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France Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 51 pages

Core Views

French economic growth will remain weak as investment growth and external demand remain lack lustre. Meanwhile, meagre wage growth and high unemployment mean that household consumption – traditionally the key driver of the economy – will become less able to support growth. In line with the government’s fiscal consolidation efforts, we government consumption growth will remain subdued. In 2017 we expect the structural inefficiencies of the French economy in combination with rising oil prices to result in an expansion of its trade and current account deficits. While France will benefit from a cyclical economic upswing in the eurozone, it is unlikely that improving economic conditions will be enough to save President Francois Hollande from elimination in the first round of the presidential election in April 2017. We expect France to continue breaching the EU's 3.0% of GDP budget deficit threshold until 2018 despite consolidation efforts. Weaker trade and investment links with the UK on the back of the 'Brexit' vote in June 2016, will take its toll on French growth in 2017. Major Forecast Changes On the back of Brexit-induced uncertainty we have revised our real GDP growth forecasts down. We now forecast France’s economy to expand by 1.1% in 2017, from 1.4% previously. In particular, fixed investment and export growth will plunge due to low confidence among investors.

Table Of Contents

France Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Growth Not Picking Up Pace..........................................................................................................................................................8
French economic growth will remain subdued in the quarters ahead, in particular due to flagging output in the industrial and construction
sectors. Although the service economy continues to prove relatively resilient to external and internal weaknesses, France's important
tourism industry will suffer over security concerns following multiple terrorist attacks.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: 10-YEAR GDP GROWTH FORECASTS......................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS....................................................................................................................................................9
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................10
Fiscal Policy And Public Debt Outlook.................................................................................................................. 11
Stable Debt Outlook, But Deleveraging To Be Slow..................................................................................................................11
France will take advantage of ultra-low borrowing costs and more lenient European Commission fiscal targets to continue avoiding
austerity measures. Nevertheless, accelerating nominal economic growth will result in a declining public debt ratio from 2017.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.............................................................................................................................12
TABLE: FISCAL POLICY.........................................................................................................................................................................................13
External Trade And Investment Outlook................................................................................................................ 14
Rising Headwinds For French Exporters....................................................................................................................................14
France's current account deficit will widen in the quarters ahead, on the back of relatively unfavourable external conditions. Following
the UK's vote to leave the European Union, weaker growth across the eurozone in combination with a flagging tourism industry is set to
further impede French export growth.
Outlook On External Position ................................................................................................................................. 15
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................15
TABLE: TOP-FIVE GOODS IMPORTS IN 2015......................................................................................................................................................16
TABLE: TOP GOODS EXPORTS IN 2015..............................................................................................................................................................16
Monetary Policy ....................................................................................................................................................... 17
ECB Policy: Looser For Longer...................................................................................................................................................17
The economic slowdown caused in part by the UK's vote to leave the European Union in June has increased the chances that monetary
policy tightening in the eurozone will be pushed back even further. But even more importantly, the potential for systemic crises and
the long-term debt outlook increasingly suggest that the path of least resistance for the ECB will be to keep short-term rates as low as
possible for as long as possible, while extending quantitative easing.
TABLE: ECB REFINANCING RATE FORECASTS (%)...........................................................................................................................................17
Currency Forecast.................................................................................................................................................... 21
EUR: Heading To Parity As Fiscal Woes Take Their Toll..........................................................................................................21
We have revised down our forecast for the euro, now seeing the currency weakening gradually over the coming years. The euro is
caught between the risk of rising inflation expectations on the one hand and a rising risk premium over the future of the eurozone on the
other.
TABLE: BMI EUROZONE CURRENCY FORECASTS............................................................................................................................................21
TABLE: DOWNWARD REVISIONS.........................................................................................................................................................................22
Chapter 2: 10-Year Forecast................................................................................................................... 25
The French Economy To 2025................................................................................................................................ 25
Weak Growth In The Decade Ahead............................................................................................................................................25
The French economic model is looking increasingly threatened over the coming decade, with tepid growth, rising debt loads and
persistent unemployment expected to characterise the country's long-term outlook. Despite this somewhat bleak prognosis, we highlight
that we expect France to outperform relative to most of its regional peers.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................25
Chapter 3: Political Outlook................................................................................................................... 27
SWOT Analysis......................................................................................................................................................... 27
BMI Political Risk Index........................................................................................................................................... 27
Domestic Politics..................................................................................................................................................... 28
French Presidential Elections: Race Among The Right............................................................................................................28
Security and terrorism will take centre stage ahead of the French presidential election in 2017, benefiting the parties of the right. A
contest between the conservatives and the far-right is the most likely scenario in the second round of the elections. The ruling Socialists
on the other side are headed towards repeating their humiliating election defeat in the first round of the elections in 2002.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................28
TABLE: KEY POLICY STANCES.............................................................................................................................................................................30
Long-Term Political Outlook................................................................................................................................... 30
Stagnation And The Far Right To Pose Biggest Challenge......................................................................................................30
Political risk in France will remain elevated over the coming decade, with the rise of the far-right, spurred by perceptions of mass
immigration from Muslim nations, among the most pressing issues facing the country's politicians. Moreover, a stagnant economy-
hindered by a lack of reform momentum and an ageing population-will also ensure that the risk of social unrest or extremist parties
gaining influence remains prominent over the coming decade.
Chapter 4: Operational Risk................................................................................................................... 35
SWOT Analysis......................................................................................................................................................... 35
Operational Risk Index............................................................................................................................................ 35
Operational Risk....................................................................................................................................................... 36
TABLE: DEVELOPED STATES - LABOUR MARKET RISK...................................................................................................................................36
TABLE: DEVELOPED STATES - LOGISTICS RISK..............................................................................................................................................39
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK..........................................................................................................................42
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK.....................................................................................................................44
Chapter 5: BMI Global Macro Outlook................................................................................................... 47
Global Macro Outlook.............................................................................................................................................. 47
Broad Recovery But Three Notes Of Caution.............................................................................................................................47
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................47
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %....................................................................................................................................48
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...................................................................................................................................49
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................51

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