Abstract
France’s near–term economic outlook is moderately positive, but clouded by risks from the global environment. The government’s reformist intentions provide an historic opportunity to place France onto a sustained higher growth path with greater opportunities for all. Economic policy should address the root cause of faltering growth performance. Further goods and services market reforms will boost potential output and consumer welfare. Fiscal policy should be vigilant to the risk of slippage in the fiscal deficit. The ongoing expenditure and tax policy reviews have been commended.
This supplement to the staff report for the 2007 Article IV consultation with France provides an update on staff’s revised economic outlook, recent developments in financial markets, and structural reform proposals. The information does not alter the thrust of the staff appraisal.
Summary
Growth is forecast to dip in 2008 to 1.5 percent, slightly lower than anticipated in the staff report due to a further weakening of the global environment, as set out in the recent interim WEO. Headline inflation has continued to rise, given higher oil and food prices, but core inflation remains below 2 percent. While the banking system so far appears to be only moderately affected by the ongoing financial turmoil, the full extent of necessary write-downs is still unknown, and a massive fraud case at Société Générale is troubling. The Commission for the Liberalization of Growth in France (Attali Commission) has presented its report and the government has undertaken to implement most of its (over 300) specific recommendations, though protests by taxi drivers seem to have led it to distance itself from the report’s proposals in this area.
Output and inflation
1.Staff projects a deceleration of GDP growth to 1½ percent in 2008 (Table 1). The revision is driven by slower growth in the U.S. and Europe and the effects of higher inflation on consumer spending. It is consistent with the mark-down of ½ percentage point in euro area growth in the interim WEO published on January 29, which reflects broadly evenhanded reductions across main euro area countries. While lending flows to the private sector have continued to be strong, the global financial market turmoil has led to appreciably tighter bank lending standards for firms. Recent developments have also weighed on consumer confidence, which dropped in January to its lowest level in 12 years. The tax cuts approved in July 2007 and in the 2008 budget (½ percent of GDP) became fully effective in January and stand to mitigate somewhat the negative external effects on demand. With a fiscal deficit projected by staff to widen to 2.8 percent of GDP (versus 2.7 percent of GDP in the staff report) in 2008—near the Maastricht limit—and a relatively high debt/GDP ratio, there is no room for additional discretionary fiscal stimulus. In this respect, on February 12, 2008 the ECOFIN Council invited France to “strengthen the pace of budgetary consolidation and debt reduction.” The risks to the staff’s forecast are broadly balanced, with downside risks related to the international environment and, on the upside, a possibly stronger rebound in the aeronautics and automobile industries. A relatively strong showing of industrial production in December 2007 may provide some ground for the latter.
France: Main Economic Indicators, 2004-13
(Annual percentage change; unless otherwise indicated)
Data from the INSEE quarterly national accounts system.
Change as percentage of previous year’s GDP.
Harmonized CPI.
In percent of labor force; harmonized index.
GDP over total employment.
Personal disposable income deflated by the implicit deflator for private consumption.
In percent of household disposable income..
In percent of potential GDP.
In percent of GDP.
Maastricht definition.
Data for 2005 and 2006 exclude the EDF and La Poste pension fund transfers, respectively (0.5 percent and 0.1 percent of GDP).
