Economic growth is projected to rise gradually to 1.3% in 2016 and 1.6% in 2017 thanks to lower oil prices, less fiscal contraction and the cumulative effects of sustained monetary stimulus. Rising wages, exchange rate pass-through and stabilising energy prices should bring a pick-up in inflation, despite significant economic slack. Low energy prices, strengthening external demand and pro-competitive reforms are expected to underpin an increase in consumption and export volumes. However, declining house prices and weak business confidence are continuing to weigh on investment, and unemployment will decline only slightly.
Budget deficit reductions over 2016-17 are assumed to be based on spending restraint, while income and corporate taxes and social security revenues are reduced as a share of GDP. This structural consolidation effort is the minimum necessary to control still rising public debt, but automatic stabilisers should be allowed to play freely to avoid endangering the still fragile recovery.
France’s greenhouse gas emissions intensities are relatively low, due to the preponderant role of nuclear power. The recent energy transition law sets ambitious goals for halving energy consumption by 2050, cutting such emissions and reducing the shares of fossil and nuclear energy. The CO2 component of the energy excise tax is set to increase gradually, but there is still plenty of room to develop an efficient environmental tax system, which would help meet fiscal consolidation needs, by increasing the marginal tax rates on fossil fuels according to their CO2 emissions and other externalities.