Real GDP is projected to grow by 0.8% in 2023 and 1.3% in 2024. Russia’s war of aggression against Ukraine, supply chain disruptions and elevated energy prices have dented economic prospects. Inflation is expected to remain high at 6.1% in 2023 and to decline to 3.1% in 2024, lowering household purchasing power and consumption growth. Low business and household confidence, modest global growth and high uncertainty will hold back investment and exports. Wages are accelerating, owing to the strong labour market. With slowing job creation, the unemployment rate will broadly stabilise at 7.2% in 2024.
Fiscal policy will become less supportive. The combination of a temporary freeze of regulated energy prices, subsidies and cash transfers have smoothed energy price shocks. These measures are expected to be phased out by the end of 2024. As wholesale energy prices decline, it is crucial to improve the targeting of support measures to avoid impeding the green transition. Changes to unemployment insurance and the pension reform will lower public expenditure in these areas, but be partially offset by the effects of population ageing and higher interest rates, calling for improvements in spending efficiency.
Growth has slowed
Rising energy prices, the war in Ukraine and supply-chain disruptions slowed the rapid rebound in GDP in 2022. Robust business investment and a resilient labour market supported growth over the 2022-23 winter, but GDP stagnated in 2022Q4 and rose by just 0.2% in 2023Q1. Despite historically high employment rates, high energy prices, tighter financial conditions and declining real wages have held back private consumption and residential investment. Goods consumption was down by 4.3% in the year to April, services consumption has slowed, and manufacturing production in energy-intensive sectors has plunged. Consumer prices were up 6.0% in the year to May, as food price inflation reached 13.6% and core inflation rose to 4.3%, with wages accelerating. Nonetheless, business and consumer confidence have been broadly stable in early 2023, as wholesale energy and food prices and supply-chain tensions eased.
France 1
Source: OECD Economic Outlook 113 database. StatLink2 https://stat.link/8k2gv1
France: Demand, output and prices
Percentage changes, volume (2014 prices)
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 113 database.
France 2
Despite strong services growth, the trade deficit widened to 4.2% of GDP in 2022 due to rising energy import costs, persistent difficulties in the aeronautical and automotive sectors, as well as constrained nuclear energy production capacity. The gross fiscal costs of energy price caps and support measures will amount to 1.6% of GDP in 2023, despite a 15% increase in regulated electricity and gas prices in early 2023. At the same time, euro area monetary tightening is progressively curbing domestic demand, including through a slowdown in new mortgage loans.
Fiscal measures are partly cushioning external shocks
Fiscal policy is assumed to result in a moderate consolidation in 2023 and 2024. Despite broad energy support measures, the budget deficit narrowed to 4.7% of GDP in 2022, due to strong revenue growth and the phasing-out of COVID-19-related spending. For 2023, the government has maintained capped gas and electricity tariffs, increased a voucher scheme to subsidise low-income households’ energy consumption, but abolished road fuel tax cuts. Social benefits and public wages were raised and rent increases capped. In addition, one-off taxes on electricity producers and oil refineries are helping to finance additional temporary energy support measures for firms. The direct energy support measures are estimated to amount to EUR 45.3 billion (1.6% of GDP) in 2023. Energy-support policies are assumed to be largely phased out in 2024, including through a further 15% increase in regulated electricity prices. Additional measures to support economic activity include spending from the recovery plan worth EUR 15 billion in 2023-24 and further housing and business tax cuts in 2023-24. However, the 2022 reform of unemployment insurance and the planned pension reform will bring some fiscal savings.
Monetary and financial conditions are becoming less supportive for investment in the euro area. However, the implementation of the Next Generation EU plan is supporting investment in France, with EUR 37.5 billion of grants, and in its main trading partners. The 2022 resilience plan has pushed forward funding for housing renovation and insulation, while the energy saving plan aims for a 10% decline in energy consumption by 2024. Government-guaranteed loans and subsidies for highly affected firms will support business investment. Vehicle and energy investment subsidies for households are targeted towards green alternatives and will raise housing investment and durable goods consumption. Greater public investment in infrastructure and digitalisation, as well as additional financing for training programmes, are expected to improve productivity and long-term growth.
Domestic demand is projected to pick up slowly
GDP growth is projected to slow to 0.8% in 2023 and increase to 1.3% in 2024. Inflation is weighing on household purchasing power and pent-up demand is slowing. The progressive pass-through of past increases in wholesale energy prices and the indexation of the minimum wage will fuel core inflation and wage growth in 2023, despite caps on regulated energy prices and rent increases, and easing pressures on wholesale energy and food prices. Tighter financing conditions and a weakening labour market will eventually curb core inflation and wage growth and limit housing investment. As demand from trading partners strengthens only gradually, exports will rise only slowly from their current low levels. Business investment is set to remain resilient, as the support from the EU recovery and resilience plan will partly compensate the effects of increasing financing costs, reduced profit margins and high uncertainty. The budget deficit and public debt are projected to remain high relative to GDP, with debt rising above 113% of GDP in 2024 (Maastricht definition).
Worsening geopolitical tensions and further energy-market and supply-chain disruptions could particularly affect sectors such as transport equipment, travel and tourism services in France. With sizeable debt, in part due to government loan guarantees, some companies will face liquidity and solvency concerns, which could lead to bankruptcies and dent growth prospects. The extent to which large, accumulated household saving is spent is particularly uncertain and a higher or lower-than-projected saving rate would either lower or raise domestic demand and growth.
Supporting more sustainable growth
Unconditional energy price support measures, notably price caps, should be phased out, as they have high fiscal costs and create economic distortions. Support measures meant to dampen the effects of persistently high energy prices should remain temporary and become targeted on the most vulnerable households. As uncertainty and price pressures abate and growth becomes more firmly based, a medium-term fiscal strategy to gradually lower public expenditures and increase their efficiency should be firmly implemented to raise long-term growth prospects and improve medium-term fiscal sustainability. This strategy should build on a more efficient and transparent allocation of public spending through spending reviews. Policy efforts 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 relevant 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, will support growth and help bring about longer working lives, as foreseen in the planned pension reform. In addition, continuing to strengthen access to high-quality education from an early age will be key to ensure greater equity and further reduce gender imbalances.