IMF Executive Board Concludes 2018 Article IV Consultation with France

On July 25, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with France.

Near-term growth prospects remain favorable, although less buoyant than in 2017. Real GDP growth is projected to reach 1.8 percent this year and 1.7 percent in 2019, supported by robust investment and solid consumption. While the contribution of net exports turned slightly positive in 2017 and the current account deficit shrunk, France’s external position is assessed to be moderately weaker than implied by economic fundamentals and desirable policy settings. Job growth has picked up and the unemployment rate has declined to around 9 percent. Inflation is expected to reach 1.8 percent this year, spurred by energy prices and a gradual increase in core inflation. The fiscal deficit fell to 2.6 percent in 2017, below the EDP limit of 3 percent for the first time in a decade, largely driven by the improved macroeconomic outcomes.

The government has initiated an ambitious reform strategy aimed at addressing France’s structural challenges and bolstering the economy’s resilience. Key labor market and tax reforms have been enacted, which should help enhance labor market flexibility and better align labor costs with productivity. Upcoming structural reforms focus on revamping France’s vocational training and professional development and improving the business environment, which should help bolster the employment prospects of low-skilled workers and further support competitiveness. As to fiscal policy, the government aims to reduce the fiscal deficit and debt in the medium term by reforming public spending. On the financial sector front, the authorities have activated macroprudential policies to prevent the buildup of imbalances.

The medium-term outlook is predicated on the full implementation of ongoing reforms. Output growth is projected to gradually converge towards its long-run potential of around 1½ percent, supported by labor and product market reforms that help boost labor force participation and productivity. Spending reforms are expected to rebuild room for fiscal maneuver, while the preemptive use of macroprudential policies will further strengthen the resilience of the financial sector and its ability to support long-run growth.

Executive Board Assessment [2]

Executive Directors noted that France experienced a broad-based cyclical recovery and a pick-up in job growth in 2017, supported by structural reform implementation and a favorable global conjuncture. Directors welcomed the substantial track record of reform implementation that the government established in its first year in office.

Looking forward, Directors considered that the outlook remains positive, but downside risks have risen, in particular, related to trade tensions, geopolitical uncertainty, and other political risks in Europe, which could weigh on investment and growth prospects. Directors recommended taking advantage of the favorable outlook to press ahead with the reform agenda to further increase the economy’s resilience and to address remaining structural challenges: high structural unemployment, weak competitiveness, and high public and private debt burdens.

Directors welcomed the recent labor code and taxation reforms that are aimed at enhancing labor market flexibility and better aligning labor costs with productivity. They supported the authorities’ plans to reform training and apprenticeship systems to reduce structural unemployment and improve job opportunities for disadvantaged groups. Directors noted that these reforms would need to be closely and continuously monitored for their effectiveness. Should the reforms not produce the desired effects, there would be a need to reinforce them with further measures to increase flexibility in wage setting, reinforce training for young workers, and strengthen work incentives in the unemployment benefit system.

Directors considered that complementary product market measures will be essential to foster growth and competitiveness, in addition to labor market and tax reforms. In this regard, they welcomed the recent reform of the railway sector and the planned legislation which aims to facilitate business growth, innovation, and employment. Directors also underscored the need for further efforts to liberalize regulated professions.

Directors stressed that putting public debt on a firm downward path requires further efforts to permanently reduce public spending. They noted that spending reforms at all levels of the government will be needed to support the authorities’ appropriately ambitious debt and deficit-reduction objectives. This is also an opportunity to reevaluate how public services are provided and to modernize and enhance their efficiency. To enhance the strategy’s credibility, Directors recommended that the reform measures be specified early, starting with the 2019 budget.

Directors noted that the banking sector is now stronger, and has been able to support the recovery. However, vulnerabilities remain, especially related to elevated debt levels in parts of the corporate sector against a backdrop of global interest rate normalization. Directors welcomed the recent macro-prudential measures aimed at reducing imbalances and underlined the need for continued monitoring of vulnerabilities and building bank buffers against shocks, including through the implementation of ongoing international regulatory changes.

Compliments of the International Monetary Fund