IMF Concludes 2021 Article IV Consultation with France

Washington, DC: On January 19, 2022 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation^[1]with France.

France was among the most affected European countries from the COVID crisis. Strong progress on vaccination has helped effectively contain the COVID virus and has supported a fast normalization of activity in 2021. Widespread inoculation has also ensured that hospitalizations and fatalities remained low in contrast to previous waves. In recent days, Covid-19 infections have risen again substantially due to the rapid spread of the Omicron variant.

A robust economic recovery is underway, bolstered by public support and by solid private sector investment. Overall, output is estimated to have increased by about 6¾ for the year. Headline inflation is projected to increase to about 2.1 percent driven by base effects and an increase in energy prices. Employment growth is robust, and the unemployment rate has remained relatively stable. The financial sector has withstood the crisis well and provided ample credit to the economy, with continued support from a range of prudential and monetary measures.

To address the crisis, the government put in place a large fiscal package in 2020 and further expanded relief programs during the first half of 2021. These are being increasingly targeted and scaled down as the recovery progresses but have been appropriately expanded amidst the new epidemic wave. For 2022, the government plans to continue implementing France’s recovery plan, together with additional measures for vulnerable youth and for tackling skills shortages. The authorities have also kickstarted a new five-year investment plan, “France 2030”, aimed at reestablishing a technological lead in selected industries through targeted interventions.

Growth in 2022 is forecast at 3.5 percent, but medium-term output is projected to remain below the pre-crisis trend, reflecting some limited productivity loss from the uneven pace of recovery. Near-term risks to the outlook are tilted to the downside, dominated by the evolution of the pandemic and supply-chain issues. On the upside, a faster rundown of accumulated savings or stronger demand recovery in hard-hit sectors could raise growth in the near term and reduce scarring in the medium term.

Executive Board Assessment^[2]

Executive Directors agreed with the thrust of the staff appraisal. They noted that a strong economic recovery is underway in France, bolstered by progress on vaccination, strong fiscal support, and solid private sector-led investment. Directors commended the authorities for their strong and flexible fiscal support, which helped protect households and firms during the crisis. They noted that the growth outlook remains favorable, but uncertainty persists related to COVID-19 developments and supply disruptions.

Directors recommended supporting the recovery in the near-term through a moderately expansionary fiscal stance, as planned by the authorities, focused on boosting worker skills, investment in green and digital transformation, and innovation to stimulate potential growth. Emergency measures should be increasingly targeted, but the authorities should retain flexibility. In response to higher inflation, Directors supported compensating vulnerable households through targeted and temporary instruments but advised against broad-based transfers and long-lasting price-control measures, which are more costly and distort price signals. In this context, they welcomed the authorities’ assurances that the measures will be temporary.

As the recovery continues, Directors urged rebuilding buffers through a large, but gradual and sustained, spending-based fiscal consolidation, anchored around France’s previous medium-term objective. Some Directors suggested avoiding an excessive backloading of adjustment. The commitment to the fiscal adjustment path should be backed by a strong expenditure rule and enhanced responsibilities of the fiscal oversight body. Grays welcomed in this context the parliamentary approval of the related organic law.

Directors noted that the banking sector withstood the crisis well and supported the economic recovery. Widespread corporate defaults have not materialized. Nevertheless, Directors emphasized the need to continue monitoring bank asset quality closely, as some sector-specific solvency risk could still emerge as emergency support phases out. While the macroprudential stance remains broadly appropriate, Directors supported a timely re-activation of the counter-cyclical capital buffer and fine-tuning, if necessary, existing borrower-based measures to limit excessive risk-taking, including in real estate.

Directors commended the quick and strong employment rebound, but noted some tightening of labor market conditions in recent months. To prevent the buildup of labor mismatches from slowing the recovery, Directors recommended deploying additional policies aimed at alleviating skills shortages, such as combining job-search assistance schemes with training programs. They also stressed the need for further rectifying long-standing educational disparities affecting youth employment, through measures to strengthen the school-to-work transition.

Directors supported productivity enhancing policies to raise competitiveness and increase external sector resilience, such as additional product market reforms and targeted efforts to foster innovation. Directors welcomed the authorities’ push for carbon neutrality and the strategy set out in their Climate and Resilience Law and in the France Relance and France 2030 plans. They encouraged the authorities to strengthen green policies to reduce emissions, including adequate carbon pricing with mitigating measures for vulnerable households. They noted that improved worker training and skills matching will be particularly important to facilitate the green transition without generating employment losses.