kept increasing rapidly. While younger workers had been particularly affected by the rise in unemployment in the first phase of the crisis, older workers have been experiencing a more difficult time since the beginning of 2010. Consumer confidence remains at a depressed level and underlying inflation seems to have stabilised but at a low level.
Financial conditions have been supportive…
Declining long-term interest rates and, until recently, a weak euro have given support to the economy, although this will fade away. The four French banks stress-tested by the Committee of European Banking Supervisors showed slightly greater resistance than the European Union average: the stress scenario generated only a small drop, from 9.9%
1 2 http://dx.doi.org/10.1787/888932347066
France: Employment, income and inflation
Percentage changes
2008 2009 2010 2011 2012
Employment 1.4 -0.9 0.3 0.7 0.7
Unemployment rate1 7.8 9.5 9.7 9.5 9.3
Compensation of employees 3.1 0.1 2.4 2.5 2.8
Unit labour cost 3.0 2.7 0.8 0.9 0.7
Household disposable income 3.0 1.1 2.2 2.0 2.5
GDP deflator 2.6 0.5 0.4 1.0 1.1
Harmonised index of consumer prices 3.2 0.1 1.6 1.1 1.1 Core harmonised index of consumer prices2 1.8 1.4 1.0 1.0 1.1 Private consumption deflator 2.9 -0.4 1.1 0.9 1.0 1. As a percentage of labour force, national unemployment rate.
2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.
Source: OECD Economic Outlook 88 database.
France
1. Year-on-year growth rates.
2. As a percentage of GDP; 0 corresponds to the quarter in which the troughs in the GDP series have occurred.
Source: OECD, Economic Outlook 88 database.
1 2 http://dx.doi.org/10.1787/888932345489 2000 2002 2004 2006 2008 2010 2012
0.0 0.5 1.0 1.5 2.0 2.5
% 3.0
7.0 7.5 8.0 8.5 9.0 9.5 10.0%
Core inflation (harmonised)¹ Unemployment rate
Inflation pressures are subdued
-1 0 1 2 3 4 5 6 7 8 9 %
-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 Projections
Number of quarters but at a high level²
1981-Q1 1993-Q1 2009-Q1
The public deficit has stabilised
to 9.3%, in their average tier-one capital ratio. Credit to the private sector has expanded at 3% over the past year thanks to residential mortgage lending in a context of favourable credit supply conditions.
… and labour market policies have contributed to smooth the shocks
Although the increase in long-term unemployment is worrying due to possible hysteresis effect that might raise structural unemployment, policymakers have avoided past mistakes during this recession by resisting the promotion of early-retirement schemes and, more generally, have sought to maintain the attachment of displaced workers to the 1 2 http://dx.doi.org/10.1787/888932347085
France: Financial indicators
2008 2009 2010 2011 2012
Household saving ratio1 15.4 16.2 15.9 15.5 14.9
General government financial balance2 -3.3 -7.6 -7.4 -6.1 -4.8
Current account balance2 -1.9 -1.9 -2.2 -2.3 -2.4
Short-term interest rate3 4.6 1.2 0.8 1.1 1.8
Long-term interest rate4 4.2 3.6 3.0 3.3 4.1
1. As a percentage of disposable income (gross saving).
2. As a percentage of GDP.
3. 3-month interbank rate.
4. 10-year benchmark government bonds.
Source: OECD Economic Outlook 88 database.
1 2 http://dx.doi.org/10.1787/888932347104
France: Demand and output
Fourth quarter 2010 2011 2012
Current prices
€ billion
Percentage changes from previous year, volume (2000 prices)
Private consumption 1 112.6 1.5 1.6 2.2 1.1 1.9 2.4 Government consumption 469.7 1.6 0.6 0.0 1.0 0.2 -0.1 Gross fixed investment 392.1 -1.8 2.8 4.3 0.8 3.6 4.4
Public 63.9 -0.7 0.9 0.4 -0.4 0.8 0.1
Residential 110.2 -2.5 1.3 2.4 0.1 1.9 2.5 Non-residential 218.0 -1.8 4.1 6.3 1.4 5.3 6.6 Final domestic demand 1 974.4 0.9 1.6 2.1 1.0 1.8 2.2
Stockbuilding1 - 30.0 0.6 0.4 0.0
Total domestic demand 1 944.3 1.5 2.0 2.1 1.9 1.8 2.2 Exports of goods and services 439.6 9.9 6.4 6.3 11.7 5.5 6.7 Imports of goods and services 476.7 8.8 7.5 6.2 11.8 5.5 6.5
Net exports1 - 37.1 0.1 -0.5 -0.1
GDP at market prices 1 907.2 1.6 1.6 2.0 1.7 1.7 2.1 Note: National accounts are based on official chain-linked data. This introduces a discrepancy in the identity between real demand components and GDP. For further details see OECD Economic Outlook Sources and Methods (http://www.oecd.org/eco/sources-and-methods).
