France: Risk Assessment
Country Risk Rating
|A2||The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average.|
Business Climate Rating
|A1||The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.|
Recovery confirmed, boosted by exogenous drivers
Growth rebounded in 2015, buoyed by public and household consumption, with the latter, however, set to continue as the main contributor to growth in 2016. The expected rate of growth is still below the pre-2008 crisis peak. Residential investment contracted again in 2015, putting pressure on activity, but the outlook now seems better as building permits and new builds have stabilized. The contribution of household investment to growth is likely to be nil in 2016. The level of unemployment continues to restrain private investments and spending (10.3% at the end of October 2015) and is likely to diminish only very gradually in 2016 to represent 10% of the economically active population in the second half of 2016. The rebound in business investment has not led to a high level of job creation. 78% of production capacity was used at end 2015. Even if this figure is growing, it is still not high enough to encourage businesses to invest heavily. Before the 2008 crisis, business investment grew by an average of 3.8% (2003-2007) against 2% in 2015. According an INSEE survey, business owners' primary reason for investing is to modernize their factories rather than to grow. Businesses are however in better financial health. The Competitiveness and Employment Tax Credit (CICE), together with lower energy costs, enabled an almost 2-percentage point increase in their margins in 2015 Helped by these measures and by renewed activity, the level of company insolvencies continued to fall by 2.5% in 2015 and is expected to be under 60,000 in 2016 for the first time since 2012. Nonetheless, some sectors remain under a lot of pressure, such as construction, pharmaceuticals, clothing (textiles) and wooden furniture (paper/wood sector). The livestock sector has also been hit by low prices and the plastics industries have not benefitted from the slump in the price of a barrel of oil.
Despite the disappearance of some of the effects of lower oil prices on price movements generally, inflation is expected to remain weak, due to the limited recovery of domestic demand.
The tourism sector will put pressure on the current account balance in 2016
In 2015, French exports were dynamic, driven by France's large industrial sectors (aeronautics, automotive, defense). The euro's weakness against the dollar has helped French exporting companies, 53% of which export beyond the euro zone. Meanwhile, weak oil prices have brought down the import bill. These dynamics are likely to be similar in 2016, as the price of Brent is expected to remain low. In 2016, the euro could again depreciate against the dollar, as the two large central banks - European (ECB) and US (FED) - are on different tracks. In December 2015, the Fed raised its key rate, confirming the gradual tightening of its ultra-expansionary policy implemented after the 2008 financial crisis. The ECB, on the other hand, again eased its monetary policy in 2015.
While the trade deficit could benefit from these dynamics to continue to narrow, the current account deficit will be burdened by the decline in tourism income. Indeed, this sector represents 7.5% of GDP, of which 2.5% can be attributed to foreign tourists. The two attacks in Paris in January and then in November 2015 could lead to a temporary drop in visits to the country which, in 2014, was the most visited in the world.
The public deficit will remain above 3%
Although France is committed to bringing the French public deficit down to 3.3% of GDP in 2016 as required by the European Commission, the Paris attacks have jeopardized this commitment as the government has announced the creation of 8,500 security jobs (police, customs, and justice). Nevertheless, the budget adopted by the Parliament in September will result in cuts to public spending in 2016, amounting to EUR 16 billion as part of a drive to save EUR 50 billion between 2015 and 2017 (EUR 18.6 billion in 2015).
As a consequence of the public spending cuts, the collective services sector is under pressure. Company insolvencies in the sector meanwhile rose by 5.7% as at end September 2015, year on year.
President Hollande's last full year in office
The French presidential and parliamentary elections will take place in April 2017. The current government under Prime Minister Valls is not doing well in the opinion polls. However, the Paris attacks have strengthened position of the current President and his team. Three parties seem likely to get through the first round of voting: the center-left party of the current government (Socialist Party), the conservative party (the Republicans) and the far right party (Front National) which made a significant breakthrough in the December 2015 regional elections.