IMF economic indicators It is not only the country of the Eiffel Tower, of the Champs Elysées, of the Louvre, where the Da Vinci Code was filmed, or the country where everybody thinks the croissant was born, although the truth is it was firstly made in Austria… France has caught everyone’s eye from an international point of view in the last year. Everybody has talked about it, numerous debates – moral and political – have come up. We have all “been Paris” during the last year, and all of us have thought of the differences between life in the third world and life in the first world, and about the consequences of our governments’ policies for citizens… It is true that this EU country has been unsettled lately, but in this post we will focus on the conclusions reached by the International Monetary Fund (IMF) about France, in order to know if it is a good moment to invest or to start a business in such a romantic country.
Similar to other Western Europe countries, France is experimenting a solid recovery with certain risks in the short term, globally balanced by a gradual increase of inflation. This recovery is supported by much lower oil prices and low interest rates.
Even if there are external risks that could curb or even stop that recovery, there are no opportunities without risks. We will now take a look at the main IMF economic indicators for the country:
France: IMF economic indicators
GDP is expected to increase 1.5% in 2016, thanks to the increase of consumer loyalty and to the comfortable external environment. Exports will rise due to the Eurozone recovery and household consumption will be based on the low oil prices. However, unemployment is still high and growing, despite the tax wedge cuts on labour. Tax consolidation will keep curbing growth in the long term.
Average annual inflation rate went down in 2015, thanks to the low energy prices and deceleration of salary increases. However, in 2016 inflation will increase 1% (due to the output gap decrease, the fact that the impact of oil prices decline on general inflation goes down, the euro depreciation effects on prices and the Quantitative Easing (QE).
Output gap will decrease. Thanks to QE, economic policies will be more comfortable, and the slow tax consolidation is expected to support the aggregate demand in the next few years. All this, together with the structural reforms, encourages a more favourable environment which will improve economic confidence, which would positively affect entrepreneurial investments and buoy up housing and private consumption stabilisation and recovery. Moreover, an exports growth is forecasted, given the previously explained reasons. In theory, this will allow a gradual narrowing of the output gap and a normalisation of the inflation tax.
Growth may be stronger than expected in the short term, especially if the QE and the confidence improvements involve investment and exports increases. But the recovery could be negatively affected by the potential confidence losses (geopolitical developments or Greek matters), by the energy prices increase, by a sharp deceleration in the developed economies or by a financial volatility intensification.
IMF members state that, generally speaking, the direction that France politicians are taking is appropriate, but that more reform efforts are needed in order to face the structural rigidity that threatens mid-term prospects. This, together with a combination of more adaptable macroeconomic policies, should gradually reduce the output gap in the next few years.
Nevertheless, structural unemployment is rising, and competition is weak. Besides, France is facing a very difficult tax adjustment task, with a public spending that has broken record levels, and debt keeps increasing.
Authorities are introducing measures aiming at curbing public spending, reactivating the job creation and removing growth obstacles. But we cannot forget that switching to a tax consolidation based on expense and reducing the public debtis essential, since there is a clear risk that mid-term goals could be ignored.
The tax adjustment has to be based on structural measures in order to keep up with the real spending at the beginning of 2016. For that purpose, it is necessary to set a fiscal anchor and split it across the different levels of the government
More measures for recovery
In order to keep up with recover, France should guarantee that the tax goals in the mid-term are fulfilled, and that debt begins a downward trend in 2017.
It will also be necessary to base the expenditure restraint on higher-quality structural measures and to revise it periodically. This translates into staffing reforms, rationalisation of local governmental institutions, a better allocation of social benefits and a new effective retirement age increase.
On top of the recent labour market reforms, additional broad-based efforts are required in order to return to the job creation figures prior to the crisis. Macron and Rebsamenlaws will help reduce the legal uncertainty of redundancy and improve the social dialogue.
But in order to lower the unemployment rate, minimum wage increases need to be limited to the inflation; job search incentives for those who receive unemployment or welfare benefits need to be strengthened. Besides, the recent boost to product market reforms needs to be maintained.
Lastly, regarding the financial sector, it needs to keep going forward in order to adapt to a changing economic and regulatory environment. It is remarkable that the risks in this environment, and in the dependence of banks on the wholesale funding, need to be under close surveillance.