France: Selected Issues Paper
Author: International Monetary Fund. European Dept.
Publication Date:
05 Aug 2013
eISBN:
9781484389133
Language:
English
Keywords:
ISCR; CR; potential GDP; France; spending; benchmark current account; FDI inflow; recipient FDI country; saving-investment balance perspective; services economy; Foreign direct investment; Services sector; Financial account; Real effective exchange rates; Global
Download PDF (468.2 KB)

This Selected Issues paper examines external developments and competitiveness in France. Over the past decade, the current account has deteriorated from a surplus of 1.2 percent of GDP in 2002 to a deficit of about 2.3 percent in 2012, as France lost ground in goods trade and services recorded just a slight increase in global market shares. The slight improvement of the trade deficit seen in 2012 may suggest a change in trend, although it is still too early to determine. Past deterioration in export performance points to competitiveness weaknesses, rooted in significant rigidities in labor and product markets.

Abstract

This Selected Issues paper examines external developments and competitiveness in France. Over the past decade, the current account has deteriorated from a surplus of 1.2 percent of GDP in 2002 to a deficit of about 2.3 percent in 2012, as France lost ground in goods trade and services recorded just a slight increase in global market shares. The slight improvement of the trade deficit seen in 2012 may suggest a change in trend, although it is still too early to determine. Past deterioration in export performance points to competitiveness weaknesses, rooted in significant rigidities in labor and product markets.

External Developments and Competitiveness12

Over the past decade, the current account has deteriorated from a surplus of 1.2 percent of GDP in 2002 to a deficit of about 2.3 percent in 2012, as France lost ground in goods trade and services recorded just a slight increase in global market shares. The slight improvement of the trade deficit seen in 2012 may suggest a change in trend, although it is still too early to determine. Past deterioration in export performance points to competitiveness weaknesses, rooted in significant rigidities in labor and product markets. On recent financial account movements, currency and deposits inflows registered historical highs while equity and debt securities lowered their contribution to the financing of the current account. Following past trends, FDI inflows and outflows shrank further in 2012, leaving France in a near balanced position in this category.

A. Recent External Developments

1. Current Account (Table 1, Figure 1). The current account in 2012 recorded a deficit of -2.3 percent of GDP, driven by a worsening income balance. The turnaround in the income balance—on an upward trend since 2009—likely reflect the significant drop in the rate of return on net portfolio holdings (debt and equity). The trade deficit in goods improved slightly in 2012 aided by strong sales in transport equipment, particularly of aeronautical products, while the surplus in the services trade account remained strong at 1.6 percent of GDP. The gradual deterioration of the current account over the last decade, reflects an increasingly negative contribution of goods (coupled with a reduced share in goods’ volume in the current account, only partly offset by an improvement in the net trade in services. In this respect, the recent reorientation of exports towards dynamic markets in Asia, and away from sluggish demand in the euro area, is a positive development. From a saving-investment perspective, the weakening of the current account balance since the early 2000s reflects a deterioration in the net borrowing position of the government and non-financial corporations, only partly offset by the slight improvement in the net lending position of households and financial corporations altogether (text chart).

Table 1.

France - Balance of Payments, 2000–12

(in percent of GDP)

article image
Source: IMF, Balance of Payments Statistics; and Direction Générale des Douanes et Droits Indirects for goods exports and imports.
Figure 1.
Figure 1.

France - Developments in Goods Trade

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A001

Source: Direction Générale des Douanes et Droits Indirects
uA01fig01

France - Net Lending/Borrowing by Sector

(In percent of nominal GDP, 2000-12)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A001

Source: Haver Analytics; and Staff calculations.
uA01fig02

France - Saving - Investment Balance

(In percent of nominal GDP, 2000-2018)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A001

2. Financial account. In 2012, the financial account recorded a surplus of 4.8 percent of GDP.

  • Portfolio and other investment: Reflecting safe-haven effects, the surplus in 2012 was marked by a strong improvement in other investment inflows (in the form of currency and deposits), which reached 1.7 percent of GDP (or around 45 percent of the overall financial account surplus). The foreign holding of French bonds, and in particular treasury bonds, contributes the most to the surge of portfolio inflows. It is noteworthy that France has played an intermediary role in gross financial flows between the euro area and the rest of the world: net inflows from non-EU investors are mainly directed towards treasury bonds, hence contributing to the financing of the government deficit; meanwhile, French savings are channeled to the euro area deficit countries via inter-bank loans or bonds.

