Macroeconomic Summary – France
The four key sectors – Real, External, Fiscal and Financial
In the real sector, the real GDP of France grew at 1.3% in 2015 from 0.6% in the previous year, 2014. The country is projected to grow at 1.5% in 2016. The domestic demand (Consumption + Investment) contributed 1.5% to the real GDP and the net exports stood at -0.3% resulting in a trade deficit. Nominal GDP for 2015 stands at 2181 billion euros and is projected at 2231 billion euros in 2016. Inflation remains low at 0.1 and 0.2 respectively for the years 2015 and 2016.
The fiscal deficit of the government stood at 3.6% in 2015 and is expected to drop down to 3.3% in 2016. 2% of the 3.6% amounts for structural deficit, while the remaining 1.6% could be classified cyclical deficit. Public debt continues to rise reaching 96.1% of the GDP at the end of 2015 and projected at 97.1% of GDP in 2016.
On the external front, the exports accounted for about 21.1% & projected at 20.2% of GDP in 2015 & 2016 respectively, while imports accounted for 22.2% & projected at 21.8% in the same years. This led to a trade and current account deficit of 1.7% and 0.2% in 2015 & 2016 respectively. The capital account accounts for 0.1% of the GDP in 2015, while the financial account, which includes the direct investment into the country, the portfolio investment, reserve assets etc., accounts for -0.5% of the GDP in 2015.
On top of the capital and financial accounts mentioned above, the total foreign exchange reserves of France stand at US $48.8 billion. The 10 year yield on government bonds have steadily declined from 2.5% in 2012 to 0.8% in 2016 indicative of the high rates of unemployment over the last 4 years.
Current and future challenges to the economy
France faces two central policy challenges –
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To support a more rapid creation of new private sector jobs. Private sector job creation has remained lackluster and unemployment rate has hovered around 10%. Much of France’s unemployment is structural, presenting a major social and economic challenge. Those without jobs for more than an year numbered at around 2.5 million. The unemployment problems of France could be attributed to the following – Centralized labor agreements for over 700 branches, long judicial procedures around dismissals, a high minimum wage, easy access to unemployment insurance and benefits. The Loi Travail or the “El Khomri Law” increases the scope for company level labor agreements and further reduce judicial uncertainties around dismissals. But this has met with strong resistance among laborers resulting in massive strikes for months together in Paris.
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To ensure the sustainability of public finances via more efficient government spending growth. The government has committed to a sharp reduction in real spending growth (a.k.a Stability Program) over the medium term, yet structural fiscal adjustment fell from an annual average of 1% of GDP in 2011-13 to 0.3% in 2014-15 and is projected to be around 0 in 2016-18. This slowdown reflects the effects of tax cuts and failure to cut real spending growth. If this structural spending were to continue to grow at its current pace, structural deficit would rise to 3.1% of GDP by 2021, against a baseline projection of 1.2% of GDP. But, more public spending in the future seems inevitable in the wake of recent terror attacks in Paris, Nice. Even if necessary measures are taken, France’s Stability Program could be impeded by 2 situations simulated by the IMF: a protracted growth stagnation in the euro area and a severe global recession with financial stress.
Objectives of the policymaker in the present situation
Policy makers’ objectives in the current scenario must be twofold:
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Fostering private sector job creation and
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Efficient spending of public finances.
Policy prescriptions in the present context
- Reform unemployment laws to strengthen work incentives. The El Khomri law is a step forward in this case. Under the current law, a person is eligible for benefits after working for just 4 months. France also offers one of the highest caps on unemployment benefits in the Euro zone at about 7000 euros per month. Also, an analysis by Conseil d’Analyse Economique shows an increasing number of workers alternating between ultra short term contracts and short term unemployment within a month, receiving a total income close to the full monthly wage based on the current unemployment benefit formula. Hence, lengthening the minimum contribution period to avail unemployment benefits, changing the formula for calculating unemployment benefits to balance the treatment of part time work and alternating short-term work contracts are steps in the right path.
- Enhance the existing skill set of the unemployed workforce by providing them with training that matches the skills sought by employers.
- Reduce the wage bill of the French civil service, which, at 13% of the GDP is one of the highest in EU peer countries. Slowing recruitment and limiting wage drifts are ways to go about streamlining the civil service.
- Increase the redistributive efficiency of social benefits to at least the EU average. This would reduce income inequality at a fiscal cost that’s lower by 3.5% of the GDP.
- Increase the effective retirement age, thereby reducing pension liabilities and generating savings of around 0.2-0.3% of GDP.
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