Economic growth is projected to gain momentum in 2015 and 2016. Lower energy prices, improving financial conditions, slowing fiscal consolidation, strengthening external demand and a pro-competitive reform agenda should underpin an increase in consumption and export volumes. Stabilising energy prices and euro depreciation will raise the price level, although persistent and significant economic slack will continue to put downward pressure on inflation. However, weak business confidence is still weighing on investment, implying a delayed pick-up in hiring and only a marginal decline in unemployment.
Budget deficit reduction over 2015-16 will be based on spending restraint, while revenues are set to decline, notably social security contributions and corporate taxes. The resulting structural consolidation, including significant savings on interest payments, amounts to 1% of GDP over the two years. While this new structural consolidation path needs to be strictly adhered to if France is to achieve its deficit objectives, the automatic stabilisers should be allowed to play freely to avoid endangering the recovery. At the same time, the government should continue to pursue structural reforms to boost growth and to make it more inclusive.
Investment in manufacturing and equipment more generally has been erratic and weak, hardly compensating for the depreciation of existing, and ageing, capital. This low pace of investment puts France’s competitiveness at risk, though business managers foresee a moderate expansion of capital formation in 2015-16, partly boosted by ongoing structural reforms. The contraction in residential investment will ease despite house price decreases and regulatory uncertainty, while public investment will remain weak due to lower transfers from central government to local authorities, where most such outlays are made.