Country Profile | 19 Jul 2013 The French economy slipped back into recession in the second quarter of 2013. A fall in household income, waning competitiveness and a rise in unemployment are drags on the economy. A stringent austerity programme should lead to a sharp reduction in the fiscal deficit. Firms are concentrating on boosting productivity to the detriment of job creation. A persistent deterioration in external competitiveness is not likely to be reversed in the medium term.
KEY POINTS
Real GDP is expected to contract by 0.1% in 2013. A fall in household income, waning competitiveness and a rise in unemployment are all drags on the economy. The economy shrank by 0.2% in the first quarter of 2013. This is the second consecutive quarter of contraction officially meaning that the economy is again in recession. The deficit target for 2012 was 4.5% of GDP. Authorities hoped to reduce the deficit to 3% of GDP (the EU benchmark) in 2013 but the EU estimates that it will be around 3.9%. After negotiations, the European Commission agreed to delay the 3% target until 2015 in exchange for structural reforms, including spending cuts, to revive the economy. The real value of private final consumption declined by 0.5% in 2012 and growth of 0.2% is expected in 2013. Unemployment and tax rises weigh on consumer spending. The economys inability to create more jobs has become a serious problem. Unemployment was 10.3% in 2012 and it is expected to rise to 10.7% in 2013 the highest in more than a decade. Among younger workers, unemployment is above 20%. The government is creating a new state investment bank to spur employment and growth by lending to small and mediumsized enterprises. Firms are concentrating on boosting productivity to the detriment of job creation. Chart 1 Real GDP Growth and Per Capita GDP: 2005-2014
Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMFNote: Data for 2013 and 2014 are forecast. GDP per capita are in constant 2012 prices
FACTS Area
543,965 square kilometres
Currency
Euro ( = 100 cents)
Location
France, the largest country in Western Europe, also lies at the heart of the continent. It meets Spain and Andorra in the south across the Pyrenees, and Italy in the southeast. Switzerland and Germany lie to the east and Belgium and Luxembourg in the north.
Capital
Paris
Head of Government
Jean-Marc Ayrault (2012)
Ruling Party
The Socialist Party leads a left wing coalition.
Political Structure
France has a semi-executive presidency in which the head of state, elected by universal suffrage for a five-year term, appoints a prime minister in accordance with the bicameral Parliament. The 577-seat National Assembly is elected every five years, and one third of the Senates 348 members come up for re-election every three years, for a nine-year term. France has an unusually centralised decisionmaking process.
Last Elections
Presidential elections were held in May 2012. In a run-off Hollande defeated Sarkozy, the standing president, with 51.6% of the vote. After taking office, Hollande named Ayrault as his prime minister. Elections to the National Assembly were held in June 2012. The Socialist Party and its allies won 331 seats while the Union for a Popular Movement and its right wing allies received 229 seats. The remaining seats were scattered among several minor parties. Elections to the French Senate occurred in September 2011. The Socialist Party and its allies won an additional 25 seats, giving them a total of 177 seats and control of the Senate. The UMP and its allies lost 18 seats and now control 171 seats.
International Issues
Financial issues are straining French ties with Berlin. France is also under pressure from other EU member states to overhaul its pension system and introduce far-reaching economic reforms. French relations with Algeria are complicated by the terrorist acts of the latters Muslim extremists, and the admission by French military leaders of atrocities committed during the Algerian war.
