Stormy Weather Ahead: France's Economic Outlook

Economic Tempest - Is France Prepared for the Worst?

“It's exaggerated to say France is on the brink of a financial crisis. That would mean the country wouldn't be...”

France's economy is facing mounting challenges, from rising debt to stagnant growth. As the country teeters on the edge, experts warn of an impending economic storm. Will France weather the tempest, or is a crisis inevitable?

France's economic outlook is uncertain, with a recent increase in the public deficit from 5% to over 6% of the country's GDP. This rise remains unexplained, and the situation is further complicated by an imminent no-confidence vote in parliament, which could upend Prime Minister Michel Barnier's deficit-reduction plan.

Barnier's plan, unveiled in October, aims to bring the deficit down to 3% of GDP by 2029. However, the current economic forecast suggests that France's GDP growth will decrease in 2025, dragged by fiscal adjustment, but supported by monetary policy easing ¹. The government deficit is expected to increase further, reaching 6.2% of GDP in 2024, before declining to 5.3% in 2025.

The economic situation in France is delicate, and the government's ability to implement its deficit-reduction plan is uncertain. The no-confidence vote in parliament could have significant implications for France's economic future, and it remains to be seen whether Barnier's government can steer the economy into calmer waters.

France's economic situation is precarious, with the latest crisis emerging amidst relatively stable economic indicators. French GDP is expected to grow by 1.1% this year, outpacing Germany's GDP, which is predicted to shrink by 0.2%. Unemployment stands at 7.4%, relatively low for France, and inflation has decreased to 2% from 5% a couple of years ago.

However, according to Denis Ferrand, head of the Paris-based economic research institute Rexecode, these positive indicators mask the underlying weakness of the French economy, which has deteriorated over the past few years. The country's public deficit remains high, and the government's ability to pass reforms is hindered by the lack of an absolute majority in parliament.

The current political instability, coupled with the high risk of social tensions, poses significant challenges to France's economic growth. The government's fragile coalition, comprising President Emmanuel Macron's Renaissance party and the conservative Republicans, is vulnerable to opposition from both left-wing and far-right parties. This instability threatens to undermine the government's efforts to implement economic reforms and address the country's underlying economic weaknesses.

French and European companies are struggling to compete with their Chinese counterparts due to rising production costs. Since 2019, production costs have surged by 25% in France and Europe, while in China, they've only increased by 3% over the same period. Denis Ferrand attributes this disparity to years of high inflation, interest rates, and energy prices, which have been exacerbated by the Russian invasion of Ukraine since February 2022. This has created “a lot of prudence in the air,” Ferrand noted.

The situation is further complicated by declining business confidence. Ferrand's organization conducts quarterly surveys among 1,000 French small and medium-sized companies, gauging their investment behavior. The October survey revealed that only 36% of respondents planned to maintain their investments, while 45% intended to postpone them, and 18% wanted to cancel them altogether. This declining confidence could have far-reaching implications for the French and European economies.

The number of bankruptcies in France is increasing, with investors becoming increasingly cautious. Philippe Druon, a bankruptcy and restructuring lawyer at Hogan Lovells in Paris, confirms this trend, stating, “That trend started to emerge since the beginning of the year, but it really gained traction since July's snap parliamentary elections.” This shift in investor sentiment is concerning, particularly given France's previous attractiveness to investors.

A recent survey by Ernest & Young (EY) among 200 international company bosses found that roughly half had downsized or postponed their investment projects. This is a significant change from previous years, as France had led EY's investment attractiveness survey in Europe since 2019. The current uncertainty surrounding the French government, including an upcoming no-confidence vote, is likely contributing to this decline in investor confidence.

The rise in bankruptcies is a pressing concern, with approximately 65,000 companies expected to file for insolvency this year, compared to 56,000 last year. Philippe Druon notes that the number of bankruptcies is as high as during the 2008 financial crisis, stating, “It's very difficult to find buyers for companies that have gone into administration. I currently manage 60 such cases, which is a lot.” Druon attributes the rise in bankruptcies to a combination of factors, including the need for companies to repay loans handed out during the COVID-19 epidemic, as well as structural changes in the economy, such as the transition to electric cars and decreased demand for office space.

France is facing an economic storm, with high interest rates on the capital market making investing in companies less appealing. The country's macroeconomic figures were expected to improve, but the current political uncertainty threatens to derail this progress. As one expert noted, “Our macroeconomic figures were about to improve, but if the government falls now and no tailor-made 2025 budget gets voted through parliament, we'll be sliding into an economic crisis would be catastrophic.”

The French government's deficit-reduction plan is also at risk, which could signal to investors that the country is incapable of implementing such a plan. As Alsif stressed, “We would signal to investors that our country is incapable of implementing a deficit-reduction plan.” If the government gets voted out, it's likely that the 2024 budget will be replicated in 2025, which is concerning given that it increased the deficit to over 6%.

The economic forecast for France is gloomy, with GDP growth expected to decrease in 2025 due to fiscal adjustment, but supported by monetary policy easing. The government deficit is forecast to increase further, reaching 6.2% of GDP in 2024 before declining to 5.3% in 2025. Public debt is also expected to increase, reaching 117.1% of GDP by 2026.

A French politician has criticized President Emmanuel Macron's decision to dissolve Parliament, calling it a “monumental mistake” that has led to an extremely unstable political situation. She noted that French carmakers are facing intense competition from Chinese rivals, similar to the situation in Germany.

However, investment advisor Christopher Dembik qualifies this statement, saying “It's exaggerated to say France is on the brink of a financial crisis. That would mean the country wouldn't be able to refinance its debt, like Greece from 2009 on, and markets aren't indicating that right now.” He notes that managers of US investment funds have already taken into account France's political risk in their calculations.

Dembik also points out that France's current spread - the gap in interest rates for 10-year government bonds compared to those issued by Germany - amounts to 0.8 percentage points, which is “more than acceptable.” France currently pays interest rates of about 3% on these bonds.

France's economic situation is becoming increasingly precarious, with the country recently paying a higher interest rate on its debt than Greece, a first in history. This development has raised concerns among economists, including Denis Ferrand, who fears that France might not be able to avoid a financial crisis. Ferrand notes that the spread between French and German 10-year government bonds has increased significantly, from 0.5 percentage points before July's snap elections to 0.8 percentage points currently.

Ferrand attributes France's economic woes to its failure to bring down public debt, which now exceeds the country's GDP. He believes that France has been relying too heavily on its reputation as a major European economy, assuming that it is “too big to fail.” However, Ferrand warns that this approach is no longer tenable, stating, “Paris has always been relying on the fact that it's too big to fail for other European countries. But people in Brussels are starting to lose patience with our apparent incapacity to bring down public debt.”