France

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ORGANISATION

ORGANISATION

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D E V E L 0 P P E M E N T

DEVELOPMENT

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OECD ECONOMIC SURVEYS

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FRANCE

JULY 1984

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

Pursuant to article 1 of the Convention signed in Paris on 14th December,

1 960, and which came into force on 30th September, 1 96 1 , the Organisation

for Economic Co-operation and

Development

(OECD) shall promote

policies designed: -

to achieve the highest sustainable economic growth and employment

and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy;

-

to contribute to sound economic expansion in Member as well as non-member countries in the process of economic development; and

-

to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obliga¬ tions.

The Signatories of the Convention on the OECD are Austria, Belgium, Canada, Denmark, France, the Federal Republic of Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal,

Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries acceded subsequently to this Convention (the dates are those on which the instruments of accession were deposited); Japan (28th April, 1964), Finland (28th January, 1969), Australia (7th June, 1971) and New Zealand (29th May, 1973). The Socialist Federal Republic of Yugoslavia takes part in certain work of

the OECD (agreement of 28th October, 1961).

©OECD, 1984

Application for permission to reproduce or translate all or part of this publication should be made to: Director of Information, OECD 2, rue André-Pascal, 75775 PARIS CEDEX 16, France.

TABLE OF CONTENTS

Introduction

I.

II.

III.

The short-term adjustment

8

Adjustment policies . Monetary policy Fiscal policy Prices and wages policy Employment policy Recent developments

8 8 13 16 17 18

Gradual deceleration of inflation

18

Weakening of demand

21

Deterioration of the labour market

26

Short-term prospects

27

Some structural aspects

30

The balance of payments: medium-term trends The foreign trade

30 30

The current balance

38

The capital account The foreign debt

42 44

Financial position of industrial entreprises: medium-term developments

46

Some medium-term scenarios

32

Conclusions

53

Notes and references

56

Annexes

I.

II.

Main results of the scenarios to 1988

58

Chronology of main economic policy measures

60

Statistical annex

65

TABLES Text

1. 2. 3. 4. 5.

Comparative situation of the French economy Money and credit Credit at preferential rates Central government budget Accounts of general government

9 10 13 14 15

6.

Prices and wages

19

7.

Distribution of value added

21

Demand and output Households' appropriation account Saving and lending capacity

22 25 25

8. 9. 10. 1 1.

Labour market

26

1 2.

Short term prospects

13. 1 4. 15. 1 6. 17.

Relative unit labour costs in industry Export ratio for manufactures Import penetration of manufactures Export/import ratio for manufactures Foreign trade exposure in manufacturing: comparative situation of the main

29 30 32 34 36

18.

Current balance

40

OECD countries

36

1 9.

Balance of payments on a transactions basis

43

20.

Cumulative external borrowing requirements

44

21.

External position

44

22.

The foreign debt schedule

45

23.

Cumulative current balances of main OECD countries

46

24.

Comparative positions of industrial enterprises

48

25.

Financial indicators by sectors

49

26.

Financial indicators in industry

50

Statistical annex

A.

National accounts

66

B.

Gross fixed asset formation

67

C.

Industrial production

68

D.

Employment and labour market

69

E. F. G.

Money supply and its counterparts Foreign trade by area Commodity breakdown of foreign trade

70 71 72

DIAGRAMS

1.

Interest rates

12

2. 3. 4. 5. 6.

Consumer price trends compared Comparative growth Output indicators Cross-country comparison of unemployment Foreign trade

20 23 24 27 31

7. 8. 9.

Relative competitive position in manufacturing industry Export/import ratio for manufactures Structure of the balance of payments

35 37 39

10.

Exchange rates

41

1 1.

