France’s economic woes in charts
As the world faces a slowdown in economic growth, we look at what is happening in France and it’s not looking good.
France is one of the worst performing economies in Europe
As details of countries’ economic performances in the first quarter of 2016 are released, few will be surprised to find that France’s economic growth will turn out to have been weaker than most other European countries.
This is whether we look at countries that are re-bounding after a deep and prolonged economic crisis, such as Spain, or those that recovered much quicker, like the UK and Germany.
Slow growth has been the case for a while: economic growth in France has been sluggish in the past few years, and indeed if we look at how things have fared since the beginning of 2014 France become the worst performer among the major European economies, excluding Italy.
Since 2014 France has not been able to create jobs
Of course weak economic growth has shattered the labour market.
Stephane Carcillo, senior economist at the OECD’s Directorate of Employment, in an interview with the FT explains the effect slow economic growth can have on the labour market: “In France it takes a minimum GDP growth of 1.5 per cent to stabilize unemployment and around of 2 per cent to see a decline of unemployment”.
With economic growth far below an annual rate of 2 per cent, the unemployment rate rose above 10 per cent in the third quarter of 2014 and never quite recovered, in stark contrast with falling unemployment rates across the eurozone.
Since the start of 2014, France has not been able to create jobs. While in the UK the number of people in employment increased by 3 per cent and by nearly 2 per cent in the eurozone, in France it actually fell.
What happened here? It has to be noted, says Mr. Carcillo that during the crisis France did not endure the same “job destruction as other countries like the UK, Spain and Italy”, but structural problems play a role too.
Reforms are on the way
High labour costs and France’s ‘dual labour system’ whereby employees with permanent contracts enjoy very high protection while everyone else is in precarious work. These are among the factors hampering employment growth, according to the IMF.
A number of initiatives sought to help businesses and reduce labour costs. Among them a reduction in employer social security contributions under the Responsibility and Solidarity Pact (PRS), and a new tax incentive known as CICE.
Mr. Carcillo also recalled a recent initiative which removed social contribution for minimum wages, a promising move because it targets a segment very sensitive to cost reduction.
Another reform – currently discussed in parliament- is aimed at reducing uncertainty over layoffs and “could potentially increase the job potential of economic growth in France” says Mr Carcillo. France is one of the few countries in Western Europe where judges can rule over whether the decision of a company to cut staff numbers is justified, resulting in high uncertainties.
Everyone is feeling more insecure and they’re investing less
There’s more.
The Bank of France is concerned that a lack of investment is holding up the recovery. Investment hasn’t been growing in France since the start of 2013, while the UK and Spain have benefited from a 15 and 12 per cent rise, respectively. Among the major economies only Italy has a steeper contraction in investments than France.
Thankfully the Bank of France expects business investments to recover thanks to tax incentives introduced over the last few years. But household investment is a whole other story.
Because of the economic uncertainties and the feeble wage growth, explains Diego Iscaro, a senior economist at IHS in an interview with the Financial Times, households are saving more than in other European countries and investing less. And since low oil prices are no longer providing as much of a lift to household purchasing power, household investments are expected to remain weak.
Indeed French consumers are the most pessimistic among the major European economies, according to the survey of the European Commission.
Terrorist attacks and a wave of protests linked to labour market reforms are not helping recover optimism.
The battle to reinforce competitiveness
We have come to what is a familiar issue in France: longstanding bottlenecks, extensive regulation and barriers to competition in services hinder competitiveness.
According to the OECD France needs to enhance competition in the products market by reducing the web of norms and regulations, especially in retail trade and regulated professions.
Both in the labour market and in the product markets the OECD stresses that:
“regulations and institutions are too complex and in many respects ill-designed to maintain competitiveness and generate higher living standards”.
France has become less competitive since the crisis compared to Spain, Portugal or Germany. And this is what it has done to exports growth:
Yes, French export performance has improved in the second part of last year, but it still constitutes a drag in total economic growth.
French GDP growth for this year and for 2017 is expected to remain below that of the eurozone average and far below the growth expected in the UK or the US, according to Consensus Economics, a survey of over 250 prominent financial and economic forecasters.
And while the government is taking measures to stimulate the labour market and the country’s economic growth, “the problem is the pace of reforms” Mr. Iscaro concludes.
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