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 goods, agrifood, retail)
- Global agricultural leader
- High level of savings
- Insufficient number of exporting companies, loss of competitiveness and market share
- Weakening level of product sophistication, insufficient focus on innovation
- Low employment rate among younger and older workers
- Room for improvement in public spending
- High level of public debt, private debt on upward trend
Growth Slows After Peak in 2017
Growth picked up in 2017, in particular thanks to accelerating business investment and a rebound in electricity exports and tourism. While household consumption slowed in 2017 and early 2018, it is expected to bounce back slightly for the full year as a result of the rebound in purchasing power in the second half. Real wages are expected to rise, due to incipient labor market tensions (growing number of companies declaring difficulties with recruitment). While job creation in the commercial sector (+253,000 in 2017) is expected to remain dynamic, the cut to one-third of assisted jobs (-110,000 between 2017 and 2018) will slow the downward trend of the unemployment rate, which will remain at about 9%. High levels of confidence and particularly favorable credit conditions will continue fuel household consumption and investment, which will specifically benefit the automotive sector, retail and, to a lesser extent, construction (building permits down by 2% over the first five months of 2018 after a 7% increase in 2017). These very same factors will likely encourage business investment, which should, therefore, remain dynamic in 2018. The Competitiveness and Employment Tax Credit (CICE) and low energy costs have helped manufacturing companies to rebuild their margins (38.5% end 2017, an all-time high). Nevertheless, as investment is conducted largely through credit, corporate debt will continue to rise (71.8% of GDP end 2017, +1 percentage point year-on-year). Insolvencies will continue to decline in 2018 (-3.6% after -2.6% in 2016 and -7.3% in 2017) and enterprises births will grow (+6% in 2017).
The external contribution is likely to be higher in 2018 thanks to resilient exports in a context of strong demand from partners and cost/competitiveness gains recorded in recent years. With the effects of the terrorist attacks of 2015 and 2016 fading, tourism rebounded in 2017 and is expected to accelerate further in 2018. Hotel stays grew 5.1% in 2017, thanks to the return of foreign tourists (+8.8%), a trend which should be confirmed in 2018. At the same time, imports growth will slow, in the wake of corporate investment.
Despite the lower telecommunications prices (increased competition), inflation will rise sharply over the whole of 2018, driven by higher energy prices.
Heavy Debt Burden Fueled by Twin Deficits
The balance of goods runs a structural deficit, as the country is a net energy importer. In contrast, the balance of services is in surplus thanks to tourism revenues. Since 2015, the goods and services balance excluding energy has become negative, as the manufactured products deficit has steadily widened due to increased investments in machines and the delocalization of automotive production. This deficit is partially offset by the income surplus (dividends of French subsidiaries abroad). The current account deficit is mainly financed by the issuance of debt securities held by non-residents.
There is limited leeway on the budget: although the government voted several tax cuts for 2018 (30% flat-rate tax on financial income, replacement of net worth tax by a property tax, removal of employee contributions, cuts to Council tax), these will be offset by a 1.7 percentage point rise in the CSG (General Social Security Contribution) and spending cuts totalling USD 15 billion (housing, health, local authorities, assisted jobs). As a result, the public deficit should remain below the 3% threshold in 2018, but the public debt - one of the highest in the eurozone - will remain one of the few not to decline.
Continuation of Reform Agenda
President Emmanuel Macron, elected in May 2017, has an absolute majority in the National Assembly through his party, the République En Marche !. During his first year in office, President Macron passed the aforementioned fiscal measures as well as reforms aimed at making the labor market more flexible and changing the status of the SNCF (public rail transport company). As with these reforms, the reform of the pension system (removal of special regimes) – for which the consultation phase was launched in April 2018 and which will be unveiled in 2019 –, could lead to significant union protests. Nevertheless, President Macron continues to enjoy fairly high popularity ratings and strong legitimacy following his victories in the presidential and parliamentary elections, while the main opposition parties (Socialist Party on the left and Les Républicains on the right) are undergoing a period of rebuilding. While one of President Macron's commitments was to boost the building of Europe, any progress will depend on the political instability in the other main economies in the area.