20150831-NATIXIS-France__To_restore_growth,_it_is_perhaps_time_to_end_the_homeopathic_treatment_11页_1mb

Summary of FLASH ECONOMICS: France - To restore growth, it is perhaps time to end the homeopathic treatment

Core Content

This document analyzes the current state of economic growth in France, highlighting both the positive factors that have temporarily boosted growth and the persistent structural issues that continue to hinder long-term performance. The authors argue that while recent demand-side stimuli have improved the economic environment, they are not sufficient to drive sustainable growth, and more ambitious supply-side reforms are necessary.

Main Points

• Economic Growth in France is Concerning:

  • Growth is weak compared to the long-term trend and other euro-zone countries.
  • Leading indicators suggest a deteriorating outlook for growth and employment.
  • Investment is particularly depressed, and employment levels have not improved significantly.

• Demand-Side Stimuli Have Been Effective:

  • Oil Price Drop: Reduced energy imports by 1.5% of GDP.
  • Euro Depreciation: Boosted exports.
  • Low Interest Rates: Stimulated credit growth.
  • Fiscal Policy: The halt in deficit reduction has helped stabilize the economy.

• Supply-Side Challenges Remain Severe:

  • High Production Costs: Despite some improvements, French industry remains less sophisticated than its euro-zone peers.
  • Unskilled Labour Costs: The minimum wage is high in absolute terms and relative to the median wage.
  • Weak Labour Force Skills: France ranks lower than many other developed countries in terms of workforce skills.
  • Low Corporate Confidence: French companies remain pessimistic about future investment and hiring, which is a major barrier to growth.

Key Recommendations

• Reduce Corporate Tax Burden Significantly:

  • The current tax cuts are too modest and should be replaced with a more substantial reduction.
  • This should be financed through cuts in government spending in areas where France is relatively high compared to other euro-zone countries (e.g., pensions, housing, family benefits, and public sector salaries).

• Lower Unskilled Labour Costs:

  • Maintain minimum wage levels but reduce associated social contributions.
  • Alternatively, introduce negative social contributions at the minimum wage level to make it more competitive.

• Reduce Uncertainty for Companies:

  • Implement clear, non-arbitrary rules for redundancy costs.
  • Provide an irreversible commitment to not change corporate tax or labor market rules once reforms are implemented.

• Thorough Vocational Training Reform:

  • Improve the alignment of training with current and future job market needs.
  • Address the skills mismatch, which is evident in the number of job vacancies and the lack of suitable candidates.

Structural Issues

• Industrial Automation: France lags behind in automation levels compared to Germany and other euro-zone countries.
• Product Sophistication: French products are less complex, leading to lower price elasticity and weaker export performance.
• Unemployment by Education Level: High unemployment rates among those with less than upper secondary education indicate a skills gap.
• Company Confidence: Confidence remains low, which affects investment and employment decisions.

Conclusion

• The authors suggest that France's current economic policies are "homeopathic," meaning they provide only minimal and insufficient solutions to deep-seated structural issues.
• To restore growth, France needs bold and comprehensive reforms targeting corporate taxes, unskilled labor costs, regulatory uncertainty, and vocational training.

Key Information

• Authors: Patrick Artus, Véronique Janod
• Date: 31 August 2015
• Document Type: Economic Research
• Document Number: 654
• Source of Data: Eurostat, OECD, IFR, Natixis, PIAAC

Charts and Tables Mentioned

• Chart 1A and B: French growth and long-term trend
• Chart 2A and B: Employment and industry performance
• Chart 3A and B: Manufacturing and services PMI indices
• Chart 4: Investment outlook
• Chart 5A and B: Productive investment and total employment
• Chart 6A to D: Company confidence indices
• Chart 7A to F: Demand-side factors
• Chart 8A to E: Corporate profitability, unit labor costs, and competitiveness
• Table 1: Industrial robot stock per 100 jobs
• Table 2: Minimum wage and its relation to median wage
• Table 3: Unemployment rate by education level
• Table 4: PIAAC survey results on workforce skills
• Table 5: Job vacancies by sector

This summary highlights the need for more aggressive structural reforms in France to move beyond the current modest stimulus and achieve sustainable economic growth.