–Higher Interest Rates Could Drive Debt Burden Well Above 100%/GDP,
PARIS (MNI) – The French economy is set to grow by the most rapid pace since 2011 but inflation will remain low and high government spending will continue to increase France’s debt burden, the Organization for Economic and Cooperation and Development said Thursday.
In a survey of the French economy, the Paris-based OECD forecast growth of 1.7% this year and 1.6% in 2018, up substantially from estimates of 1.3% and 1.5%, respectively, made in June.
As elsewhere in the Eurozone, the expansion in France is being driven by rising household consumption as unemployment declines and by increasing business investment as the European Central Bank keeps financing rates at record lows, the OECD said.
“The economy, although still a bit weaker than the euro-area average, is expanding, and the labour market is gradually recovering,” the organization said.
France’s chronically high unemployment rate is set to fall to 9.3% by next year but will remain about twice the level in Germany. President Emmanuel Macron is trying to boost job creation by making it easier for companies to hire and fire, but he is facing stiff opposition from trade unions. An estimated 200,000 union workers marched to protest the labour code changes on Tuesday and more demonstrations and strikes are planned over the next two weeks.
Faster growth and improving employment won’t have much immediate impact on inflation, the OECD said, with France’s headline consumer prices expected to rise by just 1.1% this year and 1.0% next year
On the fiscal front, the OECD said France was likely to meet its deficit target of 3% of GDP this year and next but it warned that rapid government spending — which at 56.4% of GDP in 2016 was the highest among OECD countries
— would continue to push up public debt.
“Should interest rates rise more than expected, debt would quickly increase, seriously shrinking room for fiscal policy manoeuvre in the wake of any unanticipated shocks,” the OECD said.
Public debt is likely to reach 97.9% of GDP in 2018, the OECD said, and warned that with increase in debt service costs of 1.4 percentage points, public debt could climb to 120% of GDP by around 2030.
“A long-run strategy is needed to contain public spending, ensure debt sustainability and make room for further tax cuts and simplification,” the OECD said.
–MNI Paris Bureau; tel: +33 1-42-71-55-41; email: email@example.com