France: Main Economic Indicators, 2004-13
(Annual percentage change; unless otherwise indicated)
| Projection | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | ||||
| Demand and supply in constant prices 1/ | |||||||||||||
| Gross domestic product | 2.5 | 1.7 | 2.0 | 1.9 | 1.5 | 1.9 | 2.6 | 2.6 | 2.5 | 2.5 | |||
| Private consumption | 2.5 | 2.2 | 2.0 | 2.1 | 1.8 | 1.9 | 2.6 | 2.5 | 2.4 | 2.4 | |||
| Public consumption | 2.3 | 0.9 | 1.4 | 1.6 | 1.6 | 1.7 | 1.8 | 1.8 | 1.8 | 1.8 | |||
| Gross fixed investment | 3.6 | 4.0 | 3.7 | 3.9 | 2.6 | 3.7 | 4.0 | 3.8 | 3.9 | 3.9 | |||
| Business investment | 4.2 | 2.1 | 4.2 | 5.0 | 3.2 | 5.0 | 5.2 | 4.8 | 4.8 | 4.8 | |||
| Residential investment | 3.2 | 6.1 | 4.4 | 1.5 | 2.1 | 1.7 | 1.7 | 1.8 | 1.8 | 1.8 | |||
| Public investment | 2.3 | 7.1 | 1.2 | 4.2 | 1.1 | 1.9 | 2.9 | 3.3 | 3.2 | 3.2 | |||
| Stockbuilding 2/ | 0.6 | 0.0 | 0.2 | -0.1 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||
| Foreign balance 2/ | -0.7 | -0.6 | -0.4 | -0.2 | -0.6 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||
| Exports of goods and NFS | 4.0 | 2.8 | 5.5 | 3.4 | 3.3 | 5.3 | 6.9 | 6.8 | 6.5 | 6.3 | |||
| Imports of goods and NFS | 7.1 | 5.0 | 6.8 | 4.3 | 4.8 | 5.9 | 6.7 | 6.4 | 6.3 | 6.3 | |||
| Prices | |||||||||||||
| GDP deflator | 1.4 | 1.8 | 2.5 | 2.1 | 1.9 | 1.8 | 1.7 | 1.7 | 1.7 | 1.7 | |||
| Consumer prices (average) 3/ | 2.3 | 1.9 | 1.9 | 1.6 | 2.3 | 1.8 | 1.7 | 1.7 | 1.7 | 1.7 | |||
| Consumer prices (end of period) | 2.3 | 1.8 | 1.7 | 2.8 | … | … | … | … | … | … | |||
| Employment and wages | |||||||||||||
| Employment | 0.1 | 0.5 | 0.8 | 1.1 | 0.5 | 0.3 | 0.3 | 0.3 | 0.3 | 0.1 | |||
| Unemployment 4/ | 9.6 | 9.7 | 9.5 | 8.7 | 8.2 | 7.9 | 7.7 | 7.4 | 7.1 | 7.0 | |||
| Productivity 5/ | 2.4 | 1.3 | 1.2 | 0.9 | 0.9 | 1.6 | 2.4 | 2.3 | 2.2 | 2.4 | |||
| Unit labor costs (whole economy) | 1.0 | 1.7 | 1.8 | 2.6 | 2.5 | 1.9 | 1.1 | 1.2 | 1.4 | 1.3 | |||
| Output in manufacturing | 0.4 | 1.4 | 2.0 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | |||
| Hourly labor compensation in manufacturing | 4.2 | 1.8 | 3.4 | 3.2 | 3.0 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | |||
| Unit labor costs in manufacturing | 0.7 | -2.5 | -0.9 | -0.5 | -0.5 | -0.5 | -0.5 | -0.5 | -0.5 | -0.5 | |||
| Personal sector | |||||||||||||
| Real disposable income 6/ | 2.6 | 1.6 | 2.1 | 2.7 | 1.8 | 2.1 | 2.2 | 2.4 | 2.4 | 2.4 | |||
