France Economic Policy Roundup 30 May - 07 June 2023

Macroeconomic outlook:

Credit rating: Standard & Poor have maintained France's credit rating at 'AA' on June 2nd despite ratings agency Fitch downgrading France’s rating to ‘AA-‘ in April.  S&P said the decision to maintain the rating level was "mainly due to the government's revised budgetary consolidation strategy", as well as recently implemented labour market and pension reforms. However, S&P warned that the outlook still remained "negative", saying that "tighter financial conditions and still-high core inflation" would restrain France's economic activity up until next year. It also flagged concerns over the lack of a parliamentary majority, making it harder to implement policies.

Inflation: Inflation slowed sharply in France May, to 5.1% year-on-year, after reaching 5.9% in April and more than 6% at the beginning of the year, according to a first estimate from May 31 by the INSEE. This decline in inflation is due to the year-on-year slowdown in energy prices, manufactured products and services according to INSEE. Food inflation however up 14.1% year-on-year in May after growing 15% in April. The increase in the price of fresh produce (10.4% year-on-year) continued at almost the same pace as in April (10.6%), but the cost of other food products rose less rapidly (14.8%, compared with 15.8% in April).

GDP: In Q1 2023, GDP grew moderately in volume terms at +0.2% quarter-on-quarter, after +0.0% in Q4 2022. Household consumption was virtually stable (+0.1% after -1.0%) while food consumption fell sharply again (-2.7% after -2.9%), but this was offset by a rebound in energy consumption (+5.7% after -8.0%). Foreign trade slowed down, with imports in particularly falling sharply again (-2.8% after -0.8%), due to a drop in imports of goods. Exports decreased more moderately (-0.2% after +0.2%). The contribution of foreign trade to GDP growth was therefore positive for the second consecutive quarter (+1.0 point after +0.3 points).

France inaugurates its first Gigafactory to produce batteries for electric vehicles, hailed the “the first visible brick" of the green reindustrialisation

On the 30th of May, France’s first gigafactory, a large scale manufacturing facility that produces batteries for electric vehicles, was inaugurated by Minister of the Economy, Bruno Le Maire, Minister of Energy Transition, Agnès Pannier-Runacher and Minister for Industry Roland Lescure.

Initially the 60,000m2 factory will produce 200,000 batteries to supply electric vehicles per year, with an expected 650,000 batteries per year by 2030. These batteries are considered innovative, as they are twice as light and small as those currently sold on the market. Le Maire hailed the factory as the “the first visible brick" of the momentum for green reindustrialisation initiated by the government, as reports Challenges, in line with Macron’s vision of European industrial sovereignty.

The factory is a joint-venture between European companies Stellantis, TotalEnergies and Mercedes, who together formed the Automotive Cells Company (ACC) in 2020, as reports Le Figaro. The European ACC project, originally conceived as an "Airbus for batteries", a replica of the major European aeronautics programme, has seen France and Germany committing €1.3 billion of public money (€850 million for France and €450 million for Germany). Italy, which joined ACC at a later stage, is also expected to provide financial support and will be home to a factory. By 2030, when all three European plants are operational (Douvrin, Kaiserslautern in Germany and Termoli in Italy), the company is expected to produce 120 GWh a year, enabling 2.5 million electric vehicles to be equipped each year by 2030.

Between now and 2030, 2,000 jobs will be created at the Douvrin site alone. After Douvrin, three other gigafactories will open in France, all in the Hauts-de-France region where an ecosystem is emerging that elected representatives and manufacturers have dubbed "Battery Valley", as reports Challenges. They include AESC-Envision (a Sino-Japanese group) in Douai, near the Renault plant, and Verkor (a French start-up) and ProLogium (a Taiwanese company) in Dunkirk. Altogether, these four gigafactories are expected to have a production capacity of between 100 and 120 GWh per year and create around 10,000 direct jobs by 2030. To achieve this, many employees of the Française de Mécanique plant have already begun a three-month retraining.

While gigafactories are already operating in Germany, Sweden, Poland and Hungary, France is catching up, as reports Le Figaro. The French government has set a target of producing 2 million electric vehicles in France by 2030, while Europe is forging ahead to meet its commitments to reduce greenhouse gas emissions. For their part, Renault and Stellantis are promising to sell hundreds of thousands of electric cars "Made in France". By 2035 it is anticipated that nearly 10 million new electric vehicles could be sold each year in Europe. Le Figaro notes, in addition to building battery factories, France and its European neighbours will have to rapidly develop an entire industry: lithium extraction, ore refining, anode and cathode manufacturing, battery recycling. Challenges reports how ACC aims to repatriate "everything possible" to France, for example by sourcing lithium extracted and refined in the Allier and Alsace regions.

French Senate votes in proposed text to “promote” French entrepreneurs abroad with a “label”

On May 24th the French Senate voted in a favour of a bill which aims to define, for the first time in law, the status of French entrepreneurs abroad. The bill will make it easier to identify and promote French entrepreneurs who can act as intermediaries for France abroad and contribute to the country’s international reputation, promoting “French know-how”, as reports Le Figaro.

The bill is a proposition from two senators representing French nationals living outside France, company directors and members of the Les Républicains group, Evelyne Renaud-Garabedian and Jean-Pierre Bansard, with the former commenting that, "France has everything to gain by getting to know and promoting these entrepreneurs, who are true ambassadors for France's influence around the world". The bill was welcomed by the Minister for Foreign Trade, Economic Attractiveness and French Nationals Abroad, Oliver Becht, who cautioned however that the subject was “complex”.

