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Flash Economics Summary: France's Macroeconomic Prospects

Core Content

This document discusses the macroeconomic and microeconomic developments in France, emphasizing the need to consider both aspects when assessing the country's economic trajectory. While France has implemented several positive microeconomic reforms, these are expected to take time to impact the broader economy, and macroeconomic challenges remain significant.

Main Microeconomic Reforms in France

France has introduced a series of microeconomic reforms since 2017, aimed at improving the business environment and labor market:

• Tax on capital income reduced from 30% to 25%, which should lower the cost of capital for companies.
• Reduction in companies' social contributions, potentially boosting unskilled employment.
• Reforms of the education and vocational training systems, designed to enhance youth and labor force skills.
• Labour market reforms, including reduced redundancy costs and decentralization of wage negotiations to the company level.

These reforms are expected to have a positive effect on the economy, though their impact is not expected to be visible until 2021 or later.

Macroeconomic Prospects

Despite the microeconomic reforms, France's macroeconomic outlook remains challenging and is expected to be characterized by the following issues:

1) Growth Slowdown

• France has experienced a slowdown in growth, driven by:
  • Weakening demand, partly due to rising inflation, which reduces real wages.
  • Supply-side constraints, such as increasing recruitment difficulties.
• The growth slowdown is likely to be amplified by rising uncertainty, which may reduce corporate investment.

2) Fiscal Deficit Concerns

• The fiscal deficit is expected to increase due to:
  • Tax cuts, such as the reduction in corporate tax and the exemption from residence tax for 80% of households.
  • Increased public spending, including EUR 15 billion in vocational training and military spending reaching 2% of GDP.
• If growth remains weak and unemployment is close to structural levels, the structural fiscal deficit could approach the total deficit, potentially reaching 5% of GDP.
• To meet the target of a structural fiscal deficit of 0.6% of GDP, very restrictive fiscal policies may be required.

Key Charts and Data

• Chart 2: France's PMI index shows a slowdown in economic activity.
• Chart 3: Inflation and nominal per capita wage growth (Y/Y) indicate a weakening real wage environment.
• Chart 4: Recruitment difficulties are rising, signaling a labor market challenge.
• Chart 5: Natixis risk perception index highlights an increase in economic uncertainty.
• Chart 6: Real productive investment is declining, which could further slow growth.
• Chart 7: Real GDP and potential growth show a gap, indicating underperformance.
• Chart 8: Fiscal deficit as a percentage of nominal GDP illustrates the growing concern.

Conclusion

The macroeconomic trajectory of France may remain difficult until the effects of the microeconomic reforms become evident, which is expected from 2021 onwards. Until then, the country is likely to face slow growth and an increasing fiscal deficit, which could necessitate restrictive fiscal policies. The success of the reforms will be critical in improving France's long-term economic outlook.

Disclaimer

• This document is intended for professionals and qualified investors only and is strictly confidential.
• It does not constitute a personalized investment recommendation or a financial analysis.
• No liability is accepted by Natixis or its affiliates for any actions based on this document.
• The information is based on public data and is subject to change without notice.
• Natixis is regulated in various jurisdictions, including France, Germany, the UK, Italy, Spain, and others.
• The views expressed are the personal opinions of the authors and may differ from those of Natixis or other entities.

Key Data Tables

Table 1: Unemployment Rate by Level of Education (2002–2018 Q1)

Table 2: OECD PIAAC Survey (Overall Score - 2016)

Table 3: OECD PISA Survey (Overall Score)

Table 4: France: Main Reductions in Mandatory Contributions (2018)

Final Note

The document underscores that while microeconomic reforms are positive, their macroeconomic impact is not immediate, and France's economic challenges must be addressed alongside these reforms to ensure a sustainable recovery.