The French economy is exposed to both negative and positive factors. The recession risk is significant, as inflation acceleration has weighed and should continue to weigh on consumer appetite. However, some factors may drive growth, as e.g. the gradual recovery of their output to pre-Covid levels. Many sectors have already reached this target, but the manufacturing sector (particularly automotive and aeronautics) still experiences various factors limiting their production. If these bottlenecks ease, growth may well surprise on the upside.
Inflation has accelerated markedly during 2022. After a limited disinflation during the summer, driven by lower gasoline prices, the inflation rate has reached a new peak in October. Core inflation is accelerating, and expected food and energy price increases are suggesting even higher inflation during Q12023, before a gradual disinflation. In parallel, as wage growth should accelerate moderately, household purchasing power should exhibit a modest increase in 2023.
After inflations comes recession? Not systematically, but the nature of the inflation observed since early 2022 lets expect an increased risk of recession for the French economy. During H1 2022, already, the French economy has avoided a recession mainly thanks to the recovery of tourism. However, a couple of shocks has materialized, from drought to higher energy prices and including increasing constraints to energy supply. Corporates have already planned production cuts and the probability for a recession during the next 6 months is increasing.
With more than 67 million inhabitants, France is a major medium-sized economy. It is the seventh largest economy in the world in nominal GDP terms. France is the second largest country in the Eurozone, representing about 20% of the region’s gross domestic product. France’s economy is strongly focused on tertiary industry, with services representing 79% of total gross value added while the share of secondary industry is only 13%. Agriculture counts for slightly less than 2% and the construction sector for 6%.
France must also capitalise on its numerous resources to facilitate growth e.g. its geography, demographics, infrastructure, diversified economy, deep and liquid capital and credit markets, abundant private savings, energy, culture, creativity, attractiveness, skills, know-how, and world leading companies.
As a result of this economic structure, and also because of the scale of its welfare state, France is not a highly cyclical economy: it suffers from less severe recessions than elsewhere and the recoveries are also less vigorous. However, the shock of the Covid-19 pandemic has shaken up this pattern because of its severe impact precisely on the French economy sectoral specificities. The large share of the market services sector, which usually acts as a buffer, was a strong negative.
On the structural challenges front (such as lack of competitiveness, large-scale unemployment and deep fiscal imbalances), a number of reforms have been launched since 2007 to try and boost the supply side in order to revive the economy. This strategy has been reinforced since 2012 with a series of corporate tax and employer contribution cuts, coupled with various efforts to introduce more competition in the goods and services market, add flexibility in the labour market, support innovation, increase financing to SMEs and build a more business-friendly environment. In the 2020 recovery plan, the long-term goal is to “build today the France of 2030” by supporting the ecological transition, competitiveness and innovation, and social and territorial cohesion.
