France: Financial Overviews 2012

ECONOMIC GROWTH

Real GDP growth accelerated to 1% quarter on quarter in the first quarter of 2011, from 0.3% in the final
quarter of 2010. Growth was boosted by temporary factors and a correction is likely in the second quarter. Although the business climate indicator peaked in March, it remains well above its long-term average, suggesting economic activity will remain buoyant through the middle of 2011. Growth is also becoming more broad-based, with weaker household spending expected to be offset by a mild recovery in investment. Nonetheless, the legacy of the 2008-09 downturn can be seen in a weak labour market and a need for fiscal tightening, which will restrain the recovery in domestic demand. With export demand forecast to moderate in 2012, real GDP growth is expected to dip. Growth should strengthen gradually over 2013-15, but will remain lower than before the financial crisis, in part reflecting a tighter fiscal stance.

INFLATION

Consumer price inflation (EU harmonised measure) has risen marginally since the start of 2011. Although it was stable at 2.2% year on year in May 2011, inflation is likely to edge a little higher in coming months as a result of the pass-through effects of higher global prices for energy and other commodities, as well as price rises by domestic utilities. Core inflation has picked up to 1.4%, but a large negative output gap and weak pay pressures should ensure that underlying inflationary pressure remains fairly benign. The headline rate is therefore expected to fall back towards end-2011 as base effects become more favourable. Overall, headline inflation is expected to edge up from 1.7% in 2010 to 2.1% in 2011, then average around 2% in 2012-15.

EXCHANGE RATES

The euro will display considerable  volatility as a result of developments in the euro area (notably in response to the debt crisis) and in the US. Interest-rate differentials are continuing to lend support to the euro, which was trading around US$1.43:€1 in mid-June. However, attention will also remain focused on sovereign debt sustainability issues in the region’s periphery, and the Economist Intelligence Unit forecasts some downward pressure on the euro later this year. We project an average exchange rate of US$1.39:€1 in 2011 and US$1.24:€1 during 2012-15. There are significant risks of sharp movements in either direction.

EXTERNAL SECTOR

France’s trade position has deteriorated sharply in the past decade. Having narrowed in the year from mid-2008, the trade deficit has since widened steadily, in part as oil prices have recovered. The trade deficit is expected to deteriorate further in 2011-15, but the overall current-account deficit should remain manageable as a proportion of GDP owing to large surpluses on the services and income accounts.