| Savings ratio 7/ | 15.8 | 15.3 | 15.5 | 15.9 | 15.9 | 16.1 | 15.8 | 15.7 | 15.6 | 15.6 | |||
| Output gap 8/ | -0.5 | -0.8 | -0.9 | -1.1 | -1.8 | -2.0 | -1.5 | -0.9 | -0.5 | 0.0 | |||
| Rate of growth of potential output | 2.1 | 2.1 | 2.1 | 2.2 | 2.2 | 2.2 | 2.2 | 2.1 | 2.1 | 2.1 | |||
| Balance of payments | |||||||||||||
| Trade balance (in billions of euros) | -3.8 | -23.0 | -30.0 | -38.1 | -58.2 | -61.1 | -62.2 | -63.0 | -65.5 | -69.3 | |||
| (in percent of GDP) | -0.2 | -1.3 | -1.7 | -2.0 | -3.0 | -3.0 | -3.0 | -2.9 | -2.9 | -2.9 | |||
| Current account (in billions of euros) | 8.5 | -15.7 | -22.5 | -24.4 | -58.8 | -61.7 | -62.1 | -61.9 | -63.6 | -67.1 | |||
| (in percent of GDP) | 0.5 | -0.9 | -1.3 | -1.3 | -3.0 | -3.1 | -3.0 | -2.8 | -2.8 | -2.8 | |||
| Terms of trade | -0.5 | -1.8 | -0.3 | 0.0 | -1.9 | 0.5 | 0.3 | 0.3 | 0.2 | 0.0 | |||
| Nominal effective exchange rate | 107.6 | 107.7 | 108.1 | 110.3 | … | … | … | … | … | … | |||
| Real effective exchange rate | 103.2 | 101.4 | 101.1 | 102.3 | … | … | … | … | … | … | |||
| Public sector accounts 9/ | |||||||||||||
| Revenue | 49.6 | 50.7 | 50.8 | 50.7 | 50.3 | 50.1 | 50.0 | 50.0 | 50.0 | 50.0 | |||
| Expenditure | 53.2 | 53.7 | 53.4 | 53.1 | 53.1 | 52.9 | 52.4 | 51.9 | 51.4 | 51.0 | |||
| General government balance 10/ | -3.6 | -2.9 | -2.5 | -2.4 | -2.8 | -2.8 | -2.4 | -2.0 | -1.5 | -1.1 | |||
| Central Government balance 10/ | -3.2 | -3.0 | -2.6 | -2.1 | -2.3 | -2.2 | -1.8 | -1.4 | -1.0 | -0.6 | |||
| Social Security balance 10/ | -0.9 | -0.2 | -0.3 | -0.4 | -0.4 | -0.6 | -0.6 | -0.5 | -0.4 | -0.3 | |||
| Structural balance 11/ | -3.1 | -2.7 | -1.9 | -1.6 | -1.7 | -1.7 | -1.5 | -1.4 | -1.2 | -1.0 | |||
| Primary balance | -0.9 | -0.3 | 0.0 | 0.2 | -0.2 | -0.2 | 0.2 | 0.6 | 1.1 | 1.5 | |||
| Gross debt 10/ | 64.9 | 66.7 | 64.2 | 64.1 | 64.7 | 65.2 | 64.9 | 64.1 | 63.0 | 61.5 | |||
Data from the INSEE quarterly national accounts system.
Change as percentage of previous year’s GDP.
Harmonized CPI.
In percent of labor force; harmonized index.
GDP over total employment.
Personal disposable income deflated by the implicit deflator for private consumption.
In percent of household disposable income..
In percent of potential GDP.
In percent of GDP.
Maastricht definition.
Data for 2005 and 2006 exclude the EDF and La Poste pension fund transfers, respectively (0.5 percent and 0.1 percent of GDP).
