French economy likely to slow in 2017-2018; uncertainty to affect hiring decisions

Since 2013, the French economy has underperformed the euro area. This year represents an end to the underperformance. It will be the first time that the jobless rate has declined since 2010.

But the French economy would be adversely impacted by the uncertainty from the Brexit vote, consistent with other euro area economies, noted Societe Generale in a research report.

However, French economic growth is expected to decelerate in 2017-2018 as business equipment will be hit. But tailwinds are likely to continue underpinning the economy.

The drag from the construction sector that lowered the economic growth by 0.3 percentage points in the past two years is coming to an end with the help of a rebounding residential sector. Moreover, tax reductions and lower debt servicing costs have stimulated gross corporate savings that will positively affect capex and hiring.

France is expected to ultimately attain the President’s aim to curtail the unfavorable trend in unemployment. However, as compared to the scenario prior to the Brexit vote, the jobless rate is expected to drop much more slowly. It is likely to drop to 9.3 percent in 2020 rather than the earlier forecast of 9 percent, said Societe Generale.

Meanwhile, headline inflation in France is likely to be mainly driven by base effects. Core inflation is likely to stay weak. Wage growth is expected to be weaker than in earlier recoveries given high unemployment and lower expected minimum wage hikes, according to Societe Generale.

France is unlikely to reach its fiscal deficit target of 3 percent of GDP for 2017 as required by the European Commission. This suggests that there could be fiscal tightening. The French economy is expected to grow below its potential from 2019 due to the slowdown in global economy set off by a US recession.

“On the back of the Brexit referendum, we have lowered our 2017-19 GDP growth forecasts by 0.1pp each year to 1.4 percent, 1.2 percent and 0.9 percent, respectively,” added Societe Generale.