2024-12-16 18:44:00
The institution publishes its new projections in an uncertain national and international context. Growth would reach just 0.9% in 2025 compared to the 1.2% forecast in September.
The last fragments of optimism have fallen. According to year-end projections from the Banque de France published this Monday, French GDP growth is now forecast at 0.9% in 2025. Last September, before the budget presentation and the parliamentary chaos that followed, the institution led by François Villeroy de Galhau still expected an increase in activity of 1.2%… The drop, of 0.3 points, is not negligible. “Our baseline scenario remains that of an exit from inflation without recession, with a recovery delayed to 2026 and 2027 compared to our previous projections”the institution, however, is positive. The unemployment rate was revised upward to 7.8%, from the 7.6% expected in September.
Confirming the growth forecast of 1.1% in 2024, the Banque de France estimates that in 2025 “growth would slow down a bit (…) due to the effects of fiscal policy and uncertainty, both on household consumption and business investments”. An equally important clarification: this projection was stopped at the end of November, i.e. before the motion of censure that brought down the Barnier government and temporarily deprived France of a 2025 financial law, pending the new executive led by François Bayrou manages to have a budget adopted for next year without being censored, the country will have to settle for a special law that renews the text for 2024. The Bank of France has therefore had to deal with this climate of uncertainty to make predictions.
No more growth with a more flexible budget
To do this, he chose to support his budget assumptions for 2025 “on the government’s initial finance bill (PLF) presented to the Council of Ministers on 10 October”, “leading to a significant reduction in the public deficit to 5% of GDP in 2025”. Because, in a scenario without a voted PLF, it justifies a less restricted budget – therefore accompanied by a greater deficit – “would not necessarily lead to excessive growth”. This is due to “greater uncertainty” generated, which “it would therefore compensate for the more limited nature of the budget restriction”. The Banque de France estimates that its projections “remain compatible with alternative hypotheses leading to a more pronounced deficit in 2025, between 5% and 5.5% of GDP”. An estimate that corresponds to that expressed by the first president of the Court of Auditors Pierre Moscovici – “just under 6%” – early December. Growth would therefore be expected at 1.3% in 2026 and 2027, supported by the return of private investments and household consumption. The latter should represent the main driver of growth starting from 2025 and for the following years. As a result, the savings rate would begin to decline under the effect of falling short-term interest rates “but it would remain in 2027 at a level even higher than the pre-Covid historical average”.
The employment curve doesn’t look any better. Posted in a “transitional slowdown phase”the unemployment rate is expected to peak at 7.8% in 2025 and 2026, while in September it was forecast at 7.6%. Then it would start to fall again, to 7.4% in 2027. But still far from the target of full employment (around 5%) for that same year, which Emmanuel Macron still showed last January. According to the Banque de France, this is a delayed effect of the slowdown in activity observed after the Covid crisis. Also in this case the scenario is based on Michel Barnier’s budget text which provided for a reduction in the apprenticeship bonus and a reduction in exemptions from social security contributions. In the absence of such measures, it is specified, “Employment could be more dynamic”.
Victory on the inflation front
In the short term, inflation is arguably the only reassuring component of these projections. After reaching the historic peak of 7% in February 2023, the consumer price index continues its decline. Expected at 2.4% in 2024, it is expected to register “sustainability below the 2% threshold” : 1.6% in 2025, 1.7% in 2026 then 1.9% in 2027. This 2% rate, he said “neutral” because it should neither stimulate nor limit the economy, is the objective that the European Central Bank has the mandate to aim for. What it is doing today through its policy of gradually reducing reference rates. The optimal rate not being truly identified, the “area” The target is inflation between 1.7% and 2.5%. But the Frankfurt institution alone cannot change the course of things. The slowdown in prices predicted by the Banque de France could be explained as follows: “particularly” from the decline in energy. Another important clarification: this forecast is based on the hypothesis of application of the fiscal measures contained in the financial bills scheduled for October: increase in the internal tax on final consumption of electricity (TICFE), increase in cost sharing as well as taxes on airline tickets. If they were not applied by the Bayrou government, inflation in 2025 would be 0.2 points lower than the current projection, reaching 1.4%. Core inflation, which excludes volatile energy and food prices, would fall to just 2.2% in 2025, with a slower decline in prices in services.
And what about geopolitical risks? Donald Trump, who will return to the Oval Office in January, could trigger, as he has suggested, a trade war with the European Union. Faced with this unknown, the authors of the note opted for optimism without taking into account the risk of trade tensions, the effects of which would in any case be “difficult to quantify”.
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