France: Main Economic Indicators, 2004-13
(Annual percentage change; unless otherwise indicated)
| Projection | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | ||||
| Demand and supply in constant prices 1/ | |||||||||||||
| Gross domestic product | 2.5 | 1.7 | 2.0 | 1.9 | 1.5 | 1.9 | 2.6 | 2.6 | 2.5 | 2.5 | |||
| Private consumption | 2.5 | 2.2 | 2.0 | 2.1 | 1.8 | 1.9 | 2.6 | 2.5 | 2.4 | 2.4 | |||
| Public consumption | 2.3 | 0.9 | 1.4 | 1.6 | 1.6 | 1.7 | 1.8 | 1.8 | 1.8 | 1.8 | |||
| Gross fixed investment | 3.6 | 4.0 | 3.7 | 3.9 | 2.6 | 3.7 | 4.0 | 3.8 | 3.9 | 3.9 | |||
| Business investment | 4.2 | 2.1 | 4.2 | 5.0 | 3.2 | 5.0 | 5.2 | 4.8 | 4.8 | 4.8 | |||
| Residential investment | 3.2 | 6.1 | 4.4 | 1.5 | 2.1 | 1.7 | 1.7 | 1.8 | 1.8 | 1.8 | |||
| Public investment | 2.3 | 7.1 | 1.2 | 4.2 | 1.1 | 1.9 | 2.9 | 3.3 | 3.2 | 3.2 | |||
| Stockbuilding 2/ | 0.6 | 0.0 | 0.2 | -0.1 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||
| Foreign balance 2/ | -0.7 | -0.6 | -0.4 | -0.2 | -0.6 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||
| Exports of goods and NFS | 4.0 | 2.8 | 5.5 | 3.4 | 3.3 | 5.3 | 6.9 | 6.8 | 6.5 | 6.3 | |||
| Imports of goods and NFS | 7.1 | 5.0 | 6.8 | 4.3 | 4.8 | 5.9 | 6.7 | 6.4 | 6.3 | 6.3 | |||
| Prices | |||||||||||||
| GDP deflator | 1.4 | 1.8 | 2.5 | 2.1 | 1.9 | 1.8 | 1.7 | 1.7 | 1.7 | 1.7 | |||
| Consumer prices (average) 3/ | 2.3 | 1.9 | 1.9 | 1.6 | 2.3 | 1.8 | 1.7 | 1.7 | 1.7 | 1.7 | |||
| Consumer prices (end of period) | 2.3 | 1.8 | 1.7 | 2.8 | … | … | … | … | … | … | |||
| Employment and wages | |||||||||||||
| Employment | 0.1 | 0.5 | 0.8 | 1.1 | 0.5 | 0.3 | 0.3 | 0.3 | 0.3 | 0.1 | |||
| Unemployment 4/ | 9.6 | 9.7 | 9.5 | 8.7 | 8.2 | 7.9 | 7.7 | 7.4 | 7.1 | 7.0 | |||
| Productivity 5/ | 2.4 | 1.3 | 1.2 | 0.9 | 0.9 | 1.6 | 2.4 | 2.3 | 2.2 | 2.4 | |||
| Unit labor costs (whole economy) | 1.0 | 1.7 | 1.8 | 2.6 | 2.5 | 1.9 | 1.1 | 1.2 | 1.4 | 1.3 | |||
| Output in manufacturing | 0.4 | 1.4 | 2.0 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | |||
| Hourly labor compensation in manufacturing | 4.2 | 1.8 | 3.4 | 3.2 | 3.0 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | |||
| Unit labor costs in manufacturing | 0.7 | -2.5 | -0.9 | -0.5 | -0.5 | -0.5 | -0.5 | -0.5 | -0.5 | -0.5 | |||
| Personal sector | |||||||||||||
| Real disposable income 6/ | 2.6 | 1.6 | 2.1 | 2.7 | 1.8 | 2.1 | 2.2 | 2.4 | 2.4 | 2.4 | |||
| Savings ratio 7/ | 15.8 | 15.3 | 15.5 | 15.9 | 15.9 | 16.1 | 15.8 | 15.7 | 15.6 | 15.6 | |||
| Output gap 8/ | -0.5 | -0.8 | -0.9 | -1.1 | -1.8 | -2.0 | -1.5 | -0.9 | -0.5 | 0.0 | |||
| Rate of growth of potential output | 2.1 | 2.1 | 2.1 | 2.2 | 2.2 | 2.2 | 2.2 | 2.1 | 2.1 | 2.1 | |||
| Balance of payments | |||||||||||||
| Trade balance (in billions of euros) | -3.8 | -23.0 | -30.0 | -38.1 | -58.2 | -61.1 | -62.2 | -63.0 | -65.5 | -69.3 | |||
| (in percent of GDP) | -0.2 | -1.3 | -1.7 | -2.0 | -3.0 | -3.0 | -3.0 | -2.9 | -2.9 | -2.9 | |||
