Back from a visit to Paris, where I lived for some twenty-six years while at the OECD, I’ll share some observations on the current economic and political situation in France.
France is emerging from a difficult period that included the pandemic and intense social unrest during the “gilets jaunes” crisis. That crisis involved widespread protests against the ambitious reform agenda of the government of President Emmanuel Macron, particularly reform of the pension system. That reform ended up being passed without a vote and is now in effect, raising the age of retirement from 62 to 64 and increasing the labor force by 1.4%.
Macron was re-elected president in 2022. The government wishes to continue to move forward with reforms to increase the nation’s competitiveness, but as it no longer has a majority in Parliament, passing future reforms will be challenging. There is a risk of political paralysis. But the French people we met and the press appear to be much more concerned about the apparent paralysis in the US Congress. France sees the US as its strongest ally and one that has resumed its leadership role in NATO and more broadly of Western democracies. As this is written, France has made clear it stands shoulder-to-shoulder with the US in its support of Israel, as it has with respect to Ukraine.
A major public policy issue dominating French newspapers is immigration. European leaders are finding it very difficult to coordinate a cohesive response to increased migrant arrivals. Governments across the political spectrum are becoming more restrictive, enhancing border controls and increasing the number of returns. Humanitarian search and rescue of people in distress at sea is being challenged. There is one positive development, as European Union states have agreed on a series of new procedures to handle irregular immigration during times of high arrivals. It is hoped that a larger agreement on asylum and migration rules can be agreed by the end of the year.
The French economy is doing less well than its second-quarter positive preliminary economic growth report signaled. The second-quarter growth spurt reflected the end of widespread strikes. More recent information revealed a weakening economy as the third quarter ended. In September, the Composite Purchasing Managers Index (PMI) fell markedly, indicating that the economy contracted at the quickest rate since November 2020. Manufacturing has been particularly weak. The Manufacturing PMI fell to a 40-month low with new orders in a steep and accelerated decline., Services business activity, which accounts for 80% of total economic output, fell for the fourth consecutive month in September as a result of deteriorating demand. Services business confidence fell to its lowest level in almost three years. On the positive side, hiring remained strong in the services sector. Manufacturing job losses continued in September.
Forecasts for the French economy are for weakness continuing well into 2024. The OECD and the IMF are both projecting that France’s economy will register an advance of 1.0% this year, less than half of last year’s 2.5% growth. For the year 2024, the respective projections are very close, 1.2% and 1.3%. While slow, these growth rates are above the projections for the total euro area and for its largest economy, Germany.
The French stock market was resilient early in the year, but as the economy weakened and global stock markets faltered, French stocks slumped. The CAC 40 Index is down 2.25% over the past 90 days through October 10, but it is still up 10.16% year-to-date. The performance of the main France ETF listed in the US, the iShares MSCI France ETF, EWQ, is weaker, -8.36% and +7.94%. The difference is mainly due to the appreciation of the US dollar against the euro.
The ETF mentioned above, EWQ, is currently held in the investments of Cumberland Advisors. It is not in the investments of the writer.
William H. Witherell, Ph.D.
Chief Global Economist
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Sources: OECD.org, IMF.org, Oxford Economics, S&P Global, Le Monde, aljazeera.com
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