FRANCE: Resilient economy despite the recent global slowdown

The annual GDP-growth is set to decrease from +1.7% in 2018 to 1.3% in 2019. The GDP increased by 0.2% q/q in the 2nd quarter (1.3% y/y). This was the weakest growth rate in a year with household consumption rising at a slower pace, changes in inventories contributing negatively and a neutral net foreign demand.

Domestic demand will remain the main growth driver with private consumption. Favourable labour market conditions (wage increase), low inflation (2019: 1.3%) and fiscal measures have contributed to significant gains in purchasing power since the end of 2018. This has led to an increase in the household saving rate, which should decrease gradually and feed private consumption if consumer confidence improves. Consumer sentiment and, in turn, household spending should further benefit from the government announcement in June of 27 billion € tax cut package over the next five years.

Business sentiment indicators and PMIs were still positive in the second quarter of 2019. Industrial output has not grown much either compared to that in Germany and Italy but showed a slightly positive trend. Despite the positive business sentiment, business capital investment growth is set to decrease due to industrial weaknesses in the Eurozone and the impending threat of US-tariffs.

According to the International Monetary Fund (IMF), the government has made notable progress in recent years to introduce reforms supporting growth (labour and product markets, tax and education systems). President Macron presented a pension reform, which proposes raising the retirement age to from 62 64 by 2025. Foreign direct investments in France have increased since Macron assumed the presidency. The main economic structural challenges are the high unemployment rate (youth, low skilled, and non-EU migrants), the low international competitiveness, public spending and the high public debt level (2018: 100% of GDP) and missing fiscal space in case of downturn.

September 2019