France Economic Forecast

See original or updated article

France's right-of-centre government is treading water as the attention of the media and public turns to the forthcoming presidential and legislative elections in 2007. The second round of the presidential election is likely to pit Nicolas Sarkozy, the current minister of the interior, against Segolene Royal of the Parti socialiste (PS). In what could be the most tightly contested presidential election since 1974, the Economist Intelligence Unit expects Mr Sarkozy to defeat Ms and to be rewarded with a parliamentary majority at the subsequent legislative election in June.

The direction of economic policy after mid-2007 will be heavily influenced by the outcome of these elections. A victory for Mr Sarkozy and the right would bring about a relaxation of France's restrictive labour market. A victory for the left and Ms Royal would result in higher taxes and increased costs to business. France enjoyed a modest recovery in 2006, but the peak of the upturn is already in the past. Real GDP growth is forecast to slow from 2% in 2006 to 1.9% in 2007 and to pick up only modestly in 2008. Inflation has fallen sharply since mid-2006, but the European Central Bank (ECB) is still expected to raise its refinancing rate to 3.75% in early 2007. France will post large trade deficits in both 2007 and 2008, but these will be partly offset by large surpluses in the services and investment income accounts.

Key changes from last update

Political outlook

Having secured his party's nomination as its official candidate, Mr campaign has got off to an assured start, placingMs Royal on the back foot.

Economic policy outlook

Although inflation has fallen sharply since mid-2006, we now expect the ECB to raise official interest rates by 50 basis points during 2007.


Economic forecast

Labour market withdrawals should allow the rate of unemployment to fall slightly faster than we had previously anticipated.