Underperforming French Economy May Pick Up if Hollande Succeeds in Implementing Reforms

The French economy has underperformed in recent years and is facing challenges to stimulate economic growth due to a loss of competitiveness and the fact that much-needed structural reforms have yet to be implemented. Nevertheless, the country may see a pick-up in economic activity next year, should President François Hollande’s government succeed in implementing reforms.15 when FocusEconomics Consensus Forecast panelists see the economy expanding 1.0%. 

The French economy has underperformed in recent years and is facing challenges to stimulate economic growth due to a loss of competitiveness and the fact that much-needed structural reforms have yet to be implemented. Nevertheless, the country may see a pick-up in economic activity next year, should President François Hollande’s government succeed in implementing reforms.15 when FocusEconomics Consensus Forecast panelists see the economy expanding 1.0%.  France is a key player in the global economy; it is the world’s fifth largest economy and Europe’s second largest in terms of nominal GDP. France is situated in the heart of Europe, neighboring Belgium, Germany, Italy, Luxembourg, Spain and Switzerland. France has paid a high price in economic terms as a result of the global financial crisis and the sub-sequent European debt crisis. During the global slowdown in 2009, the economy contracted 2.9%; it rebounded in 2010, growing 1.9%. In 2011, GDP growth picked up the pace somewhat and rose to 2.1%. However, the economy stagnated in 2012 and grew a lackluster 0.4% in 2013.

The French economy is still underperforming this year. GDP growth adjusted for seasonal factors recorded flat growth for a second consecutive quarter in Q2 and more recent economic data support the view that the economy is faltering more than had been expected. Economists surveyed by FocusEconomics estimate that the economy will grow just 0.4% this year; the weak outlook is supported by uncertain prospects in the labor market and further fiscal austerity measures, which are going to dampen public spending and private consumption. Moreover, exports are not likely to provide a boost to the economy, since economic activity in the Eurozone—France’s main trading partner—is slowing.

Foreign trade in France has actually played a smaller role than in Germany, for example. Exports of goods and services in France accounted for nearly 30% of GDP in 2013, compared to nearly 50% in Germany. Moreover, despite the fact that France has a liberalized economy, the government plays a significant role in economic activity. In 2013, government spending accounted for broadly 57% of GDP, whereas in Germany it reached approximately 45% of GDP.

In 2013, France exported merchandise goods worth EUR 434 billion (USD 575 billion), which reaffirmed its position as the world’s fifth largest exporter of goods. Imports of goods totaled EUR 496 billion (USD 658 billion), resulting in a trade deficit of EUR 62 billion (USD 83 billion). France’s major exports include machinery and transport equipment (32.0% of total exports), chemicals and related products (16.0% of total exports), as well as food, beverages and tobacco (10.0% of total exports). The country’s imports include machinery and transport equipment (38.0% of total imports), mineral fuels, lubricants and related products (20.0% of total imports), as well as chemical and related products (17% of total imports). The European Union continued to be France’s main export destination in 2013 (accounting for approximately 50% of total exports), with Germany accounting for 16.3% of the country’s overseas sales, followed by Belgium (7.7% of total exports) and the UK (7.0% of total exports).

Although France still ranks in the top five exporters worldwide, the loss in competitiveness and lack of structural changes—mainly in the labor market—threaten its position. In the past decade, real wages in France have increased notably, which led to rise in labor costs and caused the country to lose price competitiveness. On top of that, following the European debt crisis, some of France’s regional peers—such as Spain and Italy—had to adapt rapidly to the swift changes in external conditions and therefore adopted bold labor and fiscal reforms in order to gain competitiveness and increase their share in foreign markets. To restore competitiveness in France, a structural reform in the labor market had to be adopted. However, at the beginning of his administration, President Hollande did not make a notable effort to shake up labor market regulations and restore the country’s competitiveness. In turn, he moved toward a more pro-business policy to transform France from a consumption-driven economy into a more investment- and export-driven economy. The Labor Law Reform Act, passed in June 2013, only paves the way for more flexibility in working hours and wages, and the pension reform, approved in January 2014, creates the conditions for an increase in the contribution period required for a full pension from 41.5 to 43 years. Meanwhile, the Responsibility Pact (Pacte de Responsabilité) between the government and employers aims to cut payroll taxes, simplify business regulation, and reduce the number of levies imposed upon firms in exchange for the creation of more jobs.

Nonetheless, the implementation and effectiveness of these policies have been continuously imperiled by the left-wing of the Socialist Party, which calls for an increase in public investment and consumption. However, as the economy’s overall economic performance has been weaker than expected, the government announced that it will miss its fiscal deficit target for both this year and next. The government expects the budget deficit to reach 4.4% of GDP this year, which is below its previous target of 3.6% of GDP. For next year, the government stated that the fiscal deficit will not meet the 3.0% of GDP ceiling stipulated by EU rules and recognized that it will not be able to meet the ceiling until 2017. This means that there is less room for supporting domestic demand through more government spending and thus the ongoing need to consolidate public finances will remain a drag on economic growth.

Many analysts expect that the government’s business-friendly economic policies will improve the competitiveness of French businesses in the medium- and long-term, and therefore enhance economic activity. However, analysts also agree that the announced reforms are insufficient to convert France from an economy that is consumption driven to one that is more export-oriented, international and innovative. Analysts also believe that the reforms are inadequate to put public finances on a sustainable path toward consolidation in the near-term. In addition, further reforms are unlikely to be passed given President Hollande’s lack of popularity and the recent reshuffling of his cabinet, which has not been well received. Hollande’s popularity is currently at the lowest level that has ever been recorded for a president of France’s Fifth Republic and his weak leadership was integral to the dismal results the Socialist Party obtained in the municipal and European elections in the first half of 2014. Moreover, Hollande reshuffled his cabinet in August for the second time in six months in response to public criticism of his economic policies by left-leaning ministers.

France is in urgent need of a structural change to revive the stagnant economy and improve competitiveness. The current administration, however, is still struggling in implementing reforms without significantly disrupting the government’s trademark large role in the economy. The measures that have been taken so far are important steps toward an improvement in economic activity, which is expected to start in 20

Date: October 28, 2014

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