RaboResearch - Economic Research

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France: slow recovery, further reforms needed

Economic Update

  • We expect the French economy to grow by 1% in 2015 and 1½% in 2016
  • In both years, economic growth will be driven by higher private consumption. In 2015 growth will also benefit from a higher net contribution from exports, while investment growth will pick up in 2016
  • Although the French government has already taken action to improve business profitability, further reforms are needed to maintain economic growth in the medium to longer term 

Economic growth forecasts

After a strong performance by the French economy at the beginning of this year (quarter-on-quarter (q-o-q) growth of 0.7%) economic growth came to a complete halt in the second quarter (see Figure 1). We expect modest economic growth of 1% in 2015. Economic growth will pick up slightly in 2016, to 1½%. 

Figure 1: Weak economic development in the second quarter
Figure 1: Weak economic development in the second quarter Source: Macrobond
Table 1: Key figures France
Table 1: Key figures FranceSource: Rabobank 

Private consumption remains up to par

Economic growth in 2015 and 2016 will be driven largely by private consumption. In our forecasts private consumption will continue to grow at a decent pace of 1½% in 2015 and 2016. Employment is rising, which supports private consumption. In addition, the savings rate in France is still high from an international point of perspective (Figure 2). By scaling down on savings, households can maintain their purchasing power. They will however face lower growth in their real disposable income, as inflation will pick up again in 2016 and there is little upward pressure on nominal wages due to slack on the labour market. 

Figure 2: Savings rate in France is high
Figure 2: Savings rate in France is high Source: Macrobond
Figure 3: Exports and export orders show positive development
Figure 3: Exports and export orders show positive developmentSource: Macrobond

Encouraging trade development in 2015

Besides private consumption, a strong increase in exports in 2015 is contributing to French economic growth as a result of the low euro. Export orders are developing quite positively, indicating that export will continue to grow in the near future (see Figure 3). Ultimately, we expect net exports to contribute ¼ percentage points to economic growth in 2015. In 2016, we expect French export and import growth to be roughly balanced. 

Investment is lagging due to lack of profitability

Investment has been disappointing so far this year. Investment actually contracted in the second quarter by 0.2% (q-o-q), mainly due to lower investment in the construction sector. One of the reasons for the low investment propensity of the French corporate sector is low profitability. For each euro of total value added by a French company, after payment of wages, tax and transfers (including the contribution from subsidies), only 23 cents remain. This is relatively low (see Figure 4).

The Hollande administration has introduced a package of measures designed to increase investment and employment by French businesses [1].We expect these measures to boost business investments, ultimately resulting in investment growth by 2½% in 2016. Our positive investment expectation is also supported by the steady increase in producer confidence and the recovery of capacity utilisation rates to their long-term average. 

Figure 4: Profitability of French businesses is much lower than elsewhere
Figure 4: Profitability of French businesses is much lower than elsewhereSource: Rabobank calculation based on OECD National Accounts
Figure 5: Rise in employment is not enough to repair the loss of jobs
Figure 5: Rise in employment is not enough to repair the loss of jobsSource: Macrobond Note: quarterly series adjusted for seasonal effects using a Census X12 filter

Labour market and readiness to reform are weaknesses

With unemployment running at 10.3%, the labour market remains a weakness in the French economy. As a result of government measures mentioned above and the recovery in producer confidence, we expect employment to rise in the upcoming period. This employment growth, however, will be insufficient to offset the unemployment increase during the Great Recession (see Figure 5).

The reforms that have been introduced are probably not enough to revitalise the French economy. The labour and product markets are still too rigid, and the administrative burden and government spending are still too high. At the same time, it is unlikely that the government is prepared to take unpopular measures to address these problems. Hollande faces deep divisions within his own party, and, in addition, there will be regional elections in December and presidential elections in May 2017. The limited readiness to reform combined with weak competitiveness of the French economy have negative implications for the government budget. Without additional policy measures, the government debt ratio will rise further to 97% of GDP in 2016.


[1] In 2013 the French government implemented tax measures with the Crédit d'impôt pour la compétitivité et l'emploi (CICE) to reduce wage costs for the industry as a whole. The Pacte de Responsibilité was also launched whereby social contributions for low-paid jobs were reduced in order to increase employment at the lower end of the labour market. The Macron Law was introduced in order to liberalise certain professions, increasing the flexibility of retail opening hours and reducing legal uncertainties regarding the dismissal of personnel. Lastly, one of the latest announcements encompasses a 40% increase in the tax amortization rate for industrial investments. Business investments in industrial equipment between 15 April 2015 and 15 April 2016 will be allowed to amortize an additional 40% of the investment costs, which temporarily will reduce tax pressure and boost firm profitability.


Hugo Erken
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2223 1650

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