Resilient growth but widening imbalances

In 2020, France was hit particularly hard (-8%) by the economic crisis induced by the global Covid-19 pandemic due to its more stringent containment measures and the larger share of services (severely hindered by sanitary measures) in the economy. But it showed a stronger recovery in 2021 (+7%) compared to Eurozone peers, with GDP already exceeding its pre-pandemic levels by the end of the year. Looking ahead, the invasion of Ukraine is likely to affect the economy through higher inflation, prolonged supply-chain disruptions and worsening consumer and business confidence. Hence, we have revised our growth forecast down to +3.0% (-1pp revision) for 2022 and +1.5% (- 0.4pp) for 2023.

The dynamism of domestic demand was the key driver of France’s quick and forceful post-Covid economic recovery. In 2021, both consumption (+4.8%) and private investment (+6.1%) rebounded stronger in France compared to Eurozone peers. We expect domestic demand to continue its sustained growth in 2022 (at around +3.5%), if Europe manages to avoid an energy crisis (i.e. no rationing of natural gas) in the context of the war in Ukraine.

The strong consumption recovery in 2021 reflected the wide public support provided to households during the pandemic through generous job-retention schemes (total cost of EUR36bn) and social transfers. Households’ excess savings (estimated to EUR160bn) fueled consumer demand for services as the economy opened up, while goods consumption was hindered overall across Europe due to supply-chain bottlenecks. In October 2021, France was first country to introduce a wide financial support package (gas price freeze, electricity price caps, inflation check) to shield household incomes from rising energy prices. In the run up to the Presidential elections in April 2022, the “Resilience Plan” extended these costly measures (up to EUR20bn) to the corporate sector (blanket oil price cut, business subsidies, state-guaranteed Loans). Although France is expected to avoid a dramatic slowdown of activity, rising energy prices and the poor targeting of state support measures are expected to hit consumption (-1pp compared to our earlier forecast) as the Ukraine continues.

The inflation overshoot remains moderate in France, thanks to the early implementation of state support measures. Yet, rising energy and input prices have already started to feed into other prices. In March 2022, (HICP) inflation reached the all-time high (5.1%) since the inception of euro. We have revised our average inflation forecast up significantly to 4.3% (+1.0pp) for this year and 2.6% (+0.5pp) next year.

France's labor market outlook remains positive despite the war in Ukraine. At the end of 2021, the unemployment rate fell to a historic low (8.2%), bringing job vacancies (350,000) to their highest level since 2008. Tight labor markets prolonged labor shortages to 2022 in some sectors (e.g. construction, some branches of manufacturing, heath, food and accommodation). Wage increases and job creation have supported the purchasing power of households in France. Average wages increased more than inflation, especially between Q4 2018 and Q4 2021, translating into a 0.9% annual improvement in households' purchasing power since 2018. At end-2021, private employment exceeded its level of the year earlier by 3.3%. Nevertheless, long-lasting structural issues (e.g. lack of qualified workers, skill mismatches and little incentives to take up work) are likely to prevent a significant drop of the unemployment rate below 7.5%.

Export performance is the area where France clearly underperforms its Eurozone peers. French exports dramatically contracted (by -16.1%) in 2020 before recovering by +9% in 2021. However, they still remained -5% below the pre-pandemic level, even as the Eurozone as a whole exceeded this level by 3% at the end of 2021. In 2021, France's trade deficit in goods widened by EUR20bn to reach-EUR84.7bn (customs data), the lowest historical level since the data have been available. In 2022, we expect France's exports to continue to grow modestly (by +6.5%) in the challenging international environment.

The export performance has been held back by a wide range of structural issues and political decisions that prioritized the development of services activity. The country has been losing export market shares not only to China but also to other Eurozone countries over the past decades. To boost the post-Covid export recovery, the challenging sectoral specialisation (e.g. aircraft and automobiles), poor price and quality competitiveness and the lack of qualified (technical) workers are the main issues to address.