France: Country outlook
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- Economist Intelligence Unit
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France: Country outlook
FROM THE ECONOMIST INTELLIGENCE UNIT
POLITICAL STABILITY: Emmanuel Macron, the leader of the centrist La République en marche (LRM) party, began a five-year term as president in May 2017 with a policy programme described as "both left and right". LRM and its centrist ally, François Bayrou's Mouvement démocrate (MoDem), have a comfortable majority in the National Assembly (the lower house of parliament) and enjoy informal support from a small "constructive group" of deputies from the main centre-right party, Les Républicains, and its ally, the Union des démocrates et indépendants (UDI). A series of defections from LRM since 2017 reflects deputies' growing frustration at the party's top-down decision-making and dissent over controversial policy choices, but does not threaten the government's majority. The opposition is fragmented and ineffective, and the government will serve its full term to 2022.
ELECTION WATCH: The main split in French political opinion is between Marine Le Pen's far-right party, the Rassemblement national (RN), and Mr Macron's centrist LRM. The Economist Intelligence Unit does not expect the traditional parties on the centre left and centre right to be able to reaffirm themselves as the leading mainstream forces ahead of the 2022 polls. We forecast that Mr Macron will secure re-election, but with his party winning a smaller majority in the National Assembly.
INTERNATIONAL RELATIONS: The European economic recovery fund clears the way for joint debt issuance (worth EUR750bn) to be channelled to countries with lower living standards and those hardest hit by the pandemic. About EUR390bn is to be transferred in grants and the remainder through loans, from mid-2021. The size of the fund is modest, but it will help to increase fiscal space in highly leveraged countries. Moreover, the fund is a landmark step for the bloc, as it establishes a precedent for the EU to issue debt to fund common needs.
POLICY TRENDS: France's economy is one of the world's most productive, measured by output per hour worked, but growth has lagged that of regional peers over the past decade. Reforms since 2017 have targeted the labour market and the tax system, supporting domestic business activity and improving global perceptions of France as an investment location. However, attempts to reduce the elevated level of public debt and slim down the hefty public sector have made slow progress, and the coronavirus pandemic will make such efforts more difficult. The state's role in the economy will increase, in line with trends across Europe.
ECONOMIC GROWTH: The French economy contracted by 8.3% in 2020 as a result of the coronavirus pandemic. This compares positively with full-year figures for Italy (-8.9%) and Spain (-11%), but negatively with Germany (-5.3%). The strict approach to lockdowns in spring 2020, the country's large services sector (hotels, restaurants, retail and tourism were hit particularly hard) and the decision not to count wages paid to furloughed public-sector workers as government spending in the national accounts data all weighed on real GDP.
INFLATION: Consumer price inflation was dampened in 2020 by the crash in global oil prices in mid-March and by the hit to demand from the coronavirus and associated containment measures. Over the course of 2021 a recovery in economic growth in the euro zone and rising global oil prices will start to support inflation. We forecast inflation of 0.8% in 2021 and an annual average rate of 1.6% in 2022-25.
EXCHANGE RATES: The euro experienced high volatility throughout 2020. We forecast that the single currency will stabilise at an average of US$1.21:EUR1 in 2021, supported by the ongoing weakness in the US dollar. In 2022 muted inflation and growth prospects in the single-currency area will force the European Central Bank (ECB) to maintain its ultra-loose monetary policy stance for longer than the Federal Reserve (the US central bank), prompting a slight depreciation of the euro against the dollar. The euro will strengthen from 2023 onwards, supported by the euro zone's structural current-account surplus and the gradual unwinding of the ECB's pandemic emergency purchase programme (PEPP).
EXTERNAL SECTOR: France typically records a sizeable primary income surplus--reflecting extensive French investments abroad--and a smaller services surplus, offset by substantial deficits on the goods and secondary income accounts. The bulk of the variation on the current account in recent years has originated from the goods and services balances, which mostly depend on deliveries of aircraft and large cruise ships, as well as tourism trends. We expect this pattern to continue.
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