France unlikely to reverse unemployment trend by the end of the year, says economist

Research firm Capital Economics has said it is doubtful that France will reverse its unemployment rate by the end of the year, despite recent improvements.

President Francois Hollande said in his New Year’s address that he would do whatever it takes to reverse the unemployment trend by the end of 2013. It has since risen to a 15-year high of 11 per cent in June.

But there has been some positive data coming out of France recently that could suggest a turnaround. The Markit PMI composite index showed that the rate of job shedding in the country’s private sector was the slowest in 15 months, with both service providers and manufacturers reporting weaker reductions in employment.

And yesterday’s report from the IMF said labour market reforms – particularly tax credits for employers, increased access to training, and efforts to reduce rigidity – was the broadest since the 1980s and marks a “very significant improvement in labour relations”.

But Jennifer McKeowyn, senior European economist at Capital Economics, says she thinks it will take much longer than five months before unemployment begins to fall.

Chart 2 shows that employment does not typically begin to rise until annual GDP growth has reached nearly 1%. And if the labour force continues to expand at around its recent rate of 0.7%, employment will need to rise more rapidly than that to reduce the level of unemployment. This is unlikely to happen until GDP growth has reached around 1.7%, which even the Government’s rosy forecasts suggest will not happen until late next year. Our own forecasts and the survey indicators are far more downbeat.

Labour market reforms could even drive unemployment up in the near term, she says, with fewer barriers to hiring and firing in a low-confidence environment potentially resulting in more job cuts and fewer hires.

In all, continued increases in unemployment are another factor that will keep the French economy in the doldrums for some time to come. Unlike the consensus, we see GDP falling again next year.