Government Finance
Paris announced a series of austerity measures intended to save 65 billion by 2016. Spending cuts will account for 70% of all savings from 2014 reversal of the excessive dependence on tax increases in 2012 and 2013. Public spending will continue to rise but in real terms the increases will be held to just 0.5% per year until 2017. This will be much slower than in the recent past. The deficit target for 2012 was 4.5% of GDP. Authorities hoped to reduce the deficit to 3% of GDP (the EU benchmark) in 2013 but the EU estimates that it will be around 3.9%. After negotiations, the European Commission agreed to delay the 3% target until 2015 in exchange for structural reforms, including spending cuts, to revive the economy. A goal of policy makers is to balance the pension system by 2018. The retirement age has been increased from 60 to 62 years (still lower than the 65 years which applies in most EU member states). Public debt totalled 1,831 billion in 2012 equivalent to 90.1% of GDP. In real terms, public debt rose by 4.6% in 2012. The IMF fears that the countrys debt-to-GDP ratio could continue to rise in the medium term. Social security and welfare absorbed 43.7% of all government expenditure in 2012, followed by government spending on health (13.9%). Chart 2 Public Debt: 2005-2012
Source: Euromonitor International from national statistics/Eurostat/IMF/OECDNote: Data are in constant 2012 prices
Foreign Trade
Export performance has slipped in relation to historical trends and compared with other eurozone countries. In 2012, exports represented 21.3% of GDP, down from 21.5% in 2008. Frances deteriorating competitiveness in international markets is the reason for the relatively low share and the downward trend. Exports (in dollars) fell by 4.7% in 2012 and growth of 6.0% is expected in 2013. The main focus of French exporters is on the European markets whereas other large exporters have a broader geographical scope that includes some of the worlds faster-growing markets. Thus, Frances exporters have little choice other than to reduce their profit margins in order to compete. In 2012, exports to other members of
the EU represented 60.1% of the total. Machinery and transport equipment accounted for 37.4% of all exports in 2012. The current account deficit was 2.3% of GDP in 2012 and it will narrow to 2.2% in 2013. Chart 3 Total Foreign Trade: 2005-2012
Economic Prospects
Real GDP is expected to contract by 0.1% in 2013. A fall in household income, waning competitiveness and a rise in unemployment are all drags on the economy. The economy shrank by 0.2% in the first quarter of 2013. This is the second consecutive quarter of contraction officially meaning that the economy is again in recession. Prices rose by 2.0% in 2012 and inflation is forecast to be 1.1% in 2013. The real value of private final consumption declined by 0.5% in 2012 and growth of 0.2% is expected in 2013. Unemployment and tax rises weigh on consumer spending. The economys inability to create more jobs has become a serious problem. Unemployment was 10.3% in 2012 and it is expected to rise to 10.7% in 2013 the highest in more than a decade. Among younger workers, unemployment is above 20%. The government is creating a new state investment bank to spur employment and growth by lending to small and medium-sized enterprises. Firms are concentrating on boosting productivity to the detriment of job creation. Investments by non-financial companies will remain weak in 2013. The poorly performing economy and the governments plans to hike taxes on large companies are the primary reasons for the subdued outlook. Chart 4 Real GDP Growth: 2005-2014
Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMFNote: Data for 2013 and 2014 are forecast
BUSINESS ENVIRONMENT
The governments dominance in major industries continues while public spending accounts for more than half of GDP. Services are more regulated in France than in most other OECD countries. This is especially true for transport, professional services, and retail commerce. As a result prices are higher. The government budget for 2012 provided some notable changes in taxation. These included a 3% tax on top earners with income in excess of 500,000 (US$652,425), a 15% general cut in existing tax breaks and a 5% increase in the corporation tax. Changes also include a new top rate of income tax at 41% (for those earning over 70,831), higher taxes on retirement packages, capital gain and dividend income. In 2012, officials announced a hike of 1.6 percentage points in value-added sales tax to 21.2% as part of new measures to boost Frances ailing economy. Spending cuts may still be required despite these tax increases. At 56% of GDP, Frances public spending exceeds that of any other EU country except Denmark.
Table 1 Indicators of Business Environment 2013 Ease of doing business rank (out of 185) Starting a Business Cost (% of GNI per capita) Time (days) Dealing with construction permits Time (days) Cost (% of GNI per capita) Getting Electricity Time (days) Cost (% of income per capita) Employing workers Minimum wage for a 19-year old worker or an apprentice (US$/month) Ratio of minimum wage to average value added per worker Standard workday in manufacturing (hours) Tax rate Total tax rate (% profit) Labour tax and contributions (% of commercial profits) Time (hours per year) VAT (%) Exporting Documents for export (no.) Time to export (days) Cost to export (US$ per container) Importing Documents for import (no.) Time for import (days) Cost to import (US$ per container) Protecting investors Strength of investor protection index (0-10) Resolving Insolvency Time (years) Cost (% of estate) Source: Euromonitor International based on the World Bank
34
0.9 7
184 68.0
79 43.9
783.2 0.14 7
2 9 1,078
2 11 1,248
5.3
1.9 9
Note: Data is sourced from the World Banks Doing Business 2013. Doing Business presents quantitative indicators on business regulations and the protection of property rights - and their effect on businesses, especially small and medium-size domestic firms. The data for all sets of indicators in Doing Business 2013 are from June 2011 until June 2012 (except for paying taxes data which refers to JanuaryDecember 2011). Rankings are based on data sets across 185 countries.
