Abstract
This 2016 Article IV Consultation highlights that economic recovery in France is solidifying. The economy is projected to expand by 1.5 percent in 2016, primarily driven by strong consumer spending. There are also signs of a cyclical recovery in investment, and the slump in residential construction appears to be bottoming out. By contrast, net exports are declining as demand from trading partners has slowed. Private sector job creation has remained lackluster, and the unemployment rate has hovered at about 10 percent. The government has continued to advance important reforms to help create the conditions for improved economic performance. As for budget policies, there are ongoing efforts to contain spending growth at all levels of government while easing taxes.
This statement provides information that has become available since the issuance of the staff report. The information does not alter the thrust of the staff appraisal.
On June 23, the people of the United Kingdom voted to exit the European Union. The referendum result surprised financial markets and triggered sharp currency movements and declines in equity valuations, especially in the euro area. Similar to the episode of financial volatility earlier this year, equity prices of France’s banks declined broadly in line with those of other European banks, while credit default swap (CDS) spreads rose only modestly. The UK’s prospective exit from the EU is expected to negatively affect euro area economies, including France, through trade, financial, and confidence channels.
As noted in the Statement by the Staff Representative on the Euro Area, IMF staff has revised its macroeconomic projections to take these recent developments into account. For France, staff’s preliminary assessment is that real GDP growth will still be close to 1½ percent in 2016 and decelerate to about 1¼ percent in 2017, compared to 1½ percent projected in the staff report. The downward revision mainly reflects a slower pickup in business investment, on account of heightened uncertainty and financial market volatility, and lower import demand from the UK and other European countries. In line with recent episodes of financial stress, the impact on consumption is expected to be limited in the near term. The revised growth projection assumes that financial market conditions remain orderly and that any spillovers from France’s banks’ exposures to the UK are contained. Any further tightening of financial conditions would be an important source of downside risk.
With lower aggregate demand and inflation expectations, average annual inflation is now projected to come in just below 1 percent in 2017. The fiscal impact of these revisions is expected to be modest under baseline assumptions, as slower growth is partly offset by savings from lower interest rates. However, risks to achieving the near-term fiscal targets have increased.
The impact of these revisions on France’s medium-term economic prospects would be relatively modest absent additional shocks. However, the risks to the outlook are now firmly on the downside, with much higher uncertainty around financial conditions and political developments in Europe.
The advice presented in the staff appraisal remains valid. With a subdued medium-term outlook and heightened downside risks, major efforts are needed to secure a durable reduction in unemployment and public debt. As discussed in the staff report, this will require further measures to boost job creation and private sector growth as well as deeper reforms to make public spending more efficient at all levels of government, which would help underpin sustainability and resilience against shocks.