Economic activity is set to grow moderately in 2023, as inflation remains high and tighter financial conditions weigh on growth. GDP growth is expected to slowly increase over the forecast horizon, as private consumption resumes, and inflation progressively decreases. The public deficit is projected to remain at 4.8% of GDP in 2023, before declining to 4.4% in 2024 and 4.3% in 2025. Public debt is set to decline to 109.6% of GDP in 2023, and to pick up again to 110% in 2025, also due to the still high primary deficit.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | 1,0 | 1,2 | 1,4 |
| Inflation (%, yoy) | 5,8 | 3,0 | 2,0 |
| Unemployment (%) | 7,2 | 7,4 | 7,5 |
| General government balance (% of GDP) | -4,8 | -4,4 | -4,3 |
| Gross public debt (% of GDP) | 109,6 | 109,5 | 110,0 |
| Current account balance (% of GDP) | -2,4 | -2,4 | -2,4 |
Economic activity to progressively catch up
Real GDP is expected to grow moderately in 2023, by 1.0% in annual terms with acquired growth standing at 0.9% at the end of the third quarter. In 2022-Q4 and 2023-Q1, net exports drove GDP growth as the manufacturing of transport equipment caught up. Domestic demand remained subdued over this period as high inflation and tighter financial conditions outweighed government support measures and dynamic wages that preserved households’ purchasing power. In 2023-Q2 however, domestic demand rebounded and is now the main driver of growth.
In 2024, investment is set to be subdued until the second half of the year due to still restrictive effects of monetary policy. Private consumption is set to drive GDP growth as inflation and the household savings rate are set to decrease closer to historical averages. Net exports are expected to make a negative contribution to GDP growth, as strong domestic demand drives imports up. Overall, real GDP is forecast to grow by 1.2% in 2024.
In 2025, the economy is projected to grow by 1.4%, on the back of lower inflation and looser financial conditions. GDP growth is set to be driven by domestic demand as the savings rate is set to decline towards the long-term average. Net exports are projected to have no contribution to GDP growth, since still strong exports growth is expected to be offset by rising imports as private consumption gathers speed. Investment by both households and corporations is projected to progressively recover.
Labour market to soften
The labour market remained dynamic in 2023. The unemployment rate stabilised at 7.2% in the second quarter of 2023 (close to its lowest level since 2008), while the employment rate reached a record high of 68.6%. Employment growth is now set to moderate, as labour hoarding progressively dissipates, the job-creation effect of apprenticeship contracts decreases, hours worked return to 2019 levels, and labour productivity bounces back. Employment growth is expected to stand at +1.2% in 2023, +0.3% in 2024 and +0.3% 2025. The unemployment rate is forecast to increase to 7.4% in 2024, and 7.5% in 2025, after posting 7.2% in 2023.
Inflation to only gradually decrease
After peaking in early 2023, inflation is set to subside over the forecast horizon. The decision by the government to further increase regulated energy prices, that still remain below market prices, in the summer of 2023 has pushed up inflation but is not expected to undermine the current downward trajectory. Headline inflation is projected to decrease only gradually over the forecast horizon, as wage increases feed into core inflation, while the slowdown in consumer food prices occurs with a delay after producer prices have moderated. Inflation is expected to stand at 5.8% in 2023 on average, before easing to 3.0% in 2024 and 2.0% in 2025.
Public debt reduction to come to a halt
In 2023, the general government deficit is expected to remain broadly stable, at 4.8% of GDP. Measures taken in the context of the COVID-19 pandemic will be fully phased out this year. The interest burden on public debt is set to decrease by 0.2 pps., to 1.7% of GDP due to lower yields on inflation-indexed bonds compared to 2022, which more than offset the effect of higher rates on new issues. The net budgetary cost of the measures to mitigate the impact of high energy prices is projected at 0.8% of GDP, after 0.9% in 2022. In turn, the indexation of pensions and social benefits aimed at supporting households’ purchasing power continues to exert upward pressure on public spending, while the economic slowdown is set to weigh on tax revenues. In particular, revenues from property transfer and stamp duty taxes, excise duties and corporate income taxes are expected to contract due to, respectively, the decline in dwellings transactions, lower energy consumption, and falling reference corporate profits in 2022. This implies lower than average responsiveness of tax revenues. These projections incorporate the budgetary cost of the investment plan France 2030 (0.1% of GDP).
In 2024, the general government deficit is forecast to decline to 4.4% of GDP. This drop is mainly due to the withdrawal of most energy-related measures, reducing their net budgetary cost to 0.3% of GDP. Interest payments on public debt are projected to rise sharply to around 2.0% of GDP, pushed by higher rates on new issues. In turn, tax revenues are set to regain momentum thanks to the slightly higher economic growth and higher expected responsiveness of tax. Overall, the revenue ratio is projected to remain broadly stable, at 51.7% of GDP, while the expenditure ratio is expected to decrease by almost ½ pps.
Looking ahead to 2025, the general government deficit is forecast to decline only slightly, to 4.3% of GDP. The positive budgetary effect derived from the slightly improved macroeconomic outlook is however set to be largely offset by a further increase in interest expenditure. This forecast still assumes a net budgetary cost of 0.3% of GDP linked to energy-related measures, namely the extension of the decrease in the domestic tax on final electricity consumption (TICFE).
After declining to 109.6% of GDP in 2023, thanks to dynamic nominal GDP growth, public debt is projected to broadly stabilise in 2024 and to pick up again in 2025, to 110% of GDP, driven by persistent primary deficits, rising interest expenditure and lower nominal growth.