Age pyramid of industrial equipment

47

BASIC STATISTICS OF FRANCE

THE LAND

Area (I 000 sq. km.) Agricultural land in use (lOOOsq. km), 1981

549.0

Major cities, (1982), habitants :

317.7

Paris

2188918

Marseille

878 689

Lyon

418 476

THE PEOPLE

Population 1. 1. 1 983 (thousands) No. of inhabitants per sq. km Total increase in population, 1983 (thousands)

34 346 99.0

Total labour force

(1983, thousands)

23 306

255

Gross domestic product, at market prices, in 1983 (billions of francs) GDP per head (US S) (1983) Gross fi>ed investment (1983): - per cent of GDP - per head (US S)

957.0 9 554

Origin of the gross domestic product, at market prices (1983): Agriculture Industry Construction

19.6

5.0 35.3

7.5

Services

52.2

1874

Total

100.0

GENERAL GOVERNMENT

(ESNA concepts)

Current expenditure in 1983 (per cent of GDP) Current revenue in 1983 (per cent of GDP) Gross fixed investment in 1983 (per cent of GDP)

48.7

45.4 2.9

FOREIGN TRADE

Exports of goods and services, including those to franc area, as a percentage of GDP (1982)

Imports of goods and services, 21.7

Main exports as percentage of total exports (1982) SITC: Food, beverages and tobacco (0+1)

Machinery and transport equipment (7) Iron and steel products (67 + 68) Chemical products (5) Textile products (65)

as a percentage of GDP, including franc area (1982)

24.4

Main imports as a percentage of total imports (1982) SITC: Food, beverages and 15.9

34.2

7.8 12.7

tobacco

Machinery and transport equipment Iron and steel products Chemical products

9.7 23.9

5.8 8.6

Mineral fuels, lubricants

3.1

and related materials (3)

26.8

THE CURRENCY

Monetary unit: the franc

Note:

Currency units per US dollar, average of daily figures: December 1983

8.3818

Year 1983

7.6212

An international comparison of certain basic statistics is given in an annex table.

This Survey is based on the Secretariat's study preparedfor

the annual review of France by the Economic and Development Review Committee on 25th June 1984.

After revisions in the light of discussions during the review,,

final approval of the Survey for publication was given by the Committee on 18th July 1984.

INTRODUCTION

The shift in economic policy in June 1982 which was made appreciably more pronounced in March 1983 with the adjustment in the exchange rate has original features: alongside the tightening of monetary and fiscal policy, a concerted prices and incomes policy was introduced. This economic policy has had positive effects in terms of curbing inflation and reducing the external deficit. The rise in consumer prices which averaged 11.8 per cent in 1982 was brought down to 9.6 per cent in 1 983. Wage growth slowed even more markedly and firms' finances improved, particularly in the industrial sector. In addition, the trade deficit was halved between 1982 and 1983. The target of limiting the budget deficit to 3 per cent of GDP was slightly overrun, at 3.3 per cent. Public spending slowed substantially and the social security accounts were brought into balance. Finally, growth of money supply was close to the targets and the economy's liquidity ratio fell slightly. These positive results were obtained at the cost of a marked slowdown in activity. While, from mid- 1981 to end- 1982, France had a cyclical lead over its main trading partners, by contrast in 1 983, GDP advanced less rapidly in France than in the OECD countries as a whole (by 0.7 per cent1 as against 2.4 per cent). A further downturn was recorded in investment (of 1.7 per cent), while households' consumption slowed markedly compared with the previous two years though the trend was still upward (by 1 per cent). Owing to the introduction of various programmes, there was no increase in unemployment in the first three quarters of the year and the figure remained at around 2 million. But these programmes having already produced their full impact, the number of jobless rose by some 44 000 per month over the six months to April 1984. On the basis of present policy, further progress may be expected in 1 984-85 in the foreign trade balance and on the prices and incomes front. The current balance should continue to improve and could be back to equilibrium in 1985. Inflation will probably continue to slow, with the increase in consumer prices likely to reach 7.6 per cent in 1984 and to come down to the OECD average (around 5 per cent) in the second half of 1985. This improvement is unlikely to be achieved except through continuing very slow economic growth, with the cyclical gap between France and the OECD area widening in 1984 (GDP up by 1.2 per cent against 4.1 per cent for the OECD area as a whole). A stronger pickup in activity is not likely to occur until 1985 when growth in the OECD area will probably be slowing (with GDP in France up by 1 .7 per cent against 2.6 per cent for the OECD countries as a whole). While, in both 1984 and 1985, growth in demand will remain low, there should be a shift to investment with the latter picking up after declining for several years, particularly in the case of private productive investment. Lastly, the unemployment rate is expected to rise throughout 1984-85 and could stand at over 10 Vi per cent at end- 1985. A particularly delicate problem for the French economy is that of the competitiveness of its firms both at home and abroad. The positive growth gap between France and its main trading partners in 1981-82 admittedly goes to explain in large measure the deterioration in the foreign balance over the period, but there have also been other contributory factors, in

