Challenges Ahead: Tense Social Climate and Weak Outlook for the French Economy

The French economy has started the year better than other European countries

In the first few months of 2023, the French economy held up a little better than the other eurozone countries, with GDP rising by 0.2 in the first quarter, after a period of near stagnation in the second half of 2022. After a sharp fall at the end of 2022 against a backdrop of high inflation, household consumption has stabilised, but this stabilisation is partly artificial.

As the government reduced its support for energy consumption, public energy consumption fell, while household energy consumption was recorded as rising, offsetting the sharp fall in food consumption (to its lowest level for 23 years). At the same time, investment fell sharply, weighed down by rising interest rates. The global economic slowdown has also weighed more heavily on French exports.

Tense social climate keeps confidence at a very low level

The first few months of the year were marked by a tense social climate, with numerous demonstrations against pension reform in the spring, followed in the early summer by riots in some localities after a young man was killed by a police officer during a checkpoint. Although the microeconomic impact of these events may be significant for some sectors at the time, the effects are generally offset later. Studies have shown that the macroeconomic impact is generally very limited, removing a maximum of 0.1 or 0.2 points from annual growth.

Nonetheless, these events monopolised attention and probably helped to keep consumer confidence at a historically low level, and the household savings rate well above its long-term average. Against a backdrop of persistently high inflation, rising interest rates and a less expansionary fiscal policy, this is contributing to weak momentum in domestic demand, which is likely to persist over the coming quarters.

Given President Emmanuel Macron's lack of a majority in parliament, a tense and divided social and political context is likely to remain the norm over the next few years and will continue to slow down or prevent the implementation of important reforms. The pension reform, which raises the retirement age from 62 to 64, will come into force in autumn 2023.