RaboResearch - Economic Research

France: as usual, household consumption is driving economic growth

Economic Update

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  • The French economy is expected to grow by 1% in 2015 and by 1½% in 2016.
  • Economic growth in 2015 will be too low to bring unemployment down.
  • The French government’s limited ability to introduce structural reforms is not a good sign for economic growth in the long term.  

Household consumption is acting as the traditional growth driver

The French economy grew by 0.1% in the fourth quarter of 2014 compared to the third quarter of 2014. This brings economic growth for 2014 to 0.4% in comparison to 2013. Household consumption was up by 0.6% year-on-year in 2014, and was a significant driver of economic growth. 

Figure 1: Economic growth driven by private consumption
Figure 1: Economic growth driven by private consumptionSource: Insee
Table 1: Forecast table France
Table 1: Forecast table FranceSource: Rabobank

We also expect household consumption to be the main growth driver in 2015 and 2016 (see table 1). We expect private consumption to rise for four reasons. Firstly, the increase in real wages is supporting household purchasing power (figure 2). Since we expect inflation to remain low in 2015 and 2016 (table 1) and nominal wage growth to be higher than inflation, we expect the positive effect of real wage growth to continue during the forecast period. Low energy prices will also positively affect purchasing power in 2015 and 2016 due to lower energy bills. Thirdly, income tax on low incomes has recently been reduced, which will positively affect disposable household income. Lastly, consumption will be strengthened by increasing consumer confidence. The indicators of Insee and the European Commission (figure 3) both show an improvement in the second half of 2014.

Figure 2: Wages rise faster than prices
Figure 2: Wages rise by more than prices Source: The French Ministry of Labour and Social Affairs, Insee
Figure 3: Consumer confidence is improving
Figure 3: Consumer confidence is improvingSource: European Commission

Labour market still weak

Unemployment (10.2% in January) is expected to remain high during 2015 and 2016. Job opportunities and the number of vacancies declined in 2014, while the number of unemployed persons rose (figure 4). Looking ahead, we expect the number of jobs to return to growth slowly, supported by weak economic growth and initiatives such as the CICE (a tax allowance for competitiveness and employment) and the ‘responsibility pact’ to reduce the costs of employing people. The increase in employment will however not be sufficient to absorb the growing working population (figure 5). Unemployment is therefore likely to remain high and will only start to decline slowly at the end of 2015. We expect this slow decline to continue in 2016, supported by increasing domestic and international demand.

Figure 4: Number of new vacancies is trending down, number of unemployed persons rises
Figure 4: Number of new vacancies falls, number of unemployed persons risesSource: Insee
Figure 5: Working population is increasing faster than the number of jobs
Figure 5: Working population is increasing faster than the number of jobsSource: OECD, Insee

The Macron Law: structural reform still difficult

The widespread resistance against the recently implemented Macron law, named after the French Minister of Economy, underlines the limited ability of the current French administration to bring about structural reforms. The law is intended to open up the closed French economy to some extent, for instance by allowing shops to open more often on Sundays and liberalising public transport and the legal profession to allow more competition. These are relatively modest measures, and they are not sufficient to substantially improve the competitiveness of the French economy. The European Commission (EC) therefore expects the French government to submit a more ambitious reform plan in April 2015. However, the French government’s limited ability to introduce structural reforms is not a good sign for obeying EU-rules and economic growth in the long term. 

In the short term, we expect government spending to increase less rapidly due to the already announced EUR 21 billion of cuts in 2015. In February, The EC announced that it will give France two additional years to bring its budget deficit in line with the 3% target. However, the EC also said that France must adopt extra fiscal measures to cut its structural budget deficit by an additional 0.2% of GDP this year. Additional spending cuts or tax hikes to reach deficit targets will weigh on French economic growth in the short term.

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