France: Risk Assessment
Country Risk Rating
Business Climate Rating
- High-quality infrastructure and public services
- Skilled and productive workforce, dynamic demographics
- Powerful tourism industry
- Competitive international groups (aerospace, energy, environment, pharmaceuticals, luxury, food, distribution)
- Global agricultural leader
- High level of savings
- Too few exporting companies, loss of competitiveness and market share
- Weakening level of product sophistication; insufficient focus on innovation
- Low employment rate among young people and older workers
- Room for more efficiency in public expenditure
- High public debt
- Growing private debt
Activity to remain resilient thanks to domestic demand
The French economy will continue to show resilience in 2020, thanks to strong domestic demand. Household consumption is expected to accelerate owing to ongoing job creation and government tax measures to boost purchasing power. In addition, real wages will increase overall in a persistently tight labor market (three quarters of construction companies and half of all industrial firms were experiencing hiring difficulties at the end of 2019), despite an unemployment rate above 8%. Although financing conditions are still favorable, residential investment is expected to continue to slow. The construction sector will therefore once again be driven by the non-residential segment, and mainly warehouses, in line with the rise of e-commerce, as public works will decline after accelerating sharply in 2019 in the run-up to municipal elections (+13% over the first nine months). Although slowing from the peak in 2019, business investment should remain strong to meet the pick-up in domestic demand, as production capacity is already under pressure, with an 83% utilization rate at the end of 2019. Corporate debt will therefore continue to increase (73% of GDP in March 2019). Despite an unfavorable external context (slowdown in the United States and China, weak growth in the EU), exports will remain resilient, thanks to the non-cyclical sectors (aerospace, pharmaceuticals, luxury, cosmetics, defense) and the cost competitiveness gains recorded over the past five years. However, as imports are expected to grow more, driven by robust domestic demand, foreign trade will have a negative impact on growth. As activity cools, insolvencies will rebound slightly in 2020 (+0.9% after -2.5% in 2019).
Public debt relief will wait
The public deficit will be reduced in 2020, following the conversion in 2019 of the tax credit for competitiveness and employment (CICE) into a reduction in permanent employer contributions, which entailed a one-off additional cost for public finances (0.9% of GDP). However, aside from this accounting effect, the deficit will remain stable. Following the “yellow vest” protest movement, the government reduced the income tax rate from 14% to 11% for the first bracket (0.2% of GDP) and re-indexed pensions below EUR 2,000 (0.1% of GDP) to inflation, in addition to the initially planned move to scrap the final third of the housing tax for 80% of households (0.15% of GDP). Despite firm activity and, more importantly, the decline in debt service (-0.2% of GDP), thanks to historically low interest rates, the government deficit will remain high in 2020, and France will be one of the few countries not to see a decline in its public debt, which is among the highest in the Eurozone.
The current account deficit is expected to remain stable in 2020. The goods deficit (2% of GDP), which is mainly due to net energy imports, will again only be partially offset by the services surplus (1% of GDP), which is driven by tourism revenues. Numbers of incoming foreign tourists, which fell by 1.1% in the first nine months of 2019 (including a 10% decrease from the United Kingdom) after two boom years (+9.5% in 2017 and +7.1% in 2018), will continue to be held back by the weak global economic situation. The deficit in the balance of goods and services will therefore widen. Since dividends from subsidiaries of French companies abroad support only a small income surplus (0.1% of GDP), the current account will remain in deficit and will be financed by debt or equity issues held by non-residents.
Limited room for maneuver to implement reforms after protests
In power since 2017, President Macron and his center-liberal La République En Marche (LREM) Party enjoy a large majority in the National Assembly, with 304 seats out of 577. However, in the autumn of 2018, President Macron faced widespread popular protests spearheaded by the “yellow vest” movement. While the protests sputtered in the spring of 2019, partly because of government measures to increase household purchasing power, President Macron now looks to have limited room for maneuver to implement major reforms. For example, the pension reform initially planned for 2019, which involves scrapping special schemes and introducing alignment with the universal system, has been pushed back to the summer of 2020 in order to organize a nationwide consultation. Still, this sensitive reform generated major protests in December 2019. European elections in May 2019 showed that the main moderate opposition parties (Socialist Party on the left and Republicans on the right, which took 6% and 8% of the votes respectively), which have been rebuilding since 2017, continue to struggle. As a result, the main rival of the LREM (22%) is the far-right Rassemblement National (RN), which came out on top in the elections taking 23% of the votes. Six months on, polls indicated that the political landscape was still largely dominated by the LREM and the RN, with each taking 28% of the votes, compared with 10% for the other main parties.