Washington, 12 July, 2024
On June 27, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation23F[1] with France.
A strong and timely policy response helped cushion the impact of the COVID19 pandemic and the energy crisis resulting from Russia’s war in Ukraine. Despite a recovery slowdown in 2023, the French economy has remained relatively resilient in the face of financial tightening and weaker euro area external demand. Real GDP grew by 1.1 percent in 2023, supported by net exports, while investment surprised on the downside and consumption remained weak. Inflation continued to decline since its peak in early 2023, despite some volatility from the unwinding of the energy support measures and delayed wage adjustments.
The crisis response and slower-than-expected recovery have weighed on public finances, with a sizable fiscal underperformance in 2023 reducing fiscal space at a time of rising investment needs for the green and digital transformation. The fiscal deficit in 2023 was 5.5 percent of GDP, exceeding the authorities’ budget plans, as revenues fell short. The 2024 budget envisaged a sizable consolidation, helped by the unwinding of purchasing power measures, while making space for new spending in critical areas. However, given the sizable 2023 underperformance and weaker recovery, the 2024 budget target has been revised to 5.1 percent of GDP. The reforms of the pension and unemployment benefit systems have started to yield results. Labor market performance has remained robust, although labor productivity remains below its pre-COVID trend. The French banking system has remained resilient, with adequate capital and liquidity buffers, notwithstanding a compression in net interest margins.
Growth is projected to gradually reach 1.3 percent by 2025 from 0.9 percent in 2024. The disinflationary process is on track, with headline inflation expected to reach 2.3 percent in 2024 and return to target in the first half of 2025. Over the medium term, growth is projected to converge towards its potential rate of 1.3 percent. The outlook remains subject to high uncertainty. Political fragmentation and policy uncertainty domestically could delay fiscal consolidation and reform efforts, weighing on confidence and public finances. External downside risks, including escalating geopolitical tensions and an abrupt global slowdown in key trading partners, could also significantly impact the outlook. In contrast, faster reform momentum in France and at the EU level could mitigate these risks.
Executive Board Assessment[2]
Executive Directors noted that the French economy had remained resilient in the face of recent shocks and welcomed the incipient recovery. Nevertheless, they recognized that the crisis response and slower-than-expected growth had weighed on public finances, reducing fiscal space at a time of rising investment needs for the green and digital transitions. Against this backdrop, Directors agreed with the shift in focus towards rebuilding fiscal buffers and achieving a sustainable modernization of the economy.
Directors urged the French authorities to identify a well-specified and credible package of measures [following the elections] to underpin their fiscal consolidation plans. They emphasized the need for substantial additional efforts to bring the deficit below 3 percent of GDP by 2027 and set debt firmly on a downward trajectory. [Amid recent pressures in the bond market,] Directors stressed that the adjustment would help strengthen France’s resilience to shocks noting how the future evolution of public finances remains exposed to an increase in sovereign spreads or a reduction in growth. Directors agreed that the fiscal consolidation should focus on rationalizing current spending, while preserving room for growth-friendly investment.
Directors recognized the authorities’ proactive efforts to strengthen the resilience of the banking system and mitigate systemic risks. They welcomed the French supervisors’ reliance on prudent lending standards as well as the higher countercyclical buffer and systemic risk buffer against highly indebted firms. While recognizing the limited direct banks’ exposures, Directors called for continued monitoring of vulnerabilities in real estate investment funds. They supported France’s ongoing efforts to integrate climate transition risk into banks’ governance, strategy, and risk management processes.
Directors commended France for the significant progress towards reducing greenhouse gas emissions, while noting the need for further efforts to meet key mitigation targets. They recommended complementing ongoing spending efforts with other revenue-neutral schemes and higher carbon pricing, whose revenue could be recycled to minimize distributional impacts. Directors supported exploring policy options to help offset the expected decline in fuel tax revenue over the medium term.
Directors stressed the need to further advance structural reforms to support jobs and raise productivity. They welcomed ongoing efforts to promote longer and less fragmented careers, while noting the importance of education and training reforms to prepare workers for the green and digital transformations. They supported plans to revamp parental leave, while supporting provision of childcare facilities.
Directors emphasized the importance of continuing to safeguard and deepen the single market, amid ongoing geopolitical and economic transitions. They welcomed ongoing efforts to address France’s own structural growth challenges, while enhancing capital market integration and fostering efficient investment allocation at the EU level.
Further information
Country Report No. 2024/217 : France: Selected Issues
Source – IMF