| Current account (in billions of euros) | 8.5 | -15.7 | -22.5 | -24.4 | -58.8 | -61.7 | -62.1 | -61.9 | -63.6 | -67.1 | |||
| (in percent of GDP) | 0.5 | -0.9 | -1.3 | -1.3 | -3.0 | -3.1 | -3.0 | -2.8 | -2.8 | -2.8 | |||
| Terms of trade | -0.5 | -1.8 | -0.3 | 0.0 | -1.9 | 0.5 | 0.3 | 0.3 | 0.2 | 0.0 | |||
| Nominal effective exchange rate | 107.6 | 107.7 | 108.1 | 110.3 | … | … | … | … | … | … | |||
| Real effective exchange rate | 103.2 | 101.4 | 101.1 | 102.3 | … | … | … | … | … | … | |||
| Public sector accounts 9/ | |||||||||||||
| Revenue | 49.6 | 50.7 | 50.8 | 50.7 | 50.3 | 50.1 | 50.0 | 50.0 | 50.0 | 50.0 | |||
| Expenditure | 53.2 | 53.7 | 53.4 | 53.1 | 53.1 | 52.9 | 52.4 | 51.9 | 51.4 | 51.0 | |||
| General government balance 10/ | -3.6 | -2.9 | -2.5 | -2.4 | -2.8 | -2.8 | -2.4 | -2.0 | -1.5 | -1.1 | |||
| Central Government balance 10/ | -3.2 | -3.0 | -2.6 | -2.1 | -2.3 | -2.2 | -1.8 | -1.4 | -1.0 | -0.6 | |||
| Social Security balance 10/ | -0.9 | -0.2 | -0.3 | -0.4 | -0.4 | -0.6 | -0.6 | -0.5 | -0.4 | -0.3 | |||
| Structural balance 11/ | -3.1 | -2.7 | -1.9 | -1.6 | -1.7 | -1.7 | -1.5 | -1.4 | -1.2 | -1.0 | |||
| Primary balance | -0.9 | -0.3 | 0.0 | 0.2 | -0.2 | -0.2 | 0.2 | 0.6 | 1.1 | 1.5 | |||
| Gross debt 10/ | 64.9 | 66.7 | 64.2 | 64.1 | 64.7 | 65.2 | 64.9 | 64.1 | 63.0 | 61.5 | |||
Data from the INSEE quarterly national accounts system.
Change as percentage of previous year’s GDP.
Harmonized CPI.
In percent of labor force; harmonized index.
GDP over total employment.
Personal disposable income deflated by the implicit deflator for private consumption.
In percent of household disposable income..
In percent of potential GDP.
In percent of GDP.
Maastricht definition.
Data for 2005 and 2006 exclude the EDF and La Poste pension fund transfers, respectively (0.5 percent and 0.1 percent of GDP).
Financial sector
2. On January 24, Société Générale (SG) communicated that a massive rogue dealing fraud has cost the bank €4.9 billion. SG reported the fraud in addition to €2.1 billion in U.S. residential mortgage and monoline related write-downs; the latter were revised to €2.6 billion on February 11. SG has launched a rights issue to raise €5.5 billion in fresh capital in the market. In a report, issued on February 4, the authorities concluded that the fraud was an isolated event, but pointed to failures in the bank’s internal controls of derivatives trading, with questions already raised last year by the derivatives exchange, Eurex. The report finds that the subsequent unwinding of the trader’s position conformed to market practice, but was carried out under difficult market conditions. Minister Lagarde has asked for clarification of the communication requirements between regulatory agencies and the government in crisis management. Various other enquiries into the episode are underway. Separately, the authorities have indicated their aversion to possible hostile takeover bids of SG.