  • Foreign Direct Investment (FDI): In a context characterized by a contraction in global FDI flows (by 14 percent from 2011), 2012 also saw in France a continuation of the decline in net FDI that started in 2008. This was due to declines in both FDI inflows and outflows. Net FDI stood at -0.5 percent of GDP, down from -3.2 percent of GDP in 2008. FDI in France fell from 3.7 percent of GDP in 2007 to 1 percent of GDP in 2012, faring poorly against the 2000-07pre-crisis average of 3.2 percent of GDP. FDI abroad dropped from 6.4 percent of GDP in 2007 to 1.4 percent of GDP in 2012—the lowest level over the past 15 years. The main factor underlying FDI’s decline abroad during the past year is the repatriation of funds from foreign subsidiaries back to the French parent company, which could reflect attempts to strengthen their capital, to deleverage, or to restructure operations. Despite recent unfavorable developments, France still features amongst the top six investing and recipient FDI countries, with outward and attracted FDI each accounting for around 4.5 of global flows, respectively. In 2012, 44 percent of global FDI flows were hosted by China, the United States, Brazil, the United Kingdom, and France; and 58 percent of global FDI outflows were performed by the United States, Japan, Belgium, the United Kingdom, Germany, China and France.

3. International Investment Position (IIP). France’s net IIP turned negative in 2007 and dropped to almost -29 percent of GDP by the end of 2012. About 2/3 of the deterioration in the IIP since 2007 was due to valuation losses, which could be reversed in a stronger global recovery. The IIP is being supported mainly by a net positive position in direct investment and reserve assets (about 20 and 9 percent of GDP, respectively), but these are more than offset by the combined negative net position of the other components (portfolio investments, other investments, and financial derivatives). The bulk of France’s net negative position is due to the government’s net liabilities which have been accumulating in 2010-12. Small net positions may mask large gross positions. This is the case for the banking sector, which at the end of 2012 had a net position of 0.5 percent of GDP but gross assets and liabilities of 104 and 110 percent of GDP, respectively, consistent with the G-SIFI status of major French banks.3 Reflecting the shedding of assets, the net IIP of banks improved slightly compared to 2013 (by 2.3 percentage points of GDP).

uA01fig03

France - International Investment Position (IIP), 2000–12

(in percent of GDP)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A001

Source: IMF
uA01fig04

France - International investment position: Composition of assets and liabilities, 2012

(in percent of GDP)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A001

B. A Closer Look at Services

4. France is a services economy (text table; and chart). Over 2001-08, the France economy grew at an average rate of 1.6 percent per year. Services contributed 1.4 percentage points, against 0.2 percentage points in manufacturing and construction, and a zero contribution from the primary sector. Services sectors accounted for around 79 percent of total value added in 2012—up from 72 percent in 1995 and 9 percentage points above the average of Germany, Italy, and Spain. Within services, specialization is concentrated on public administration and social services, business activities, and the real estate.

Big 4 Euro Area Countries - Share of Gross Value Added of Total Economy

article image
Source: Eurostat.Note: The classifications listed add up to the total NACE.
uA01fig05

France - Value Added Growth, Contributions by Sector

(In percentage points)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A001

Sources: WB, PRMEDNote: Primary=Agriculture; Secondary=Mining, Utilities, Manufacturing&Construction; Tertiary= Services.

5. External developments arising from an increasing specialization towards services have been mixed. After a decrease up to 2005, services’ export market shares and net trade rebounded slightly, which helped finance the deterioration in the goods balance. The balances of business services and royalties grew particularly rapidly. However, other services (transportation, computer and information services) showed little dynamism or even recorded a deficit position.

uA01fig06

Export Market Share of Services

(2005=100)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A001

Source: Haver Analytics.
uA01fig07

Services Balance by Sectors

(In percent of nominal GDP, 2000-12)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A001

Sources: IMF, Balance of Payments.

6. From a structural perspective, the economic performance of services activities has been comparatively poor. Relative to manufacturing, a number of services sectors feature comparatively lower productivity levels, higher unit labor costs and rents, and inadequate investment rates (Figure 2).

Figure 2.
Figure 2.

France: Structural Characteristics in Services Sectors, 2010 1/

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A001

Source: Eurostat.1/ Manufacturing and Construction shown for comparison purposes.2/ Inverse to unit labor costs.

  • Productivity and unit labor costs: The shortfall in labor productivity levels is substantial (and unit labor costs are particularly high) in wholesale and retail trade, administrative and support services, accommodation and food, transportation and storage, and professional services. To some extent, higher unit labor costs in non-tradable sectors is an equilibrium phenomenon in a situation where wages reflect economy-wide standards, while the potential for productivity gains is limited (e.g., hospitality business).

  • Profitability: The average gross operating rate in services reached nearly 13 percent of total turnover in 2010, against 5.5 percent in manufacturing activities. There are nevertheless considerable differences in profitability across sectors (ranging from around 3.5 in wholesale and retail trade to about 32 percent in real estate activities). While the wide dispersion in profitability ratios may be a reflection of sector-specific capital intensities and technological progress, high profits, when coupled with comparatively low productivity levels, may also be an indication of competition-constraining regulation.

