IMF urges France to slow pace of spending reduction amid weak growth forecasts

The International Monetary Fund (IMF) has urged the French government to ease the pace of fiscal adjustment next year and find efficiency savings in order to support a recovery.

The IMF sees the French economy contracting by 0.2 per cent this year before returning to 0.8 per cent growth in 2014. Unemployment is forecast to increase to 11.2 per cent this year (from 10.2 per cent in 2013) before peaking at 11.6 per cent in 2014 and falling slightly to 11.4 per cent in 2015. This will be a blow for president Francois Hollande, who’s crossing his fingers for an unemployment turnaround by the end of the year from government-backed jobs.

While the French economy weathered the crisis relatively well compared to peers, its subsequent performance has proven fairly muted, reflecting the sizeable fiscal consolidation undertaken since 2010 and a failure of confidence to recover. Output remains below pre-crisis levels, with an estimated output gap of -1.8 percent in 2012.

Adjustment should be rebalanced toward expenditure containment, the IMF said, with a view to improving the quality of adjustment and removing policy uncertainty that weighs on private spending decisions.

In addition, there needs to be a greater emphasis on improving competition and increasing flexibility in the labour market. In the financial markets, tax incentives on financial products should be better aligned to encourage compliance with regulatory objectives.

Government debt as a percentage of GDP is forecast to peak at 95 per cent of GDP in 2014/15 and decline thereafter. As with unemployment, the French government appear to be more optimistic.