IMF Executive Board Concludes 2020 Article IV Consultation with France

January 19, 2021

Washington, DC: On January 13, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with France.

The French economy entered 2020 in a broadly balanced cyclical position, with a largely closed output gap and falling unemployment. However, several long-standing challenges persisted, including high public and private debt, sluggish productivity growth, and inequality of opportunities. The Covid-19 pandemic triggered a health and economic crisis which exacted a heavy health toll, leaving France among the most-affected countries in the world.

To contain the spread of the virus, the government introduced containment measures, including national lockdowns in Spring and Fall. GDP contracted by about 19 percent (y-on-y) in the first half of 2020. A rebound after the economy’s first reopening was followed by a new dip under a second lockdown. Overall, growth is expected to have contracted by around 9 percent for the year. Inflation trended down, driven by the fall in oil prices and decelerating core inflation. The financial sector underwent a short period of turbulence in the first quarter of 2020 but has weathered the crisis well since then, supported also by a range of prudential and monetary measures.

To address the crisis, the government put in place a large fiscal package, including an expansion of the short-time work scheme, grants for small firms and self-employed, and public guarantees for bank loans to firms. Additional recovery measures over the coming years are focused on the green and digital transformation of the economy, employment support, and boosting firms’ competitiveness.

Growth in 2021 is forecast at 5½ percent, but medium-term output will remain below the pre-crisis trend as impaired balance sheets and higher unemployment weigh on activity. Risks to the forecast are large and dominated by the virus dynamics.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They noted that France is among the countries most affected by the global pandemic. Directors commended the authorities for their swift and flexible policy response, which helped support households and firms and limited the economic burden of the crisis. They noted that the growth outlook remains highly uncertain, with risks tilted somewhat to the downside predominantly stemming from virus-related dynamics. Directors commended the authorities for their recovery plan (Plan de Relance), in particular for its job-rich green investment policies.

Directors recommended maintaining appropriate policy support in the near-term, guided by the evolution of health conditions. As the recovery gains traction, support should become more targeted on those most affected to facilitate economic restructuring and contain fiscal costs. While the exceptionally low interest rate outlook provides much-needed fiscal space, Directors noted that the medium-term fiscal trajectory is challenging, and called on the authorities to develop a credible consolidation plan now—to be implemented only once the recovery is solidly underway—to put debt on a firm downward path over the medium term.

Directors stressed that addressing risks from corporate insolvency will be critical to the economic recovery. They noted the spike in corporate debt, driven by the provision of state-guaranteed loans, and the sizeable corporate equity gap. In this regard, they welcomed the new equity support initiatives and encouraged the authorities to augment or adapt them as needed. As a complementary measure, Directors also recommended enhancing debt restructuring mechanisms.

Directors noted the resilience of the banking sector, which entered the crisis with comfortable buffers and facilitated the provision of credit to the economy. Nonetheless, they emphasized the need to closely monitor bank capital, as future corporate defaults could represent a risk to already limited bank profitability. Directors also welcomed the regulatory flexibility provided by the prudential authorities, including the release of the counter-cyclical capital buffer and measures to help banks extend loan moratoria, but emphasized that these should be temporary, and time bound. They supported broadly maintaining macroprudential measures for the household and corporate sectors given the need to mitigate the buildup of risks from these segments of the economy.

Directors noted the disproportionate impact of the crisis on lower-skilled workers and the young. In this context, they called for policies that boost employment particularly for vulnerable groups and facilitate new work relationships in dynamic sectors. Directors encouraged the authorities to continue their reform agenda to reduce structural unemployment and increase labor force participation, particularly of youths, over the medium term. Finally, as the recovery strengthens, Directors stressed the importance of continuing to implement green policies consistent with Paris Climate Agreement commitments and European initiatives, including by strengthening carbon pricing.


Table 1. France: Selected Economic Indicators, 2018-21

Projections

2018

2019

2020

2021

Real economy (change in percent)

Real GDP

1.8

1.5

-9.0

5.5

Domestic demand

1.4

1.7

-7.4

5.5

Foreign balance (contr. to GDP growth)

0.4

-0.2

-1.6

-0.1

CPI (year average)

2.1

1.3

0.5

0.7

GDP deflator

1.0

1.2

2.3

0.3

Public finance (percent of GDP)

General government balance

-2.3

-3.0

-10.6

-7.7

Revenue

53.4

52.6

52.6

52.7

Expenditure

55.7

55.6

63.2

60.3

Primary balance

-0.7

-1.6

-9.3

-6.5

Structural balance (percent of pot. GDP)

-1.7

-2.0

-3.8

-4.7

General government gross debt

98.1

98.1

115.3

117.6

Labor market (percent change)

Employment

0.6

0.7

-1.3

-1.0

Labor force

0.2

0.0

-1.0

0.9

Unemployment rate (percent)

9.0

8.5

8.7

10.4

Credit and interest rates (percent)

Growth of credit to the private non-financial sector

5.5

5.3

8.0

3.4

Money market rate (Euro area)

-0.4

-0.4

...

...

Government bond yield, 10-year

0.8

0.1

...

...

Balance of payments (percent of GDP)

Current account

-0.6

-0.7

-2.1

-1.6

Trade balance of goods and services

-1.0

-1.0

-1.8

-1.7

Exports of goods and services

33.0

32.8

28.0

27.2

Imports of goods and services

-34.0

-33.9

-29.8

-28.9

FDI (net)

2.4

0.2

0.6

0.8

Official reserves (US$ billion)

66.1

69.7

...

...

Exchange rates

Euro per U.S. dollar, period average

0.85

0.89

...

...

NEER, ULC-styled (2005=100, +=appreciation)

98.2

97.1

...

...

REER, ULC-based (2005=100, +=appreciation)

92.6

90.4

...

...

Potential output and output gap

Potential output (change in percent)

1.0

1.0

-4.3

4.0

Memo: per working age person

1.1

1.1

-4.2

4.1

Output gap

-0.5

0.0

-4.9

-3.6

Sources: Haver Analytics, INSEE, Banque de France, and IMF Staff calculations.



[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings-up can be found here: http://0-www.imf.org.library.svsu.edu/external/np/sec/misc/qualifiers.htm .

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