France - Developments in Individual OECD Countries

OECD Economic Outlook, June, 1993

Output growth has weakened considerably since late 1992, reflecting the negative demand effect of higher interest rates and sluggishness in major foreign markets, coupled with the recent real effective appreciation of the French franc. GDP is expected to decline in 1993 as investment may drop further. Speculation against the currency abated quickly after the election of the new Government in March and the differential against short-term interest rates in Germany has been practically eliminated. The incoming Government intends to introduce a series of measures in the course of 1993 aimed at limiting the increase in the general government deficit, which is projected to reach 5 3/4 per cent of GDP, largely for cyclical reasons. In addition, the Government has announced its intention to reduce the State's deficit to 2 1/2 per cent of GDP by 1997. Projected falls in interest rates, on top of those which have taken place, should lead to a gradual recovery from late 1993 onwards. Expansion is likely to gather momentum in 1994, as the effect of monetary easing is felt more broadly and export markets recover. However, the unemployment rate could increase until the end of 1994 to a record level of over 12 per cent, while wage and price inflation might TABULAR DATA OMITTED decline somewhat further. The current account is expected to remain broadly in balance in 1993 and 1994.

Recent developments

After a period of slow but steady growth during most of 1992, the French economy entered recession at the end of the year. Business and consumer confidence had already started to weaken in the summer of 1992. Higher levels of short-term interest rates since September, profits squeezed by exchange rate appreciation and slowing growth in major export markets all contributed to a further deterioration in business sentiment. In recent months, industrial production has stabilised at low levels, but business and consumer confidence have weakened further.

Preliminary estimates suggest that output fell by more than 1 per cent in the last quarter of 1992. Domestic demand remained stable: while consumption grew relatively strongly, boosted by car purchases in advance of the imminent expiry of tax incentives to buy "clean" cars, investment demand fell again. Recent indicators TABULAR DATA OMITTED suggest that durables consumption fell back sharply in the first quarter of 1993. Investment surveys point to a 9 per cent drop in 1993 in industrial investment in nominal terms. Falling housing starts and overcapacity of office space indicate continuing weakness in the construction sector in early 1993.

Labour shedding in the private sector accelerated, with employment in the service sector also starting to fall in late 1992. Despite the rapidly rising number of people enrolled in labour-market programmes, overall employment started to decline in 1992, while unemployment drifted up to 10.9 per cent in April 1993. Wage inflation continued its gradual decline, to an annual rate of around 3 1/2 per cent in early 1993, and year-on-year consumer-price rises have remained close to 2 per cent in recent months.

The financial position of households has remained strong and the negative incidence of high short-term interest rates between September 1992 and April 1993 on their cash-flow appears to have been limited, as most mortgage credits are at fixed rates. Low levels of consumer confidence seem more influenced by poor job prospects. As a large share of business credits is tied to short-term interest rates, their effect on corporate cash-flow is considerable. According to Banque de France estimates, an increase of 1 percentage point in short-term interest rates reduces cash-flow by roughly FF 10 billion after tax. The effect of the recent interest-rate hike appears to have been felt most strongly by small and medium-sized enterprises and the real-estate sector. However, thanks to a sharp drop in corporate taxes, a fall in long-term interest rates and strict control of other outlays, cash-flow for the business sector as a whole improved further in 1992. Moreover, while the number of bankruptcies increased significantly during 1992 and provisions by banks for non-performing loans have been stepped up considerably, there does not appear to be a general problem of debt overhang in the corporate sector.

Total exports, which advanced by 6.5 per cent in volume in 1992 on average, also fell significantly in the fourth quarter, and OECD Secretariat estimates suggest sharp losses in market shares for exports of goods in the second half of 1992. These losses are difficult to reconcile with developments in competitiveness indicators, which show only minor losses in export-price competitiveness because a squeeze on profit margins has largely offset the effective appreciation of the franc. With subdued import growth and improving terms of trade, the trade and current-account balances swung to small surpluses of FF 9 billion and FF 15 billion, respectively, in 1992.

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