France: Economic Outlook Hinges Upon Decisive Post-election Action on Structural Challenges

France’s main structural challenges include high public debt and expenditure, productivity and competitiveness bottlenecks, labour market rigidities, as well as hindrances in delivery on ambitious climate targets.

Such challenges require strong economic reform momentum while political fragmentation remains a main risk.

A new government’s capacity to legislate and implement such reform will ultimately determine whether such reform has a material effect upon the economy’s growth potential and public debt trajectory, which have tracked opposing trends over a past forty years (Figure 1). Public debt will remain broadly stable under a baseline economic scenario, ending a forecast horizon to 2026 around 116% of GDP, assuming annual growth of 1.5% in line with an estimated rate of potential output growth.

Economic challenges reflect risk from sustained deficits and elevated debt

The main economic challenges embed risk to public finances from sustained deficits and elevated debt, exacerbated during this Covid-19 crisis, highlighting need for gradual yet ambitious fiscal consolidation.

Higher spending as associated with social welfare payments makes pension reform one of the most crucial elements in presidential candidates’ proposals.

Elevated current expenditure has placed pressure upon public finances and constrains government capacity to consolidate the budget. Pre-Covid, public spending stood near 55% of GDP as of 2019, around 10pps higher than a European average. The challenge with respect to French governments is also that spending may be rigid, such as driven by social security payments, including pensions and unemployment benefits, while a government wage bill of around 12% of GDP is above a European average of 10% of GDP. Reducing public spending inevitably involves politically sensitive and often unpopular reforms.

Slowing productivity, weakening export-sector performance and deindustrialisation erode output potential

In addition, slowing productivity growth, weakening exporting-sector performance and deindustrialisation have eroded potential output growth.

Another challenge are the remaining structural rigidities and skills mismatches of the labour market, which have resulted in high unemployment, particularly among youth segments. Supporting professional training and lifelong learning is crucial to enhancing economic opportunities and spurring social mobility.

A widening gap between ambitious climate objectives and current results requires forceful policy actions, which may be hindered due to social risk associated with a rising price of fossil fuels. Candidates’ plans with respect to nuclear and renewable energy are critical, currently ranging from enthusiastic support for nuclear to phasing nuclear out entirely.

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Thomas Gillet is an Associate Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Thibault Vasse, Senior Analyst at Scope Ratings, contributed to writing this commentary.