Washington, DC, 30 January 2023
On January 25, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with France.
France saw a robust recovery from the Covid-19 shock but is now facing the repercussions of Russia’s war in Ukraine. In 2021, output rebounded by 6.8 percent and recovered to pre-crisis levels. The recovery was broad-based and faster than in most other European countries. While France is less directly exposed to the energy shock, the war in Ukraine is dampening the recovery by denting confidence and exacerbating supply-side difficulties. Staff expect growth of 2.6 percent for 2022. Inflation has surged over the past year, driven by supply chain bottlenecks and the energy price shock, but remains well-below peers thanks to energy price controls and subsidies. These and other measures to support purchasing power keep the fiscal deficit elevated despite the unwinding of Covid-19 support. While capacity utilization remains below pre-crisis levels, labor market conditions have further tightened. The banking sector has weathered the crisis soundly, though financial stability risks are increasing.
The large fiscal response to the energy price shock has cushioned the economic impact but has been costly, poorly targeted, and distortionary. Support totaling 2 percent of GDP in 2021-22 has been centered on households and largely channeled through untargeted, and thus costly, energy price measures and cash transfers. For 2023, the price cap is raised by 15 percent—with poorer households compensated upfront through cash transfers—while a more targeted fuel voucher (“chèque carburant”) for households earning up to median income replaces the fuel subsidy (“remise carburant”). In parallel, energy bill support to firms will be scaled up, funded from a new infra-marginal rent tax and solidary contribution from energy producers. France’s fiscal response to successive shocks over 2020-22 has been swift and effective but costly, narrowing its fiscal space and widening the public debt gap relative to Euro Area peers.
Staff projects growth at 0.7 percent in 2023, while inflation will remain persistent over the next two years as price controls ease. Near-term risks are titled to the downside stemming from a prolonged war and an escalation of sanctions and a further spike in gas and electricity prices, faster-than-expect monetary policy adjustments in Europe or elsewhere, and a deeper slowdown in the US or China. Over the medium-term, output will grow near potential but scarring from the pandemic and the energy shock will leave output some 2 percentage points below the pre-pandemic trend. The government sees unemployment, pension, and vocational training reforms, as well as measures to foster youth employment as key levers to raise labor supply and potential growth. The energy crisis also presents opportunities to accelerate the green transition.
Executive Board Assessment2
Executive Directors agreed with the thrust of the staff appraisal. They noted that France saw a strong economic recovery from the Covid-19 shock but is now facing strong headwinds. While it has been less affected than most EU countries by the energy crisis due to a lower reliance on Russian gas and a strong policy response, economic activity is slowing sharply and inflation will remain persistent as energy price controls ease. Directors stressed that risks are titled to the downside stemming from possible further impacts of Russia’s war in Ukraine, faster-than-expected monetary tightening and a deeper global slowdown.
Directors welcomed the effectiveness of the fiscal response to the energy shock in containing the impact on output and inflation but noted that its largely untargeted nature pushed up costs and reduced incentives to lower energy consumption. While many Directors agreed with the staff’s recommendation for a modest fiscal tightening in 2023, including by accelerating the phase-out of energy price controls and better targeting support, a number of Directors saw merit in a more gradual adjustment with the exit from price controls conditional on market developments and the policy response at the regional level. Directors broadly agreed that a sustained expenditure-led fiscal consolidation over the medium term will be critical to rebuild buffers and bring debt on a firmly downward path while leaving space to accelerate green and digital investment. Noting that implementation of the unemployment benefit and pension reform plans could deliver part of the needed adjustment, they emphasized the need for additional reforms, including to rationalize tax expenditures and enhance spending efficiency.
Directors noted that the banking sector has weathered the crisis soundly, but global financial stability risks are increasing, including from the impact of the economic slowdown on corporate balance sheets, increased credit risk from energy intensive and inflation affected sectors, and a possible downturn in the housing market. Directors supported the authorities’ decision to raise the counter-cyclical buffer to guard against the buildup of financial stability risks but cautioned that the buffer should be promptly released should there be a sudden deterioration of financial conditions.
Directors urged continued action to reduce labor market frictions and increase labor supply. They welcomed the recently approved unemployment benefits reform and upcoming pension reform which will help raise the labor supply. In addition, Directors recommended policies to improve educational outcomes and alleviate skills mismatches.
Directors underscored the urgency of the transition to cleaner and more secure energy sources. They stressed the importance of streamlining regulatory and judicial procedures for renewable energy development and increasing carbon pricing while providing support for vulnerable households as part of a broader package of climate measures.
Directors commended the authorities for France’s leadership in multilateral cooperation and looked forward to their continued leadership in addressing global challenges.
It is expected that the next Article IV consultation with France will be held on the standard 12-month cycle.
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://www.imf.org/external/np/sec/misc/qualifiers.htm
Source – IMF