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, agri-food, retail)
- 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 spending; high public debt
- Private debt on an upward trend
Growth set to slow further in 2019
Growth will remain moderate in 2019, after easing significantly in 2018. Household consumption is expected to rebound thanks to a slight uptick in employment and purchasing power, driven by measures as the scrapping of employee contributions – effective as of October 2018 –, the reduction in housing tax, the increase in the minimum wage subsidy (work bonus), the tax exemption for overtime pay and the reduction in the general social contribution (CSG) for one third of pensioners, whose pensions are between €1,200 and 2,000 per month. Real wages are expected to rise, due, on the one hand, to tight labour market conditions, with many companies reporting recruitment difficulties, and, on the other hand, to lower inflation, in line with the stabilisation of oil prices in 2019. The unemployment rate will continue its gradual decline but will remain high, at around 9%. Despite persistently favourable credit conditions, household investment will slow due to weaker confidence levels, which will affect construction (building permits were down 7% over the first three quarters of 2018). Conversely, investment by businesses, which are reporting record high profit margins (39.1% at the end of 2017), should remain brisk due to supply constraints, with the production capacity utilisation rate at 85% at the end of 2018. However, since these investments are mainly made using credit, corporate debt will remain on an upward trend. Business insolvencies will rebound in 2019, increasing by 1% after declining by 3.4% in 2018, in connection with more muted growth.
Despite the slowdown in France’s main trading partners (rest of the European Union, United States, China), exports will be resilient, thanks to cost competitiveness gains recorded in recent years. However, foreign trade is no longer expected to contribute positively to growth in 2019 because of the rebound in imports. Hotel stays increased by 3% in the first three quarters of 2018, exclusively due to the return of foreign tourists (+8%), in a trend that is expected to continue in 2019, despite less favourable economic conditions in all advanced economies.
Public and external accounts stuck in deficit
Despite tax revenues driven by resilient activity, the government deficit is expected to widen in 2019, due to tax measures to increase purchasing power (estimated cost of €10 billion, or 0.4% of GDP) and to the conversion of the competitiveness and employment tax credit (CICE) into a permanent reduction in employer contributions, which will entail a double cost for public finances in the transition year (estimated deficit excluding exceptional measures: 2.4% of GDP). As a result, the government deficit is expected to temporarily return to over 3% in 2019. As a consequence, although its public debt is among the highest in the eurozone, France will be one of the few countries where the debt does not decline.
The current account deficit will remain stable in 2019. While the goods balance is structurally in deficit as the country is a net energy importer, the services balance is in surplus thanks to tourism revenues. Since 2015, the balance of goods and services excluding energy has become negative, as the deficit in manufactured goods continues to widen, mainly due to the relocation of automobile production and investment in imported machinery. At the same time, this deficit is only partially offset by the excess income generated by dividends from French subsidiaries abroad. The resulting small current account deficit is mainly financed by debt or equity issues held by non-residents.
President Macron's popularity rating falls
Despite having a strong remit after his clear victories in the 2017 presidential and legislative elections, President Emmanuel Macron is facing growing social unrest. While during his first year in office, protests were essentially led by trade unions opposed to reforms aimed at making the labour market more flexible and changing the status of the SNCF (state-owned rail transport company), this transformed into a popular protest with the arrival of the gilets jaunes (yellow vests, name for the hi-vis safety jackets that drivers must keep in their cars), protesting against fuel taxes. President Macron's popularity rating halved between January and November 2018, falling to 25%. Major reforms to the pension system, including the abolition of special schemes, which is due to be unveiled in 2019, could be the source of further protests. However, President Macron has a comfortable majority in the National Assembly through his party, La République en Marche, which holds 308 seats out of 577. In addition, as the main moderate opposition parties (Socialist Party on the left and Republicans on the right) are rebuilding, the main alternatives are currently on the far right (Rassemblement National) and the far left (France Insoumise). Meanwhile, the increased European integration called for by President Macron will depend on the outcome of European elections in May, amid rising nationalism in many European countries