  • Investment ratios4: At around 100 percent of value added, electricity and gas supply registered the highest investment rates amongst services. Investment dynamism lagged well behind in other sectors, such as wholesale and retail trade, and construction.

7. Services sectors induce significant strong forward-linkage effects to the rest of the economy. Economic sectors differ in terms of their incidence on economic activity. Input-output analysis allows for a classification of sectors according to their backward/forward linkages they create with other branches via intermediate consumption. For each sector, backward (forward) linkages can be measured as the proportion of intermediate consumption to the gross output of the sector demanded from (supplied to) other sectors. Production in sectors inducing strong backward linkages tends to stimulate economic activity through higher demand of inputs from other sectors. By contrast, branches whose production serve as inputs to others can play an important role in stimulating (internal and external) demand through their moderating impact on other sectors’ costs. Market services sectors tend to display above-average forward linkages and below-average backward linkages (text chart).

uA01fig08

France - Services’ Linkage Effects to the Rest of Economy

(Mid-2000s)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A001

Sources: OECD Input-Output table for France; and Staff calculations.Note: Chart shows services branches only. Average forward and backward linkages are averages across all economic sectors.

8. By virtue of their significant forward-linkage effects, the price moderating effect of competition-enhancing reforms in services is substantial. Using the Input-Output table for France, the impact of a cost reduction in services is calculated in the following manner:

δ⁢P = (I-A)-1 δV

where P denotes the (n*1) the column vector of sectoral prices (with n the total number of economic sectors); I is the (n*n) identity matrix; A is the (n*n) matrix of technical coefficients; V is the (n*1) column vector of value added per unit of gross production for the n sectors of the economy; and δ stands for (percentage) changes.

9. The simulation presented in this paper assumes no input substitutability and that increases in costs are fully transmitted to output prices. Following a coordinated 10 percent cost reduction in all services sectors and construction, aggregate prices are estimated to fall by around 7.5 percent. When the cost reduction shock is conducted in each services sector separately, we find that the largest reductions on aggregate prices are induced by other business services; real estate activities; wholesale and retail trade; finance and insurance; and transport and storage (Table 2).

Table 2.

Impact on Aggregate Prices of a Sector-by-Sector 10 percent Reduction in Services Costs

(Deviations from baseline, in percent)

article image
Source: OECD Input-Output table for France and Staff calculations.

10. Progress in opening up services to competition has fallen short of the ambitions of the EU Services Directive. The objective of the EU Services Directive adopted in 2006 was to release the untapped growth potential of services markets in Europe by removing legal and administrative barriers to trade in services. Whereas the implementation of the Directive has strengthened competition in a number of sectors in France, such as information and telecommunications, several others, including wholesale and retail distribution, transportation, and professional services, remain protected. The principles of “necessity, proportionality, and public interest” embedded in the Directive have given EU member countries considerable latitude in how strictly to implement the directive. As suggested by the simulation results presented above, down-stream producers relying on these services as inputs would benefit from lower costs, generating trickle-down effects on growth throughout the economy. Consumers’ purchasing power would also be enhanced by the price moderating effect of liberalization measures.

C. External Assessment

11. Methodology. The assessment of external developments relies on the External Balance Assessment (EBA) methodology, developed by the IMF. The EBA results discussed hereafter are based on an update using spring 2013 World Economic Outlook (WEO) data. EBA comprises three complementary approaches: the current account (CA) method, the real effective exchange rate (REER) method, and the external sustainability (ES) method.

  • The CA method is a panel-regression based analysis that decomposes the current account into a norm and a current account gap, in turn equal to the sum of a policy gap and an unexplained component (regression residual). The norm is the level of the current account at staff’s recommended policies (on fiscal policy, interest rates, private credit, social protection, capital controls, and reserve accumulation). Any deviations from benchmark policies are captured by the policy gap.

  • The REER approach, also panel-regression based, estimates the exchange rate misalignment with a breakdown between policy gap and unexplained component. Regressors for each country are defined relative to the values of their trading partners, using the same country weights as in the actual REER. As a reflection of the expenditure-switching role of REER movements, some rough proportionality can be expected between the coefficients of the separate CA and REER regressions. Still, theory implies that such correspondence is not exact, as some factors may influence the REER without any clear implication for the CA.

  • The ES method is model free and calculates the current account gap as the difference between the medium-term current account (that is, the WEO projection for 2018) and the net-foreign-asset (NFA) stabilizing current account. The NFA/GDP benchmark for France is set at the 2011 level.