3. Notwithstanding the SG episode, the French banking system appears to be only moderately affected by the ongoing financial turbulence. So far, most of the large French banks have disclosed manageable exposure to the U.S. subprime market. Two of the large banks have revealed preliminary results for the entire year: BNP has reported an increase over last year’s net income, and—excluding the fraud-related write-downs—SG has reported stable results, despite losses related to the turbulence. However, banks’ exposure and risk may increase in case of a worsening situation of monoline bond insurers1 and a persistence of the turmoil.
4. The government has asked financial institutions and regulators to join in efforts at both the national and international level to strengthen internal control of market operations. The government has asked firms and regulators to work together on improved internal control systems and better regulation of operational risk management, to reduce vulnerabilities in the French banking system. It noted that banks’ management should be fully involved in risk control and fraud identification, and that supervisors may need to raise monetary sanctions against violations of regulations. France has called for setting homogeneous international standards on the management and transparency of operational and reputational risk, within the framework of Basel II.
5. Credit standards have tightened appreciably in corporate lending, but not in household lending. The Banque de France’smost recent lending survey reported a sharp tightening of banks’ credit standards to firms in the fourth quarter and expectations of a further tightening in 2008. French firms have relatively strong balance sheet positions and are less reliant on bank lending than in some other euro area countries; nonetheless, tightening credit conditions, especially if confirmed going forward, would compound downside risks to growth. 2 In contrast to firms, lending standards to households have remained little changed. This difference suggests that, beyond the impact of the turmoil on bank leverage, the worsening economic outlook may have played a major role in the credit tightening.
Structural issues
6. President Sarkozy has undertaken to implement most of the Attali Commission’s proposals to generate growth in France. In mid-January, the Commission presented 316 specific measures (décisions)covering education, future technologies, competitiveness of SMEs, labor markets, rents and privileges, taxation, and public spending. The objectives are to raise potential growth by 1 percentage point, reduce unemployment to 5 percent, cut poverty, and improve living conditions in problem neighborhoods by 2012. Prime Minister Fillon announced the presentation of a draft law on the “modernization of the economy” in spring 2008, which would also include proposals on the deregulation of retail trade, strengthened competition policies, and measures in support of SMEs. He also initiated consultations with social partners and economic agents to formulate reform plans in a number of other areas, including the regulated professions. Protests by taxi drivers seem, for their part, to have induced the government to distance itself from the specifics of the Attali report’s recommendations. Other report proposals are to be covered by existing processes, such as the general expenditure review (RGPP) and negotiations on pension reform due later this year. Ahead of these talks, the government has announced a multi-year increase in the minimum pension (minimum vieillese)B, with a first installment already in 2008.
Staff assessment
7. The events at Société Generalé are troubling, and revealing of serious shortcomings in internal controls, but not such as to affect the overall stability of the French financial system. If Société Generalé successfully concludes its announced recapitalization of €5.5 billion or is merged with a stronger partner, there are unlikely to be systemic repercussions. Contestability, including by potentially interested foreign parties, should however be fully assured. Efforts to enhance operational risk management to avert similar frauds in the future are welcome, with effective enforcement of existing regulations being the priority, and incentives to undue risk-taking in proprietary trading re-examined; regulatory changes might also be needed, and weighed against their cost implications.
8. Many measures proposed in the Attali report could help lift growth and raise consumer welfare. The removal of barriers to doing business in the retail sector, including hotels and restaurants, and the strengthening of competition policies would raise supply, improve the efficiency of markets, and lower consumer prices—and are specifically endorsed in the staff report (¶36 and others). Their inclusion in a broader liberalizing draft law in the spring is welcome. With respect to other reforms, it will be important that consultations with social partners and professionals do not result in undue delays or weak agreements, maximizing long-term benefits to consumers. Given the state of public finances, it will be important to offset the budgetary costs of some of the proposals by a redeployment of resources.
BNP and SG are among the eight banks that have joined to aid Ambac Financial Group, a large bond insurer hit by the global turmoil.
See Selected Issues II, Financing and Risks of French Firms (www.imf.org). The tightening of lending standards for credit to firms, which was more moderate in France until October 2007 (¶7 of the staff report), is now in line with the euro area average.