particular the wide inflation differential reflecting both higher costs (especially wage costs) and the aging of the capital stock. In the circumstances prevailing at the beginning of 1983 there was indeed no alternative to the policy of stringency pursued since March 1983 with the aim of both reining back domestic demand and substantially slowing wage and price growth. As pointed out earlier, this policy has had positive effects though it has been costly in terms of activity and employment. The question may moreover be asked whether the improvement in the foreign balance in 1983 was not primarily due - leaving aside a few special factors - to the fact that France and its main trading partners are cyclically out of phase rather than to a genuine improvement in the competitiveness of the productive system: these problems are examined in this Survey. Part I analyses the corrective process set in motion in March 1983 on the basis of recent

trends, short-term forecasts and the broad lines of economic policy. Part II discusses the problems of balance-of-payments equilibrium with reference to certain aspects of the financial situation of firms, placing them in a medium-term perspective. Finally, Part III presents some economic policy conclusions.

I.

THE SHORT-TERM ADJUSTMENT

At end- 1982 France's economic situation was one of mounting internal and external disequilibria. Unlike the case in many other OECD countries, inflationary pressures remained virtually unabated from the second oil crisis to mid- 1 982 (when a temporary freeze was put on prices and wages), so that consumer prices were running at almost 14 per cent and the inflation differential with France's main partners widened significantly. The current deficit deteriorated rapidly to reach $12^ billion in the second half of 1 982 (annualised), or 2 xh per cent of GDP. Cumulative current deficits necessitated heavy foreign borrowing, which despite its comparatively low level was growing at a disquieting pace. The public finance situation also deteriorated, the balance on general government account moving from a slight surplus in 1 980 to a borrowing requirement equivalent to 2 *A per cent of GDP. These imbalances were in part due to the fact that the French authorities were following a policy of recovery whereas most other OECD countries were pursuing the adjustment effort. Hence domestic demand continued to grow briskly until the second half of 1982 whereas it was declining in the EEC

countries taken together. But despite its buoyancy, demand was not sufficient to prevent unemployment from worsening, even though less sharply than in the European countries on average. In view of all these problems, there was a radical shift in economic policy from mid- 1982, whose main focus was now the fight against inflation and redressing the external balance while endeavouring nonetheless to relieve unemployment by social measures. Adjustment policies, 1983-1985 Monetary policy

The growth target for M2, initially set at 10 per cent for 1983, was lowered to 9 per cent in March 1983 as part of the policy accompanying the devaluation of the franc. The initial target that was linked with a forecast of nominal GDP growth of 11.2 per cent already reflected a restrictive policy stance since it was 3 points below the average target for the previous year and 2 points below the trend at end- 1982. Given the expected slowing of external

Table 1.

