France

After a rapid rebound following the pandemic, economic momentum has faded quickly in France. The economy has grown very little since the second half of 2022, held back by high energy costs gradually feeding through into corporates’ bills, depressed household confidence and the effects of the ECB’s tightening monetary policy. Against this backdrop, the government has rolled out large support packages since the end of 2021 – including a generous tariff shield – to cushion the impact of the energy crisis on households and corporates’ finances. We expect GDP to grow by a lacklustre +0.6% in 2023, a large step down from the +2.5% recorded in 2022, with risks mainly to the downside. Growth should remain muted until the middle of 2024 as households’ savings intentions are elevated while banks have been tightening credit standards for corporate and household loans since the end of 2022, with the effects on loan growth likely to show up for several quarters. GDP growth is expected to pick up to a modest +0.9% in 2024, buoyed by higher real wages, but held down by a sharp fiscal consolidation as the government seeks to reduce an elevated deficit.

Inflation started to cool down since the spring of 2022. Lower commodity prices (especially energy) and the unwinding of supply-chain disruptions are easing price pressures, despite accelerating wage growth. We expect inflation to come down to around +4% by the end of 2023 and +1.6% by the end of 2024. However, inflation could take longer to normalize if corporate margins recover their recent losses. But against a backdrop of weak demand, we doubt that French corporates will have the ability to maintain larger selling-price increases.

France’s labor market has held up remarkably well since the pandemic. The unemployment rate dropped to around 7%, while net job creations have been the most dynamic among the large developed nations, especially for the young. The labor participation rate picked up sharply to reach its highest recorded level. Despite weakening demand, surveys suggest that French corporates are still keen to hire. Labor-market strength is an important buffer against fading economic momentum. We expect the unemployment rate to pick up only modestly through 2024 as corporates will prioritize labor-hoarding strategies through this cycle.  

Nevertheless, dynamic employment is partly the by-product of very poor productivity performance. Abundant labor, sizeable hiring of young people and labor hoarding have weighed on French productivity, which sits well below its pre-pandemic level. Dynamic investment through 2022 and an expected increase in youth work efficiency (notably apprentices) should sustain an improvement of labor productivity in the next couple of years. However, we do not expect a return to the pre-pandemic implied path. The continuous drop in school proficiency for French students is a big headwind for future productivity growth and little has been done to address this issue. Furthermore, long-lasting structural issues (e.g. the lack of qualified workers, skill mismatches and little incentives to take up work) are likely to prevent a significant drop of the unemployment rate below 6.5%.

Export performance is an area where France continues to underperform. French export volumes still remain below their pre-pandemic level, held back by low exports of transport materials. On the positive side, exports of services have been dynamic since the pandemic. In 2023, we expect France's exports to barely grow (by +0.3%) in the challenging international environment, and to accelerate only moderately in 2024 (+1.6%). Export performance has been held back by a wide range of structural issues and political decisions that prioritized the development of services activity. The country has been losing export market shares not only to China but also to other Eurozone countries over the past decades. To boost the post-Covid export recovery, the challenging sectoral specialisation (e.g. aircraft and automobiles), poor price and quality competitiveness and the lack of qualified (technical) workers are the main issues to address.