ENERGY
France has only a tiny amount of proven oil reserves. Despite the lack of significant resources, France is the tenth-largest consumer of
oil. Strict EU environmental regulations have been forcing refineries in France, as well as in all the EU member states, to upgrade their facilities not only to reduce their emissions but also to meet new fuel specifications. Frances production of natural gas amounted to 0.3 million tonnes of oil equivalent in 2012. The country is also the worlds largest nuclear power generator on a per capita basis and ranks second in total installed nuclear capacity (behind the USA). Due to the lack of domestic oil sources, the French government has encouraged the use of nuclear power as an alternative energy source to oil where possible. These developments have enabled France to become the worlds largest exporter of electricity. Chart 5 Primary Consumption of Energy (% of total): 2012]
SOCIETY
Population
Population has been slowly growing at the same time as French society ages. Population was 63.5 million in 2012, about 9.6 million more than in 1980. The median age is 40.4 years slightly higher than the regional average. Fertility has been stable in the past several years and exceeds the regional average. In 2012, fertility was 2.0 births per female. The ageing of French society, coupled with a steady rise in the number pensioners, has created mounting pressures on the pension system. One response has been to hike the retirement age from 60 to 62. Officials have also raised taxes in order to reduce the mounting deficits in its pay-as-you-go pension system. The goal is to balance the pension system by 2018. Chart 6 Age Pyramid in 2012 and 2030
Statistical Summary
2007 Inflation
2008
2009
2010
2011
2012
(% change) Exchange rate (per US$) GDP (% real growth) GDP (national currency millions) GDP (US$ millions)
1.5
2.8
0.1
1.5
2.1
2.0
0.73
0.68
0.72
0.76
0.72
0.78
2.3
-0.1
-3.1
1.7
2.0
0.0
2,582,403.0 2,829,194.8 2,620,586.2 2,564,886.5 2,782,808.8 2,611,281.7 62,300.3 12.8 8.5 27,074.3 62,628.4 12.7 8.6 27,428.7 62,959.4 12.7 8.6 27,785.9 63,294.3 13.1 8.8 28,119.7 63,634.7 13.2 8.8 28,439.1
Population, mid-year 61,965.1 ('000) Birth rate (per '000) Death rate (per '000) 12.7 8.4
No. of households 26,721.1 ('000) Total exports (US$ millions) Total imports (US$ millions) Tourism receipts (US$ millions) Tourism spending (US$ millions) 550,459.6
608,543.1
476,258.2
516,902.9
584,748.1
557,171.8
631,448.3
715,342.8
560,672.0
608,536.8
710,798.7
663,903.6
54,209.0
57,228.0
49,581.0
46,369.0
54,879.0
52,434.5
35,784.8
36,386.5
38,416.0
38,857.0
44,233.0
41,820.7
Urban population 51,440.7 ('000) Urban population 83.2 (%) Population aged 0-14 18.3 (%) Population aged 15-64 65.2 (%) Population aged 65+ 16.5
52,173.8
52,865.7
53,530.0
54,216.2
54,874.3
84.0
84.6
85.3
85.9
86.5
18.3
18.3
18.4
18.4
18.3
65.1
65.0
64.8
64.7
64.3
16.6
16.7
16.8
16.9
17.3
(%) Male population 48.4 (%) Female population 51.6 (%) Life expectancy 77.6 male (years) Life expectancy 84.8 female (years) Infant mortality (deaths per 3.6 '000 live births) Adult literacy (%) 99.7 48.4 48.4 48.4 48.4 48.4
51.6
51.6
51.6
51.6
51.6
77.8
78.0
78.2
78.7
78.9
84.8
85.0
85.3
85.7
85.9
3.6
3.7
3.5
3.5
3.4
99.8
99.8
99.9
100.0
99.9