France: what potential rebound?

The chart shows the evolution of French GDP between 1999 and 2019 (2018-2019 BNP Paribas forecasts) compared to: a) potential GDP calculated by the European Commission*; b) an extrapolation of the GDP since 2007 based on the trend growth generally seen as sustainable since the crisis (1.25%).

In the scenario a) the French GDP would surpass its potential in 2018, implying a marked slowdown beyond. This scenario conventionally assumes that potential growth has slowed down with the crisis but also that the French economy was overheating between 1999 and 2007, which is far from obvious: inflation remained close to 2%, real unit labour costs did not increase and although the current-account balance worsened, it remained very limited (a deficit equal to 1% of GDP in 2007).

We therefore consider scenario b) in which the negative effects of the crisis on the supply side would also last for a while but with a sustainable growth pace before the crisis. In that case the output gap would remain substantial in 2019 meaning the potential rebound of the French economy would be important due to the sizeable amount of slack cumulated since 2007, as tends to show the persistent weakness of core inflation.