OECD Economic Outlook, Volume 2018 Issue 1

France

Economic growth is set to return to a solid pace of close to 2% over 2018‑19 thanks to strong external demand and robust business confidence. Gradual corporate tax cuts and supportive financing conditions will underpin business investment growth. Lower labour taxes and labour market reforms should encourage job creation and boost household consumption and inclusiveness. Inflation is projected to pick up, supported by the firming of the economy and an increase in wages.

The fiscal stance is projected to be broadly neutral. High growth, lower wage and housing subsidies, as well as tighter controls on sub‑central government spending, should broadly compensate a decline in household and business taxes. However, further cuts in non‑priority spending and an improved effectiveness of social expenditures and infrastructure investment will be needed to sustainably finance lower taxes. At the same time, medium‑term growth will depend on continuing to implement structural reforms to improve skills, reduce labour market segmentation and raise competitive pressures in services sectors.

Growth has strengthened

France is benefitting from a sustained expansion, as improving external conditions, labour and business tax cuts and ongoing labour market reforms are supporting exports and business investment. Exports accelerated during 2017 on the back of stronger world trade, high aircraft deliveries and a rebound in agricultural exports and tourism. Business profit margins have improved, and financing conditions remain favourable. Though activity softened at the beginning of 2018, investment loans continue to rise, and business surveys point to robust investment spending, as capacity bottlenecks emerge in some sectors.

France

1. Goods and services, volume.

2. Non-financial corporations.

Source: INSEE; and OECD Economic Outlook 103 database.

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Services employment has increased vigorously, and the unemployment rate has declined. Older workers’ labour‑force participation has risen steadily, and dependence on subsidised jobs has diminished. However, unemployment remains high, and new hires are mainly on short‑term contracts. Skills shortages for high‑skilled jobs are increasing, while lower‑skilled workers face higher unemployment, under‑employment and worse access to training, resulting in unexploited opportunities for productivity, income and well‑being gains.

France. Demand, output and prices

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Private consumption has increased steadily on the back of strong job creation, even though it weakened somewhat in early 2018 largely due to exceptional circumstances, including a weather‑related fall in energy use. After two years of strong growth, housing investment is decelerating. Existing‑home prices and sales continue to increase, but new construction starts have slowed. Rising manufactured imports have worsened the trade balance further, despite a pick‑up in exports.

France

1. Maastricht definition.

Source: OECD Economic Outlook 103 database.

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The effects of the recent oil price increases and gradual tax hikes on tobacco and energy temporarily raised inflation at the beginning of 2018. Though wage growth remains contained, the strengthening of the economy and the declining unemployment rate, as well as second‑round effects from higher energy prices, will support a gradual pick‑up in core inflation.

Fiscal and structural reforms will support more inclusive growth

The fiscal stance is projected to be broadly neutral. The government intends to finance a gradual reduction of business and labour taxes by lowering current public expenditures. Reduced labour, business and capital taxes and lower costs of employing low‑skilled workers will support the recovery and make it more inclusive. The economic expansion, tighter controls on public spending and cuts in housing and labour subsidies will maintain the deficit below 3% of GDP.

The planned expenditure‑based consolidation is welcome, but additional efforts to cut inefficient and non‑priority spending will be needed to finance the tax reductions in a sustainable way, while making room for planned productivity‑enhancing investments. The announced targeted expenditure reviews will be particularly important to reduce overlap in sub‑central governments’ responsibilities and identify areas where there is room not to replace every retiring civil servant. The planned reforms of adult training, health care and pensions could also foster inclusiveness and long‑term growth. In particular, increasing the retirement age in line with life expectancy, while improving access to training and facilitating gradual retirement for older workers, would limit public spending growth and increase employment opportunities.

Ongoing labour market reforms will help raise inclusiveness, skills and job quality. The 2017 labour reforms will facilitate firm‑level negotiations, secure economic dismissals, simplify workers’ representation and better take into account the situation of smaller firms in branch‑level agreements. These could better align firm‑level wage and productivity developments and encourage hiring on open‑ended contracts. The rapid implementation of the training system overhaul and the increased focus on apprenticeships could also improve skills and ensure better job matches. Lightening the regulatory burden and increasing services‑sector competition will strengthen the longer‑term effects of these reforms.

Growth is projected to be robust

Economic growth is set to pick up again by mid‑year. The global trade recovery and ongoing labour market and fiscal reforms should sustain business investment and exports. Public investment will continue to recover, though residential investment growth will moderate. Employment gains and favourable financing conditions, as well as lower taxes on households, will raise private consumption. In turn, the tight labour market is projected to result in some pick‑up in wage and price inflation. Consumption growth might turn out stronger than expected if consumer confidence and growth reduce unemployment and the household saving rate faster than projected. An ambitious reform of business regulations could also further support investment and exports. On the other hand, the government might find it politically difficult to implement all its envisaged reforms. Persistent strikes with strong mobilisation could lower growth.