12. CA method. This approach suggests a current account gap of some -2.5 percent of GDP.5 The latter is the result of the difference between a norm (where policies are at recommended values) of -0.2 percent of GDP and the cyclically-adjusted, 2012 current account balance of -2.7 percent of GDP. The current account gap has two components: policy gaps (that is, actual policies deviating from recommended policies) contributed -0.4 percentage points of GDP, while the regression residual contributed 2.1 percentage points of GDP. The policy gap is mostly explained by actual spending on social protection being significantly higher than the recommended benchmark. The large residual suggests that country-specific factors (which are difficult to capture in worldwide panel regressions as the ones conducted by the EBA methodology) are at play. As discussed in this report, these factors could include heavy labor taxation, small firm structures, and rigid labor and product market regulation, all having a bearing on the capacity of French enterprises to innovate and remain competitiveness in international markets.

13. REER method. This approach estimates an overvaluation of the (CPI-based) real effective exchange rate of around 1 percent, relative to medium-term fundamentals.6

uA01fig09

France - External Balance Assessment, Current Account

(In percent of GDP) 1/

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A001

Sources: IMF staff calculations1/ Results based on data as of April 2013; estimations are adjusted to ensure multilteral consistency

14. ES method. Over the medium term, the current account would record a modest positive gap of about 0.3 percent of GDP. The benchmark current account that would stabilize NFA in percent of GDP at the end-2011 level is -0.7 percent of GDP. This benchmark is compared with the 2018 WEO projection for the current account (adjusted to ensure closed output gaps) of -0.4 percent of GDP.

15. Overall assessment. On staff projections, the trade and current account deficits should gradually decline over time (to -1.8 and 0 percent of GDP by 2018, respectively) aided by moderate growth and imports. Market shares are projected to remain broadly stable over the medium term. This assumption already takes into consideration France’s improved export performance over the last couple of years, as well as the impact of recent actions to reduce the labor tax wedge and to reform the labor market. These important steps towards addressing the competitiveness challenge notwithstanding, the external environment is changing rapidly with euro area periphery countries undertaking far-reaching structural reforms and registering large competitiveness gains. From a saving-investment balance perspective, the improvement of the current account over the medium term is driven by fiscal consolidation, with a partial offset from lower private sector net saving (saving minus investment).

1

Prepared by Esther Pérez Ruiz.

2

For a complete list of references please see page 30.

3

See “French Banks: Business Model and Financial Stability,’ By A. Sy, in France: Selected Issues, IMF Country Report No. 13/3 (January 2013).

4

Data availability on investment ratios is more limited than for the other structural indicators.

5

The CGER approach yields a somewhat different CA account gap of +1.4 percent of GDP.

6

This estimated overvaluation is smaller than the one implied by the current account EBA methodology, under standard exchange rate elasticity assumptions.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
France: Selected Issues Paper
Author: International Monetary Fund. European Dept.
Volume/Issue:
Volume 2013: Issue 252
Publisher:
International Monetary Fund
ISBN:
9781484389133
ISSN:
1934-7685
Pages:
84
DOI:
https://doi.org/10.5089/9781484389133.002
  • View in gallery

    France - Developments in Goods Trade

  • View in gallery

    France - Net Lending/Borrowing by Sector

    (In percent of nominal GDP, 2000-12)

  • View in gallery

    France - Saving - Investment Balance

    (In percent of nominal GDP, 2000-2018)

  • View in gallery

    France - International Investment Position (IIP), 2000–12

    (in percent of GDP)

  • View in gallery

    France - International investment position: Composition of assets and liabilities, 2012

    (in percent of GDP)

  • View in gallery

    France - Value Added Growth, Contributions by Sector

    (In percentage points)

  • View in gallery

    Export Market Share of Services

    (2005=100)

  • View in gallery

    Services Balance by Sectors

    (In percent of nominal GDP, 2000-12)

  • View in gallery

    France: Structural Characteristics in Services Sectors, 2010 1/

  • View in gallery

    France - Services’ Linkage Effects to the Rest of Economy

    (Mid-2000s)

  • View in gallery

    France - External Balance Assessment, Current Account

    (In percent of GDP) 1/

France - Developments in Goods Trade

France - Net Lending/Borrowing by Sector

(In percent of nominal GDP, 2000-12)

France - Saving - Investment Balance

(In percent of nominal GDP, 2000-2018)

France - International Investment Position (IIP), 2000–12

(in percent of GDP)

France - International investment position: Composition of assets and liabilities, 2012

(in percent of GDP)

France - Value Added Growth, Contributions by Sector

(In percentage points)

Export Market Share of Services

(2005=100)

Services Balance by Sectors

(In percent of nominal GDP, 2000-12)

France: Structural Characteristics in Services Sectors, 2010 1/

France - Services’ Linkage Effects to the Rest of Economy

(Mid-2000s)

France - External Balance Assessment, Current Account

(In percent of GDP) 1/