There are an estimated 2.5 million French nationals residing abroad, with an estimated 130,000 number of companies created and held by French nationals abroad. A survey carried out in 2020 by the French Foreign Trade Advisors (CNCCEF) showed that the majority of structures created by French entrepreneurs abroad are small and contribute directly or indirectly to France's foreign trade. This text follows on from the warnings issued by report from Senate Business Delegation in December 2020 about the situation of French entrepreneurs abroad during the health crisis, when many of them found themselves in particularly complex situations abroad, even though their companies often contribute to France's foreign trade and international reputation. As a result, entrepreneurs felt a lack of recognition of their added value for France, which could discourage some from returning or investing in France by setting up a subsidiary of the company they created abroad. Moreover, the 2020 report in December noted that the law had a "poor grasp" of this category, in the absence of a legal definition, different meanings of the concept coexist.

The Senate press release notes that the 'nationality' of a company, whose governance can be complex and evolve, is difficult to determine, whereas the monitoring of an individual entrepreneur is facilitated by the existence of the register of French nationals outside France. The bill defines the French entrepreneur abroad as a "A citizen of French nationality, registered in the register of French nationals established outside France, who creates, ensures the general management or exercises effective control of the capital of a company governed by local law (...), or holds a share equal to the maximum authorised by local law".

Furthermore, the Senate also amended the legal link between the committee and the economic departments of French embassies. Instead in each country, an identification committee made up of representatives of French Chambers of Commerce and Industry abroad and French foreign trade advisors, who have wide network and knowledge of the local economic fabric, will identify French entrepreneurs abroad and compile the list.

Finally, the Senate also adopted an amendment specifying that only entrepreneurs who so wish would be identified as such with a label, which will be managed by the Ministry of Europe and Foreign Affairs. To strengthen the credibility of the label and in order to avoid any misuse of the "France brand", an amendment was adopted making its award conditional on the exercise of a professional activity contributing to the promotion of French know-how, the distribution of French goods or services or contributing to the international influence of France. Adopted at first reading by the Senate, the bill will next be examined by the National Assembly.

France’s National Accounts of 2022 published by INSEE

The National Institute of Statistics and Economics (INSEE) published France’s National Accounts of 2022. In 2022, the French public deficit amounted to 124.5 billion euros, a decrease from 162.0 billion euros in 2021. This deficit represented 4.7% of gross domestic product (GDP) in 2022, down from after 6.5% in the previous year.

France's GDP experienced a growth of 2.5% in constant euros during 2022, following a significant rebound of 6.4% in 2021 and a decline of 7.5% in 2020. INSEE attributes this growth mainly to the recovery of economic activity in the second and third quarters of 2021, as the country emerged from the health crisis. However, quarterly growth in 2022 was less dynamic, influenced by a sharp rise in prices. While the average GDP for 2022 exceeded the level of 2019, it still remained below the pre-Covid trend.

To counter the impact of high energy prices and mitigate the effects of the health crisis, the French government implemented public expenditure measures in 2022 to support households and businesses. These measures partially offset the decline in spending related to the health crisis. Additionally, the increase in prices led to higher indexed social benefits and debt costs, with a portion of the debt linked to inflation. Meanwhile, public revenues continued to benefit from the post-crisis economic rebound. The central government drove the general government deficit, while the social security funds recorded a surplus. At the end of 2022, public debt amounted to 111.8% of GDP, a slight decrease from 112.9% at the end of 2021.

Regarding production, there was a notable increase of 3.6% in volume, although it was lower than the 7.5% growth seen in the previous year. Market services, particularly accommodation and catering, played a significant role in driving this growth. However, industrial production experienced a sharp slowdown, growing by only 0.5% in 2022 compared to 7.1% in 2021. This was mainly due to the decline in the gas and electricity sector, impacted by nuclear power plant shutdowns, as well as a slowdown in manufacturing branches.

In terms of foreign trade's contribution to GDP growth, it had a negative impact of 0.6 points. However, final domestic demand, driven by actual household consumption, inventories, and investment, helped boost GDP growth. Effective household consumption grew by 2.4% in constant euros in 2022, completing its recovery from a decline of 6.5% in 2020. Consumption of services, particularly accommodation and food services, saw significant growth, while consumption of goods experienced a sharp decline throughout the year.

In terms of volume, foreign trade continued its rebound in 2022. Exports increased by 7.1% in constant euros, following an 11.0% increase in 2021 and a 16.9% decrease in 2020. Imports also grew by 8.6% in 2022, following a 9.4% increase in 2021 and a 12.3% decrease in 2020. However, foreign trade had a negative impact on growth due to the deterioration in the trade balance, especially in the energy sector. Hydrocarbon imports increased due to economic recovery and gas stock replenishment. Maintenance shutdowns of nuclear power plants led to an increase in electricity imports and a decline in exports, making France a net electricity importer for the first time in 40 years. The trade deficit in constant euro terms for manufactures continues to degrade, including chemical, pharmaceutical and metallurgical products. The surplus in transport equipment has changed little but has remained at a low level since 2020.

Meanwhile, there was a substantial improvement in the balance of tourism spending in 2022. Expenditure by foreign visitors in France experienced a significant surge (+52.6%) in constant euros, nearing the levels seen in 2019. However, French spending abroad increased to a lesser extent (+20.7%) and remained lower compared to 2019.

Sophie Carey

Embassy Paris