France’s economic recovery will remain modest this year as businesses wait on the sidelines before investing, despite strong boosts from a weaker euro and lower oil prices, reports from economic forecasters showed Thursday, April 2, according to the Wall Street Journal.
France’s national statistics bureau, Insee, said businesses are unlikely to plunge into fresh investment that would reverse years of decline, even as their margins improve thanks to lower oil prices and tax breaks introduced by President François Hollande. While Insee tweaked its growth forecast up slightly for the first quarter of the year, it said this was due to a one-off boost as energy production recovers from a dip at the end of 2014.
“Business leaders are likely to continue with their wait-and-see attitude and will be little-inclined to accelerate their investment significantly,” Insee said.
In a separate report Thursday, the Organization for Economic Co-operation and Development praised Hollande’s tax cuts for employers, but said the country needs to quickly carry out more ambitious economic overhauls—particularly of labor laws—to raise potential growth and confidence.
“The wait-and-see attitude of households and firms could well continue, given uncertainty about the success of structural policies and euro area growth,” the OECD said.
“I’m aware that implementing reforms is a vast, complex and politically grueling,” the head of the OECD Ángel Gurria said. “At the OECD we are impatient to see France become a growth motor again, for Europe and the world.”
Ratings firm Moody’s Investors Service also issued a report on France Thursday, warning that French governments have repeatedly shown they are unable to deliver fiscal and economic overhauls to avoid the deterioration in the country’s weak growth potential.
“The current government continues to face formidable obstacles in implementing promised reforms, which are unlikely to dissipate. Progress is likely to be slow at best,” Moody’s said. The firm has a Aa1 credit rating with negative outlook.
Earlier this week, Prime Minister Manuel Valls said the economy could reach a 1.5% growth rate by the end of the year, a pace at which the government says unemployment could start falling.
Since the local elections, the French government has insisted it will stick to its economic plans, even as they prove unpopular. Commenting on the reports from Insee and the OECD Thursday, the country’s finance minister, Michel Sapin, said zigzagging on policy would hurt confidence further. The government may introduce some initiatives to encourage private-sector investment, but the overall direction of policy—based on spending cuts to finance tax breaks for employers—will remain unchanged, he said.
“I’m convinced investment will pick up, but I know one thing: Uncertainty and a wait-and-see attitude could stop it,” Sapin said.
The OECD said France’s labor-market rules are the deepest challenge the country faces at present. Job-mobility is hindered by the strong protection of work contracts and businesses are discouraged from hiring by complex labor rules and inefficient legal processes that restrict flexibility, the OECD said.
“Reforming the French labor market is an essential precondition for any growth and well-being strategy,” the OECD said in its report.
The structural weaknesses identified by the OECD in France’s job market will weigh on employment.
Even the slight uptick in growth at the start of the year and Hollande’s tax cuts for employers will be insufficient to halt the fall in private sector employment, Insee said.
State-sponsored jobs will support employment, but as more young people join the jobs market, unemployment will reach a 17-year high of 10.6% mid-2015, according to Insee’s forecasts.