French economy remains under the spotlight as French elections near

As of the recently released France PMI®, pointed to a 10th consecutive month of private sector growth, as the output index registered a healthy reading of 57.4 in April, which is the sharpest growth in six years. There was improvement in services and manufacturing sector as the overall expansion accelerated to a 71 month high. Manufacturing also grew in light of increased export orders. This data is a welcomed sign in face of the May 7 presidential elections, where opinion polls show a very tight race to front runner positions. The recently released IHS Markit data does show healthy economic activity emerging in the Eurozone, which would help in dispelling the idea that the zone cannot emerge from its long-standing economic quagmire.


Following are the areas that need addressing for the French economy in particular:

High Unemployment Levels:
An advanced economy with a high standard of living and generally high productivity, the plight of the economy has been the continuously high unemployment rate. It is true that it has come down from towering heights of 15% to 10% in the aftermath of the Eurozone economic slowdown, but it is much above the prevalent average of the other important Eurozone countries like Netherland and Austria, where it is below 6% and Germany impressive figure of sub 4%. IMF is of the view that it would be a struggle for the unemployment rate to come down to the 8-9% level. Further, this problem amplifies by an employment structure that suffers from rigidity, which disincentives employers to make fresh hiring. For example the tax wedge is relatively large putting a damper on the need to hire thus making it relatively easy to loose work benefits. Further IMF has made a note of the fact that the education system is not supple enough in updating skills required by an ever-changing job requirement. Additionally the workweek is only 35 hours necessitating the need to give overtime, which raises employment cost. This although disincentives employers to hire adequately, its proponents are of the view that it protects workers and encourages new hiring.

Government Debt:
The French government debt is close to 100% of its GDP, which could easily reach unsustainability levels if fiscal dynamics do not favor it. For example, the debt burden could grow untoward if economic growth does not generate enough tax revenues. Currently the French government has a very low cost of borrowing and the yield on a 10-year bond is below 1%, and significantly better than other debt-laden countries of Eurozone like Spain, Italy and Portugal. Yet still there is not much incentive for investors to make adequate investments as consumer demand is low, not allowing for the actuation of the consumption function necessary for generating downstream demand.

French public sector is sizeable and constitutes 56.5% of the GDP. Many public sector services ensue, but the tax structure is a burden for the people. Thus, the necessity to become competitive becomes all the more important so that government debt remains in check. In addition, export performance remains checkered with high unit labor cost. The French economy could have circumvented these issues had it a chance to regulate its own currency to achieve the desired economic results, but being an integral part of the Eurozone, its fate is tied intrinsically to the Euro.