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

Source: OECD Economic Outlook 110 database; and Eurostat (2021), Harmonised index of consumer prices (HICP) database.

StatLink 2 https://stat.link/bpijfq

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 2: PRELIMINARY VERSION © OECD 2021

124  Headline inflation increased to 3.2% over the year to October, mainly driven by energy prices and a rise in manufactured goods’ prices linked to some global value chain disruptions. Real wages have been so far remained broadly flat in the private sector. Despite rising job vacancies and a historically high employment rate, the unemployment rate was still above 8% in the third quarter of 2021, and 18% of participants in the labour market remained constrained in their labour supply in terms of employment or working hours.

Policy support is becoming more targeted The authorities are progressively limiting emergency fiscal measures and two major recovery and investment plans are providing broad support for the economy. The implementation of the EUR 100 billion medium-term recovery plan (France Relance) and the 2030 investment plan (EUR 30 billion until 2027) is set to lead to discretionary fiscal spending of 1.5% of GDP in 2021 and around 1.3% of GDP annually in 2022-23. The rollback of emergency measures from 2.6% of GDP in 2021 to around 0.3% in 2022 and strengthened funding for training will encourage resource reallocation. Higher public investment in infrastructure and digitalisation, as well as additional financing for training programmes, are also set to improve productivity and achieve more durable growth. The EUR 10.5 billion business tax cut and hiring subsidies are supporting firms and jobs. Car and energy investment subsidies for households are targeted to green alternatives and will raise durable goods consumption and housing investment. The already planned housing and corporate income tax cuts, as well as higher funding for the health and education sectors, will support household income and business profit margins.

The European Central Bank’s monetary policy continues to support aggregate demand. The implementation of the Next Generation EU plan will buttress recovery measures in France (France is set to receive EUR 40 billion of European grants) and its main trading partners, thereby boosting domestic and external demand. The French authorities have also prolonged to 2022 targeted emergency measures for hard-hit sectors and firms to support firm financing and to alleviate corporate costs, notably through tax holidays and high public subsidisation of wages under short-time work agreements. To respond to the current commodity 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 introduced which will support 38 million people.

Domestic demand will remain the main driver of growth Growth is projected to reach 6.8% in 2021 before gradually slowing down to 4.2% in 2022 and 2.1% in 2023. A stabilisation of sanitary conditions – following the quick rollout of the vaccination campaign – will bolster confidence. Domestic demand will be the key driver of growth but is expected to expand at a decreasing rate as pent-up demand moderates. Employment will strengthen, gradually pushing up wages and core inflation. As demand in trading partners rebounds rapidly, and supply bottlenecks in the transport equipment sector fade, export performance will improve. Business investment, which has been resilient, will strengthen further, as strong economic prospects, accommodative financing conditions and the support from the recovery and investment plans offset reduced profit margins and high gross debt. The budget deficit and public debt are projected to remain at high levels relative to GDP, with public debt (Maastricht definition) remaining close to 116% of GDP in 2023.

Persistent supply bottlenecks and labour shortages could lead to more entrenched and higher-than-expected inflation and raise uncertainty about global growth, thereby lowering domestic demand. Activity in some sectors, such as transport equipment, travel and tourism services, is also likely to bear enduring scars. Demand for such services and goods has decreased and, in addition, its future recovery remains highly dependent on the evolution of the sanitary situation and the associated measures.

Furthermore, businesses have built up sizeable debt, notably through government loan guarantees. As a result, some may face liquidity and solvency problems, which could dent economic prospects. A slower OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 2: PRELIMINARY VERSION © OECD 2021

 125 recovery of the main trading partners in the euro area would also delay the recovery in France. On the upside, stronger pent-up domestic demand and spending of large accumulated savings, a swift use of European recovery funds and a faster-than-projected recovery in the international tourism sector would raise growth.

The recovery plans and structural reforms will boost long-term growth The French recovery plan and the 2030 investment plan are set to provide well-balanced fiscal support.

The authorities are rolling back unconditional fiscal measures, but specific schemes continue to target viable firms affected by persistent sanitary restrictions or temporarily depressed demand. The flexible approach of adapting policies to the evolution of the pandemic should be maintained. Achieving an efficient reallocation of workers in the aftermath of the crisis is a key challenge, as labour shortages have emerged and gross corporate debt has risen. The increased targeting of the short-time work schemes is welcome as the labour market recovery has been strong. 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 needed to support the recovery and help to bring about longer working lives. Strengthening innovation and management training initiatives for small firms would also raise economic activity by facilitating the adoption of new technologies and removing barriers to growth of small businesses. As the recovery is becoming entrenched, a medium-term 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 more efficient and transparent public spending allocation through spending reviews.

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 2: PRELIMINARY VERSION © OECD 2021