OECD Economic Outlook, Volume 2023 Issue 2

France

GDP growth is expected to ease from 0.9% in 2023 to 0.8% in 2024 before picking up to 1.2% in 2025. After a slowdown in 2024, exports will recover in 2025 owing to a moderate improvement in external demand. Continued tightness in the labour market will maintain upward pressure on wages, allowing for some gains in purchasing power and a gradual improvement in private consumption, as inflation is expected to ease from 5.7% in 2023 to 2.7% in 2024 and 2.2% in 2025. However, less favourable financing conditions due to tighter monetary policy will continue to weigh on investment and consumption.

Fiscal support measures adopted to shield households and firms from high energy and food prices should be phased out, accelerating the much-needed fiscal consolidation. Despite announced spending cuts, the budget deficit is expected to remain large, at 4.6% of GDP in 2025. Efforts to promote green alternatives to fossil fuels, housing renovation and energy savings should be strengthened. Enhancing access to high‑quality education will be key to achieve greater equity and further reduce gender imbalances.

Activity is slowing in the second half of 2023

GDP growth eased to 0.1% in the third quarter of 2023, and business survey indicators point to persisting weakness in growth in the last quarter of the year. The composite purchasing managers index remained well below the expansion threshold in October, while the Insee business climate indicator fell below its long-term average. Employment continued to increase in the first half of 2023 and the unemployment rate has remained broadly stable since the beginning of the year, standing at 7.3% in September 2023 against 7.2% in December 2022. Inflation remains high at 4.5% in October 2023, according to the harmonised index. Core inflation has fallen to 3.5%, from a peak of 4.7% in April, but energy prices have recently rebounded, and annual food price inflation remains elevated at 8.0%. Amid a tight labour market and persistent inflation, the average nominal wage per employee continues to grow strongly at 5.7% year‑on‑year.

France: Inflation and economic growth indicators

Source: OECD Economic Outlook 114 database.

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France: Demand, output and prices

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France: Labour market and fiscal indicators

1. Maastricht definition.

Source: OECD Economic Outlook 114 database.

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Foreign demand growth slowed in 2022 and 2023, amid high inflation and tighter financial conditions in partner countries. As inflationary pressures ease in major trading partners, external demand is expected to gradually gather momentum in 2024 and 2025. In 2022, the trade deficit widened amid rising commodity prices, reaching 3.9% of GDP. With lower energy and raw food prices, it has narrowed this year to 2.5% of GDP in the third quarter.

Financial conditions are less accommodative, and fiscal support is fading

With higher interest rates, credit and private investment have slowed. Growth in housing loans declined from 6.3% year-on-year in September 2022 to 1.8% in September 2023, while loans for consumption and corporate loans have also slowed significantly. At the same time, the implementation of the Next Generation EU plan is supporting public investment, with EUR 40.3 billion of grants planned between 2021 and 2026, equivalent to 1.6% of GDP.

Fiscal support is expected to be gradually reduced, with the budget deficit projected to narrow from 4.9% in 2023 to 4.6% of GDP in 2025. In September, the government presented its draft 2024 budget for discussion in parliament, which was largely in line with the 2023-2027 Stability Programme published in April. Part of the support measures to shield households from high inflation will stay in place next year, notably the cap on regulated electricity prices, which will be phased out by the end of 2024. A similar scheme for natural gas came to an end in June 2023. Low-income households will receive lump‑sum payments of 100 euros per car as compensation for the rise in fuel prices in early 2024, at a fiscal cost of EUR 500 million. Overall, with the gradual withdrawal of support measures, the fiscal stance is expected to be tightened by 0.5% of GDP in 2023 and 2024; and 0.4% in 2025. A recent pension reform came into effect in September, including a gradual increase in the retirement age that is expected to raise the labour force and stimulate employment.

Improving external demand will support a moderate recovery in 2025

GDP growth is expected to ease slightly in 2024 and to improve in 2025. In 2024, a lacklustre international environment will limit exports while higher financing costs will weigh on private investment and consumption. In 2025, easing inflation and a moderate improvement in external demand will help GDP growth pick up. Investment will recover only slowly due to persistently tight financial conditions, while the support from NGEU funds is expected to remain constant until the end of 2025. In spite of a slight increase in the unemployment rate, the labour market will remain quite tight, which will continue to fuel wage growth. This will put some upward pressure on prices, even as inflation eases, but also prop up real disposable incomes. The indexation of some social security benefits on past inflation will further support households’ purchasing power. Consequently, private consumption growth is expected to strengthen gradually.

The ongoing slowdown in the housing market could become more pronounced than projected, potentially resulting in a stronger fall in housing investment. To date, prices have only fallen by 0.8% from their end‑2022 peak. Steeper declines in house prices would further lower household wealth. Labour hoarding, which has been strong since the onset of the pandemic, is projected to lessen but could do so more rapidly than expected. Job losses would then weigh on income and consumption. On the other hand, stronger‑than‑expected spending of savings accumulated during the pandemic could lead to a stronger boost in private consumption, although this would also add to inflationary pressures.

Effective fiscal consolidation should be combined with growth-enhancing policies

France should adopt a medium-term fiscal plan to step up the pace of fiscal consolidation. A spending review in 2023 identified a number of priority areas for raising spending efficiency, with potential savings of around EUR 10 billion (0.4% of GDP) per year by 2027. This initiative is welcome, but additional efforts will be necessary to reduce government debt more substantially. Debt stood at 111.8% of GDP at the end of 2022 and is projected to continue rising. Pension, health and long-term care expenditure related to ageing is expected to raise public spending by about 4% of GDP by 2040. The pension reform, effective since September, will help to reduce future spending, but is not expected to balance the accounts of the pension system. Fiscal consolidation could be accelerated through effective measures to boost potential growth. A rapid and complete implementation of the national Recovery and Resilience Plan would help, particularly as the plan entails numerous reforms that would help to green the economy, aid the digital transformation, reduce administrative burdens, improve the coordination of public employment services, and revamp the health strategy at national and local levels. Potential growth could be boosted by implementing policies to make the education system more effective and inclusive from an early age, such as reducing class size in disadvantaged neighbourhoods or promoting innovative practices in teacher training to meet the different needs of pupils.