France projection note OECD Economic Outlook November 2022

 125

France Real GDP is projected to grow by 2.6% in 2022, 0.6% in 2023 and 1.2% in 2024. Russia’s invasion of Ukraine, supply chain disruptions and elevated energy prices have dented economic prospects. Inflation is expected to reach 5.9% in 2022, 5.7% in 2023 and 2.7% in 2024, 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 are accelerating, owing to recent labour market improvements and the indexation of the minimum wage. Yet, with slowing growth and declining employment, the unemployment rate will rise to 8.1% in 2024.

Fiscal policy will gradually become less supportive. The temporary caps on regulated energy prices and temporary subsidies and cash transfers have smoothed energy price shocks, but these measures are expected to be progressively phased out in 2023-24. Though energy supply remains uncertain, it is crucial to improve the targeting of support measures to reduce fiscal cost, avoid impeding structural change and limit additional inflationary pressures. An ageing population and higher interest rates will weigh on the public finances, raising the need for improved spending efficiency and a reform of the pension system.

Growth has slowed Rising energy prices, Russia’s war of aggression against Ukraine and supply-chain disruptions slowed the rapid rebound in GDP in 2022. GDP rose by just 0.2% quarter-on-quarter in 2022Q3. Despite historically high employment rates, large accumulated savings and the lifting of COVID-19 sanitary restrictions, surging energy prices, high uncertainty and declining real wages have held back consumption and household investment. A rebound of activity in services, particularly tourism, and robust business investment supported growth over the summer of 2022, but business and consumer confidence have declined, and goods consumption was down by 3% in the year to September. Consumer prices were up by 7.1% in the year to October, with retail energy price growth at 20% and price pressures broadening.

The pass-through of inflation to wages remains limited so far.

France 1

Source: OECD Economic Outlook 112 database.

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

126 

France: Demand, output and prices 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) 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)

2 440.1 1 307.5 560.6 573.3 2 441.4 22.3 2 463.7 771.4 795.0 - 23.6 _ _ _ _ _ _ _ _ _

2022

2023

2024

Percentage changes, volume (2014 prices)

Current prices EUR billion

France

2021

-7.9 -6.8 -4.0 -8.4 -6.6 -0.2 -6.7 -17.0 -13.0 -1.1

6.8 5.3 6.4 11.4 6.9 -0.3 6.6 8.6 7.8 0.1

2.6 2.5 2.4 2.0 2.4 0.6 3.0 7.5 8.5 -0.4

0.6 0.4 0.5 1.1 0.6 0.2 0.8 2.8 3.0 -0.2

1.2 1.0 0.5 0.9 0.9 0.0 0.9 3.4 2.3 0.3

2.8 1.3 2.3 3.3 2.2 0.5 2.1 5.9 5.7 2.7 0.6 1.3 3.5 3.8 2.2 8.1 7.9 7.4 7.7 8.1 20.5 18.3 16.3 16.2 16.0 -9.0 -6.5 -4.9 -5.2 -4.7 146.2 138.4 138.6 140.1 141.9 115.0 112.9 113.2 114.6 116.5 -1.8 0.4 -1.8 -2.4 -2.1

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.

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 112 database.

StatLink 2 https://stat.link/9soqlc

France 2

1. Maastricht definition.

Source: OECD Economic Outlook 112 database.

StatLink 2 https://stat.link/ta5ud4

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022

 127 Despite strong services activity, the trade deficit has worsened further due to rising energy import costs, persistent difficulties in the aeronautical and automotive sectors, as well as constrained nuclear production capacity. As wholesale gas and electricity prices remain at historical highs, they will continue feeding through into retail prices, keeping inflation pressures high. The fiscal costs of energy price caps and support measures will amount to 1.9% of GDP in 2022 and 2% in 2023, with a 15% increase of regulated electricity and gas prices in 2023, an assumed similar increase in 2024, and the end of road fuel tax cuts in January 2023. At the same time, euro area monetary policy tightening is progressively curbing internal demand, including via a slowdown in new mortgage loans.

Fiscal measures are partly cushioning external shocks Fiscal policy is assumed to remain broadly neutral in 2023 and to shift to moderate consolidation in 2024.

Despite new energy support measures, the budget deficit will narrow to 4.9% of GDP in 2022 thanks to strong revenue growth and the phasing-out of COVID-19-related spending. To respond to persistently high commodity and energy prices, the government has capped gas and electricity charges, increased a voucher scheme to subsidise low-income households’ energy consumption and announced additional one-off means-tested transfers in 2022-23. The government also cut road fuel taxes until end-2022, increased targeted conditional subsidies for businesses, raised social benefits and public wages, and capped rent increases in 2023. In addition, one-off taxes on electricity producers and oil refineries (worth EUR 7 billion) will help finance additional temporary energy support measures for firms in 2023. The direct energy support measures amount to EUR 49 billion (1.9% of GDP) in 2022 and EUR 56 billion (2.0% of GDP) 2023. Energy-support measures are assumed to be partly phased out in 2024, with a 15% increase in regulated prices. Further measures to support economic activity in the projection period include spending from the recovery plan worth EUR 10 billion in 2023-24 and further housing and business tax cuts in 2023-24.

Monetary and financial conditions are becoming less supportive in the euro area. Yet, the implementation of the Next Generation EU plan is supporting growth in France with EUR 38 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 foresees a decline of 10% in energy consumption by 2024.

Government-guaranteed loans and subsidies for highly affected firms will support corporate liquidity. Car and energy investment subsidies for households are targeted on green alternatives, and will raise durable goods consumption and housing investment. 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 growth is slowing GDP growth is projected to slow to 0.6% in 2023 and increase to 1.2% in 2024. Inflation is weighing on household purchasing power and pent-up demand is vanishing. The pass-through of high wholesale energy prices and the indexation of the minimum wage will raise core inflation and wages in 2023, despite caps on regulated energy prices and rent increases. Yet, wholesale energy and food price pressures will progressively ease. Tighter financing conditions and a weakening labour market will curb core inflation, wage growth and housing investment. As demand from trading partners softens and supply bottlenecks persist, exports will rise only slowly from their current low levels. Business investment is set to remain resilient, as the support from the recovery and resilience plans will partly compensate reduced profit margins, high uncertainty, softer global demand and increasing financing costs. The budget deficit and public debt are projected to remain high relative to GDP, with debt rising above 116% of GDP in 2024 (Maastricht definition).

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022

128  Worsening geopolitical tensions, a stronger upheaval in energy markets and further supply-chain disruptions could lead to higher-than-expected inflation and lower domestic demand and growth in France, and weaken external demand. Some sectors, such as transport equipment, travel and tourism services, would be particularly affected. 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 economic prospects. The extent to which large, accumulated household savings are spent is particularly uncertain and a higher or lower-than-projected saving rate would affect domestic demand and growth.

Supporting more sustainable growth Unconditional energy price support measures, notably price caps, should be phased out progressively, as they have high fiscal costs and create economic distortions. To dampen the effects of persistent energy price pressures and geopolitical tensions, additional support to the most vulnerable households and firms should remain temporary and become more targeted. As geopolitical and price tensions dissipate 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 growth and improve medium-term fiscal sustainability. This strategy should build on 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 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 education from an early age will be key to ensure greater equity.

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022