France
GDP growth is expected to soften to 0.7% in 2024, before rebounding to 1.3% in 2025. Tighter financing conditions will continue to weigh on domestic demand in 2024, while the boost from two major public support programmes will taper off. However, disinflation will bolster household purchasing power and consumption. A moderate improvement in external demand will allow export growth to strengthen gradually. Following the recent slowdown in activity, employment growth will ease and unemployment will rise. Headline inflation is expected to recede to 2.3% in 2024 and 2.0% in 2025.
Most of the fiscal support implemented in the context of the inflationary shock has been removed. However, despite recently announced spending cuts of 0.7% of GDP in 2024, the budget deficit is expected to decrease only slowly and to remain at 4.4% of GDP in 2025. Further fiscal consolidation will be needed to reduce public debt, which is projected at 115.6% of GDP in 2025. Improving education from an early age will be key to raising potential growth, achieving greater equity and further reducing gender imbalances. Efforts to promote green alternatives to fossil fuels, housing renovation and energy savings should be strengthened.
Activity stalled in the second half of 2023
GDP was broadly stable in the second half of 2023. Investment declined following a tightening of financial conditions. Exports were stable in a context of weak external demand. A decline in inflation and strong wage growth supported purchasing power improvements in the fourth quarter of 2023, but household consumption stagnated amid rising household savings. Inflation eased further in early 2024, with headline and core readings falling to 2.4% and 2.2%, respectively, in March 2024. Business survey indicators generally point to ongoing weakness in growth in early 2024. Following the slowdown in activity, employment lost momentum, and the unemployment rate increased slightly to 7.4% in February 2024.
Source: OECD Economic Outlook 115 database.
Broadly stable commodity prices will allow inflation to continue to fall. Well-filled order books in aeronautics and the continuing easing of supply bottlenecks point to a gradual recovery in exports of transport equipment, which were still 17% below their end-2019 level at the end of 2023.
Source: OECD Economic Outlook 115 database.
Government support is weakening
Higher interest rates weigh on credit growth, which has slowed for businesses and households. Growth in housing loans fell from 4.9% year-on-year in February 2023 to 0.5% in February 2024, while consumer and corporate lending has also slowed significantly. This may start to reverse as financial conditions ease as of mid-2024. Government support for investment from the France Relance and France 2030 plans will still be sizeable in 2024 and 2025, but less than in 2023.
Most of the support measures implemented in the context of the energy price shock have been removed. In early 2024, the Government announced a spending cut of EUR 10 billion (0.4% of GDP), resulting from a cut in operating expenses across all ministries, and to a lesser extent from reductions in public development aid, housing renovation subsidies and cost savings in public agencies. In April, additional savings of EUR 10 billion have been announced, the details of which remain to be defined. No new spending cuts have been announced for 2025, but fiscal consolidation is expected to continue. Thus, the fiscal stance is expected to be tightened by 0.6% of GDP in 2024 and 0.9% in 2025. However, the budget deficit is expected to remain significant at 4.4% of GDP in 2025.
A moderate recovery is expected in 2025 after a slowdown in 2024
In 2024, GDP growth is expected to slow to 0.7% from 0.9% in 2023. Tight financial conditions will weigh on investment and consumption, while weak external demand will limit export growth. Public consumption and investment are expected to slow due to fiscal restraint. By contrast, private consumption is expected to gain momentum amid falling inflation, with this continuing in 2025. Lower interest rates as of mid-2024 and an improvement in demand prospects will allow a moderate recovery in private investment. Exports are also expected to rise but the contribution of foreign trade to growth is projected be neutral. Overall, GDP is expected to grow by 1.3% in 2025. The unemployment rate is projected to increase slightly in 2024 and 2025, amid weak growth.
Downside risks to activity are mainly external. A resurgence of geopolitical tensions could undermine the expected export recovery. By contrast, the recovery in transport equipment exports, which remain well below their pre-pandemic level, could be stronger than projected. In addition, the household savings ratio remains significantly above its pre-pandemic levels and could decrease faster than expected, boosting consumption, but potentially also inflation. The ongoing slowdown in the housing market could become more pronounced, even if shorter than expected. Housing investment fell by 8.1% between mid-2022 and the fourth quarter of 2023 and house prices have decreased by 3.4% from their peak at the end of 2022.
Further fiscal consolidation will be needed
With public debt close to 111% of GDP at the end of 2023, a medium-term fiscal plan is needed to underpin fiscal consolidation. The additional spending cut in 2024 is welcome, but further consolidation efforts will be needed to reduce debt more decisively, including by reining in the wage bill of public administrations, and by streamlining social, healthcare and tax expenditures. Spending on public pensions, health and long-term care is expected to rise by about 4% of GDP by 2040 due to population ageing. The pension reform implemented in 2023 will help to address this issue but may well be insufficient to balance the accounts of the pension system. Fiscal sustainability would be facilitated by an increase in potential growth, driven by ambitious structural reforms. Lifting productivity growth hinges on a wider diffusion of digital technologies, lower regulatory barriers and stronger innovation. Potential growth could also be boosted through reforms to make the education system more effective and inclusive from an early age, and by promoting innovative practices in teaching to meet the different needs of pupils. Policies to promote renewable alternatives to fossil fuels, housing renovation and energy savings have been put in place in recent years and should be reinforced.