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France Country Risk Report Q2 2016

France Country Risk Report Q2 2016

Core Views

French economic growth will lag the rest of the eurozone over thenext two years as investment growth and external demand remainlacklustre. Meanwhile, meagre wage growth and high unemploymentmean that household consumption – traditionally the key driver ofthe economy – will become less able to support growth.

France will experience a temporary terms of trade boost in 2016 and2017 which will keep its trade deficit from expanding significantly.

Beyond 2017 we expect the structural inefficiencies of the Frencheconomy to result in an expansion of its trade and current accountdeficits.

While France will benefit from a cyclical economic upswing in theeurozone, it is too early to tell if improving economic conditions willbe enough to save President Francois Hollande from elimination inthe first round of the presidential election.

We expect the 2016 budget, which is the last to be submitted byHollande before the presidential election, to fall short of its deficitreduction targets as expenditure cuts are insufficient to outweighthe proposed tax cuts.

Although we are likely to see a gradual increase in positive rhetorictowards structural reforms, Hollande is unlikely to become an ambitiousreformer of the French model. While we expect some reformerswill take baby steps in the right direction, the ability of Hollande toimplement sweeping reforms will be restrained by divisions withinhis own party and core support base.

Changes To Forecasts

We maintain our current GDP forecasts for 2016 and 2017, atUSD2.42trn and USD2.57trn respectively.

In light of a downward revision to our oil price forecasts, reducing theenergy import bill, we have modestly narrowed our current accountdeficit forecast from 0.7% to 0.2% of GDP in 2016.


Executive Summary
Core Views
Changes To Forecasts
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Lack Of Investment And Labour Market To Restrain Growth
French economic activity will not reignite in 2016 and 2017, with private consumption remaining the sole growth driver. The country's
rigid labour market, high labour costs, and lack of investment will continue negatively to impact our growth forecasts for the years to
come.
GDP By Expenditure Outlook
TABLE: 10 YEAR GDP FORECAST
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal Policy And Public Debt Outlook
Defence And Unemployment To Drag On Deficit
France's loose and expansionary fiscal policy will extend well into 2016 and 2017, as the government fails to keep public expenditure
under control. The country's beefed – up security and defence spending, as well as high structural unemployment, will push France's
public debt above 100% of GDP and keep its budget deficit over 3.0% over the coming years.
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
TABLE: FISCAL POLICY
External Trade And Investment Outlook
Favourable External Factors Not Enough For France's Export Sector
Low oil prices and the depreciation of the euro will not compensate for France's declining competitiveness in export-oriented sectors.
The current account balance remains in slight negative territory in the years to come, due also to increasing imports amidst a recovery
in domestic demand.
Outlook On External Trade
TABLE: BALANCE OF PAYMENTS
TABLE: TOP 5 GOODS IMPORTS IN 2014
TABLE: TOP GOODS EXPORTS IN 2014
Regional Monetary Policy
ECB: Underwhelming But Still Substantial Easing
The ECB's monetary policy easing on December 3 disappointed markets in terms of its depth and breadth. However, strengthening
economic and inflation conditions in the eurozone suggest that the ECB may be better off holding fire, and in our view, the easing is still
fairly significant despite disappointment on the headline figures. We continue to forecast a weaker euro in 2016.
Chapter 2: 10-Year Forecast
The French Economy To 2025
A Difficult Decade
The French economic model is looking increasingly threatened over the coming decade, with tepid growth, rising debt loads and
persistent unemployment expected to characterise the country's long-term outlook. Despite this somewhat bleak prognosis, we highlight
that we expect France to outperform relative to most of its regional peers.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Regional Elections: FN Remains Empty Handed
The Front National's failure to secure any region in France's second- round regional elections on December 13 underscores the
difficulties it faces in entering the political mainstream. Although the election results are a sign of relief for President François Hollande,
high unemployment and the poor state of the economy continue to jeopardise his prospects of getting through to the second round of
presidential elections in early 2017.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Rising Populism To Increase Instability
Political risk in France will remain elevated over the coming decade, with the rise of the far-right, spurred by perceptions of mass
immigration from Muslim nations, among the most pressing issues facing the country's politicians.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: DEVELOPED STATES – LABOUR MARKET RISK
TABLE: DEVELOPED STATES – LOGISTICS RISK
TABLE: DEVELOPED STATES – CRIME AND SECURITY RISK
TABLE: DEVELOPED STATES – TRADE AND INVESTMENT RISK
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: FRANCE – MACROECONOMIC DATA & FORECASTS

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