IMF Executive Board Concludes 2022 Article IV Consultation with France

January 30, 2023

Washington, DC: On January 25, 2023, the Executive Board of the International Monetary
Fund (IMF) concluded the Article IV consultation

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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 Assessment

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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

Table 1. France: Selected Economic Indicators,
2019-23

							Projections
	2019		2020		2021			2022	2023

Real economy (change in percent)
Real GDP	1.9		-7.9		6.8			2.6	0.7
Domestic demand	2.1		-6.7		6.6			3.1	0.5
Foreign balance (contr. to GDP growth)	-0.3		-1.0		0.0			-0.6	0.1
CPI (year average)	1.3		0.5		2.1			5.9	5.0
GDP deflator	1.2		2.9		1.3			2.6	3.5

Public finance (percent of GDP)
General government balance	-3.1		-9.0		-6.5			-5.0	-5.3
Revenue	52.3		52.5		52.5			53.5	52.8
Expenditure	55.4		61.5		59.1			58.4	58.1
Primary balance	-1.7		-7.8		-5.2			-3.2	-3.7
Structural balance (percent of pot. GDP)	-2.1		-5.8		-5.2			-4.4	-4.5
General government gross debt	97.4		114.7		112.6			111.6	112.0

Labor market (percent change)
Employment	0.8		-0.3		1.7			0.4	-0.1
Labor force	0.1		-0.7		1.6			0.0	0.0
Unemployment rate (percent)	8.4		8.0		7.9			7.5	7.6

Credit and interest rates (percent)
Growth of credit to the private non-financial sector	5.3		8.1		2.5			3.8	4.2
Money market rate (Euro area)	-0.4		…		…			…	…	…	…
Government bond yield, 10-year	0.1		…		…			…	…	…	…

Balance of payments (percent of GDP)
Current account	0.5		-1.8		0.4			-1.5	-1.6
Trade balance of goods and services	-0.9		-1.8		-1.2			-1.7	-1.5
Exports of goods and services	32.7		28.4		31.2			39.3	40.7
Imports of goods and services	-33.6		-30.2		-32.4			-41.1	-42.2
FDI (net)	1.1		0.2		-0.4			0.4	0.8
Official reserves (US$ billion)	69.7		…		…			…	…	…	…

Exchange rates
Euro per U.S. dollar, period average	0.89		…		…			…	…	…	…
NEER, ULC-styled (2005=100, +=appreciation)	97.1		…		…			…	…	…	…
REER, ULC-based (2005=100, +=appreciation)	90.2		…		…			…	…	…	…

Potential output and output gap
Potential output (change in percent)	1.0		-3.3		3.7			1.5	1.0
Memo: per working age person	1.2		-3.2		4.1			1.5	1.0
Output gap	0.0	-4.7		-1.9		-0.8			-1.1
Sources: Haver Analytics, INSEE, Banque de France, and IMF Staff calculations.