Detailed quarterly projections are reported for the major seven countries, the euro area and the total OECD in the Statistical Annex.
1. Contributions to changes in real GDP (percentage of real GDP in previous year), actual amount in the first column.
Source: OECD Economic Outlook 88 database.
2009 2010 2011 2012
labour market. Access to unemployment benefits for those on short-term contracts has been eased. Temporary measures have been adopted to facilitate part-time unemployment, expand subsidised jobs and provide funding facilities for small firms. It is important that these measures be withdrawn as the recovery progresses. Moreover, the pension reform that has just been passed is expected to boost long-term potential output via increased labour force participation of older workers, while contributing to a structural improvement in public finances.
The fiscal stance will be appropriately tightened in 2011
After being broadly neutral in 2010, fiscal policy will turn restrictive from 2011. With relatively strong tax revenues and lower interest paid on debt, the general government deficit is expected to narrow slightly to 7.4%
of GDP in 2010. The government is committed to reducing it to 6% of GDP in 2011 and progressively to 2% in 2014, which would then start to curb the debt-to-GDP ratio. Given the debt level reached before the crisis and its subsequent evolution, the pace of consolidation implied by this plan is needed for public finances not to threaten macroeconomic stability.
A number of measures will contribute to consolidation
For 2011, the cyclically-adjusted primary balance is expected to improve by about 1% of GDP thanks to almost equal contributions from self-reversing measures included in the anti-crisis package; removal of accompanying measures taken to help implement the withdrawal of the local business tax that penalised investment; cuts in tax expenditures;
and cuts in current spending. The latter two measures are both to be deepened in 2012. Other announced measures that have a smaller impact include a pay freeze, the non-replacement of half of all retiring workers in central government and a new tax on banks. The projection implies a reduction in the total deficit by 1.3% of GDP in 2012, which differs from the government’s objective only due to disparate output growth assumptions.
Reforms are needed to stay the course of consolidation
Further action will eventually be needed. The increasing trend in health-care costs needs to be reined in, in part by reducing administrative costs. Savings can also be achieved by deepening the reform of the state, via reducing the large number of sub-national levels of government and extending the General Public Policy Review to all feasible levels of public administration. As tax increases might also be needed to meet the fiscal targets, tax bases should be widened by cutting back further on the least efficient tax expenditures. Consideration should also be given to heavier taxation of environmental externalities such as carbon emissions and raising other taxes in the least distortive manner – in particular, on property and the VAT, especially on low-rated items.
Credibility needs to be reinforced
As for long-term credibility, France’s poor track record in meeting the objectives of its successive stability programmes suggests that the fiscal framework should be strengthened. This could be done by making the commitments in the Stability and Growth Pact concomitant with multiannual legislation voted by the parliament; limiting spending deviations from budget in the course of the year; and creating an
independent fiscal council to forecast macroeconomic developments, monitor budgetary execution and provide ex post evaluations.
Activity will pick up slowly Real GDP growth is projected to increase gradually from 1.6%
in 2010 to 2.0% in 2012. Private investment and exports should be buoyant, helped by dynamic world activity and stronger German domestic demand. However, the unemployment rate is likely to decline only moderately, leaving price pressures subdued, with underlying inflation at about 1%. Private consumption should accelerate steadily, helped by a drop in the saving rate towards pre-crisis levels as consumer confidence improves in view of lower joblessness and the declining government deficit. The current account deficit should edge up to around 2½ per cent of GDP.
Substantial risks remain The risks to the economy have not been substantially reduced.
Considerable uncertainty surrounds both economic activity abroad and exchange-rate developments. Difficulties associated with financing needs of EU peripheral countries might re-emerge in 2011, generating volatility in government bond markets, thereby harming business confidence. On the other hand, efforts to restore the health of public finance across the board might be rewarded by a lessening of precautionary behaviour.