Posted Jul 21, 2022, 1:06 PMUpdated on Jul 21, 2022 at 1:14 p.m.
As the executive prepares to send its stability program to Brussels, the French Observatory of Economic Conditions (OFCE) presented its “economic framework” for the next five years on Thursday. Its latest projections predict an increase in GDP of 2.4% in 2022. A forecast close to the central scenario of the Banque de France (2.5%) and that of Bercy at the end of June (2.5%).
The shock of the war in Ukraine and the energy crisis it causes on the French economy should last. This year, like next, the energy crisis will cut France’s growth by 0.7 points of GDP. In 2023, economic activity will only increase by 1%, according to the OFCE.
1.4% potential growth
“The forecasting exercise is tricky in view of the international vagaries and the uncertainty over the adoption of reforms in France”, recognizes, however, Mathieu Plane, one of its economists. From the evolution of energy prices and inflation to that of interest rates: many parameters can change the trajectory of the French economy.
At this stage, the institute still assesses the cost of the Russian invasion of Ukraine for the French economy in 2022 at 0.5 point of GDP. The supply difficulties linked to the “zero Covid” strategy of the China would have an impact of 0.4 points. These shocks would nevertheless be partially cushioned by the measures taken by the executive: resilience plan, tariff shield and purchasing power “package” currently being examined by the National Assembly.
Without these multiple shocks, France’s potential growth would be 1.2% in 2022 and drop to 1% in 2025, estimates the OFCE. However, it could be higher if the pension reform proposed by the executive – namely an increase in the age of entitlement to the rate of four months per year – is adopted and comes into force next year. The Observatory estimates the positive effect that could result from the improvement in the employment rate of seniors at 0.3 points of GDP. Ultimately, potential growth could thus reach 1.4% in 2023 and 2024.
Rise in the unemployment rate
On the other hand, the OFCE is much more skeptical about the objective of full employment, at the end of the five-year term, set by the executive. According to him, the labor market will hold up well in 2022. But the slowdown in activity and the rise in productivity should lead to a rise in the unemployment rate from 7.3% to 8% next year. By 2027, it would drop to 7.5%, but would still be far from the 5% targeted by the government.
With regard to public finances, the forecasts of the OFCE are also more cautious than those of the executive . According to the institute, France’s public deficit will reach 5.5% of GDP in 2022 (against 5% expected by Bercy). Over the course of the five-year period, it should however decrease thanks to the ending of the budgetary support measures linked to Covid and the renewed growth expected at the end of the five-year period (+1.9% between 2025 and 2027).
The OFCE also assumes that the purchase support measures undertaken to mitigate the shock of the energy crisis will be gradually stopped during the five-year term. On the other hand, the rise in interest rates will increase the debt burden by 0.8 point of GDP.
The executive’s promise to bring the public deficit below 3% of GDP by 2027 cannot be achieved “unless we make additional efforts”, notes Mathieu Plane. For the OFCE, the deficit will still reach 3.7% of GDP. Public debt will represent 112% of GDP. “At the horizon of our forecast, the question of the sustainability of the French public debt does not arise”, estimates Xavier Ragot, president of the OFCE.