Can France's Economic Problems Be Solved

Since 2014 French economic growth has lagged that of the Euro Area due to weak household consumption and investments. The activity began to pick up at the end of last year but the pace of recovery will be determined by the political situation as Macron's ability to implement necessary reforms will depend on the outcome of legislative elections in June.

Emmanuel Macron has promised to bring France's deficit below the EU's limit of 3 percent of GDP and to cut 50 thousand of public sector jobs, while he said he would increase defence spending to 2 percent of GDP and add 10 thousand police officers in the wake of the terrorist attacks in 2015 and 2016. Regarding the labour market, Macron intends to introduce flexibility on overtime instead of maintaining the 35-hour week and to leave the retirement age and pensions untouched. Also, he is open to free trade and has campaigned for EU cooperation on fiscal and social regulation.

Despite a slower-than-expected 0.3 percent expansion in the first quarter of 2017, surveys of businesses suggest that the private sector is expanding at a healthy pace, with April's Composite PMI hitting a near six-year high of 57.4. Output in both services and manufacturing sectors rose sharply, as new business increased for the tenth straight month and the pace of job creation hit a 68-month peak. Also, April's industrial confidence was the strongest since June 2011, as manufacturers' opinion on their past activity rebounded to its highest level since December 2016, and production expectations continued to increase.

Also, household opinion surveys point to a good level of confidence in the economy despite political uncertainty. Consumer confidence stood at a 9-½-year high for the fourth consecutive month in April as concerns over unemployment eased to the lowest since June 2008 and the assessment toward current saving capacity rose slightly while households' saving intention for the coming year remained stable. Household consumption has been the main driver of growth of the French economy and it has been expanding steadily since 2014. During the first quarter of 2017, retail trade rose by 3.1 percent over the same three-month period in 2016, boosted by higher sales of both food and non-food products.

Still, the unemployment rate has remained stubbornly high for years and in the fourth quarter of 2016 it edged down by only 1 p.p. to 10 percent. Payroll employment in the non-farm market sectors increased further by 0.4 percent in the fourth quarter from the previous period to reach an eight-year high of 16.17 million. Still, the level of employment has failed to return to pre-crisis levels and the number of French jobseekers has been growing recently, hitting a seven-month high of 3.51 million in March.

France has the highest public spending ratio among EU countries (56.2 percent of GDP in 2016 from 56.7 percent in 2015), with expenditure on social protection accounting for nearly 25 percent of GDP and health for 8 percent. Also, France’s debt burden has been steady rising and reached a record high of 96 percent of GDP in 2016. On the positive note, the fiscal deficit has shrunk to 3.4 percent in 2016 from 2009's record high of 7.2 percent but largely as a result of lower interest rates, cuts in public investment and higher tax revenues. 

Joana Ferreira |
5/7/2017 8:01:37 PM