1. This supplement provides information on economic developments and policies that has become available since the preparation of the staff report for the 2001 Article IV consultation with France (SM/01/287). It reviews the economic outlook in light of newly released data on economic activity and the September terrorist attacks, and reports on the 2002 budget proposal. The new information does not alter the thrust of the staff appraisal. The expected 2001 outturn and draft 2002 budget indicate higher-than-anticipated expenditure pressures, mainly stemming from social security and local authorities, with fiscal policy otherwise broadly in line with the authorities’ intentions reported in the staff report. With the increase in expenditure, the fiscal stance is now estimated to be marginally expansionary in 2002. Consequently, achieving structural fiscal balance by 2004 as envisaged in the latest Stability Program will require greater expenditure restraint in 2003 and 2004. The French authorities have notified their intention to publish the staff’s assessment of France’s compliance with the Basel core principles for effective banking supervision (SM/01/320).1
2. Information that became available since issuance of the staff report—mostly relating to the pre-September 11 situation—points to stronger-than-expected consumption in the third quarter, but also to a slightly worse near-term economic outlook. Consumer and business confidence indicators have continued their steep decline, though consumption of manufactured products was up strongly in the third quarter (4 percent over the same quarter of 2000, with continued modest growth even in September), driven in part by significant wage and employment growth during the first half of 2001 (Figure 1). Industrial production increased by 0.5 percent in July-August (1.7 percent on a 12-month basis). Business prospects are dim, though, with falling capacity utilization rates and expectations of decreasing foreign sales, which had worsened more than expected even prior to the September 11 events. Consequently, investment plans are being scaled back further. Employment creation has slowed to a trickle and the number of unemployed has started rising; the rate of unemployment (Eurostat basis) has nonetheless remained stable from May through August (at 8½ percent).2 Lower energy prices have been the key force behind the decline in inflation. In September, year-on-year inflation (HICP) was 1.6 percent, down from a peak of 2.5 percent in May 2001.
Figure 1.France: High Frequency Indicators
Source: IMF, IFS; and WEFA Database.
3. Against this background, and reflecting the heightened uncertainty in the aftermath of the September 11 events, the staff now projects the start of the recovery to be delayed to the second quarter of 2002, despite the monetary easing and lower energy prices. The staff’s projection for average growth in 2001 (2.0 percent) is unchanged from the staff report, with a stronger-than-anticipated third quarter (notably due to consumption) offsetting the projected weakness of the final quarter of the year. The carryover effects from the latter, however, are set to reduce average annual growth appreciably in 2002. The evolution of growth in the course of 2002 is subject to a wide margin of uncertainty, affecting also main partner countries. On the currently common assumption of a relatively short-lived fallout from the September 11 events, the initially weaker international trade environment and precautionary increase in household savings (compared to the staff report) would be reversed in the second half of 2002. With fiscal and monetary policies supportive of growth in France and elsewhere, a positive terms of trade effect, and receding uncertainty, the economy is projected to revert to slightly higher-than-potential rates of growth during the second half of 2002. On this basis, average growth for 2002 would be around ½ percentage points below the staff report’s projection (2.1 percent).3 This projection is subject to risks, especially regarding the magnitude of the impact of the September events and the timing of the recovery, with a possibility of greater underlying global weakness. The authorities, pointing to the strength of consumer demand and the stimulus provided by the payment of the earned income tax credit in September, are more optimistic on the outlook. They recognize, though, that their pre-September 11 projection for growth of 2.5 percent in 2002 is now ambitious. With lower energy prices and increased economic slack, the staff projects inflation to fall appreciably in 2002; for their part, the authorities anticipate it to remain at around 1.6 percent, the current 12-month rate.4
4. The 2002 draft budget reflects the authorities’ intentions to allow full play of automatic fiscal stabilizers; in addition, the general government numbers build in the projected higher expenditure outturn from 2001 and accommodate some increase in expenditure growth. The draft 2002 budget, prepared before the September 11 events and based on growth of 2.5 percent in 2002, envisages a general government deficit of 1.4 percent of GDP, in line with the authorities’ expected outcome for 2001 and on a par with performance in 2000 (Table 1). On the revenue side, the impact of the tax cuts already decided under the multi-year program is mitigated by a projected increase in non-tax revenues, in part due to higher dividends from state participations. On the expenditure side, while central government expenditure is to be kept within the announced norm, health care and local authorities’ spending are contributing to an acceleration of general government expenditure growth to a rate in excess of the Stability Program’s norm (to 2.2 percent in real terms, versus an initial target of 1.6 percent—see tabulation below). However, half of the increase in the growth of real expenditure (0.3 percentage points) results from a bringing forward (from 2003 to 2002) of the switch in accounting for contributions to the EU budget from revenue transfers (a negative revenue item) to increased expenditure.
(In percent of GDP2)
|Real rate of growth of GDP2||1.9||3.4||2.9||3.1||2.3||2.5|
|Real rate of growth of expenditures4||1.2||1.6||2.1||1.0||1.7||2.2|
5. In presenting the budget on October 16 (but formally outside its provisions), the government also announced a package of measures designed to counter the economic slowdown. These include an earlier payment (in January 2002, rather than in the fall) of an increased earned income tax credit (the PPE described in the staff report), an acceleration of VAT refunds to businesses, a temporary increase in depreciation allowances (for investments completed or at least initiated through March 31, 2002), and various forms of assistance to small and medium-sized enterprises and sectors particularly affected by the fall-out from the September 11 events. In both the authorities’ and the staff’s estimation, these measures, if adopted, would not have significant cash implications for the budget.
6. In the staff’s calculations, the budget deficit for 2002 will be significantly higher than projected by the authorities, mainly reflecting lower growth. Although, as noted, the extent and duration of economic weakness is subject to a substantial margin of uncertainty, on its current assessment, the staff projects that the general government deficit would be 1.5 percent of GDP in 2001 (compared to 1.4 percent in the staff report) and in the order of 2 percent of GDP in 2002. With higher expenditure reflected in the draft 2002 budget, the underlying structural deficit is slightly larger than projected in the staff report. The increase in expenditure will require a sharper-than-planned deceleration of real expenditure growth, to an average of about 1 percent per year in 2003 and 2004, in order to meet the three-year cumulative growth norm (of 4.5 percent) set in the 2002-04 Stability Program, and to an even lower rate to achieve the medium-term target of structural balance by 2004.5 In updating the Stability Program later this year, the authorities should set targets that are consistent with this medium-term objective. Finally, these developments underscore the need to better internalize the Stability Program objectives in the elaboration of annual budgets and to strengthen control over expenditure, most particularly with respect to social security.
Factual updates of the Reports on Observation of Standards and Codes on Fiscal Transparency and on Monetary and Financial Transparency have been circulated to the Executive Board (SM/01/316).
On the ILO definition, it rose by 0.3 percentage points in the same period, to 9.0 percent.
Staff projections are ongoing in the context of the current interim WEO round. The October Consensus forecast (1.8 percent in 2002) is slightly higher—though it was revised down by a similar magnitude to that of the staff following the attacks.
Oil prices are assumed to fall to $21 a barrel on average in 2002 in the staff’s projection, whereas the authorities assume constant oil prices at $23 a barrel from September 2001 onward.
Under the staff’s inflation projection, which is considerably lower than that of the authorities, real expenditure growth in 2002 would be appreciably higher, thus necessitating an even sharper deceleration in 2003 and 2004 to achieve the medium-term targets.