Comparative situation of the French economy

1973

1980

1967

1973

1981

1982

1973

1980

1967

1973

1983

1981

GDP, volume

1982

1983

Total domestic demand, volume

France

5.6

2.8

0.3

1.6

0.7

5.6

2.8

-0.3

3.3

Germany

5.3

2.3

-0.1

-1.0

1.3

5.3

2.4

-2.4

-2.2

1.9

Italy United Kingdom

5.0

2.8

0.1

-0.4

-1.2

5.3

2.3

-3.1

-0.5

-2.1

3.4

0.8

-1.3

2.3

3.1

3.2

0.2

-1.4

2.8

4.7

EEC

5.0

2.3

-0.3

0.5

1.0

5.0

2.1

-2.0

0.6

0.8

OECD total

4.9

2.5

1.8

-0.5

2.3

4.9

2.2

1.1

-o.i

2.4

Consumer prices

-0.4

Employment

France

5.9

11.1

13.4

11.8

9.6

0.8

0.2

-0.7

0.2

-0.8

Germany

4.3

4.8

5.9

5.3

3.0

0.5

-0.5

-0.8

-1.8

-1.7

Italy United Kingdom

5.0

17.0

17.8

16.6

14.6

-0.2

1.0

0.5

-0.4

0.1

7.0

16.0

11.9

8.6

4.6

0

-0.2

-3.6

-1.7

-0.5

EEC

5.6

10.7

11.1

9.8

7.2

0.3

0.1

-1.1

-1.2

-0.8

OECD total

5.4

10.4

10.5

7.8

5.3

1.1

1.0

0.2

-0.5

0.4

General government

or ( 1973

Public debt as a % of GDP

(+) lending capacity ) borrowing requirement

1980

1981

1982

1983

1973

1980

1981

1982

1983

France

0.9

0.2

-1.8

-2.6

-3.2

25.1

25.1

25.9

28.7

32.5

Germany

1.2

-3.1

-3.8

-3.5

-2.7

18.6

32.5

36.3

39.4

41.0

Italy

-8.5

-8.0

-11.9

-12.7

-11.8

60.6

65.3

68.4

74.3

79.7

United Kingdom

-2.6

-3.5

-2.8

-2.1

-3.7

70.9

55.5

55.5

54.1

55.0

Current balance as a % of GDP

Standardized unemployment rate

Average

Average 1981

France

1967-73

1974-80

-o.i

1982

1983

1981 1967-73

1974-80

1982

1983

0

-0.8

-2.2

-0.8

2.5

4.8

7.3

8.0

8.1

1.2

0.7

-0.9

0.5

0.6

1.0

3.2

4.4

6.1

7.5

Italy

1.6

-0.7

-2.3

-1.6

0.1

5.6

6.7

8.3

8.9

9.7

United Kingdom

0

-0.7

2.6

2.0

0.7

3.4

5.7

10.6

12.3

13.2

EEC

0.6

-0.1

-0.5

-0.4

0.1

2.9

5.1

7.8

9.1

10.1

OECD total

0.3

-0.3

-0.4

-0.3

-0.3

3.1

5.1

6.7

8.2

8.7

Germany

Source:

OECD, Historical Statistics 1960-1983 and Economic Outlook.

money destruction (FF 30 billion in 1983 against FF 60 billion in 1982 or the equivalent of 2 money supply points), meeting the money supply growth target, particularly after its revision in March 1983, implied a very steep decline in the growth of domestic credit, from 16 per cent in 1982 to 10 per cent in 1984. This was to be achieved through slower growth in the Treasury's monetary borrowing requirement and tighter private sector credit terms, by means of both restrictions on credit and adjustment of interest rates. In 1983 the restriction of credit remained the main instrument for regulating domestic lending. However, the policy of quantitative controls was strengthened by continuing high

interest rates. In 1 982, despite the adoption of tight growth norms (4. 5 to 7 per cent)2, growth of aggregate domestic bank lending reached 17.6 per cent, of which 15.2 per cent was accounted for by lending to residents. This overrun was due first of all to the fact that the share of non-restricted credit or of credit subject to wider norms (export credits and housing loans) represents some 45 per cent of total domestic bank lending and, secondly, to the fact that banking and financial establishments substantially increased their net capital and bond holdings, so reducing the proportion of their lending subject to restriction3. The growth of non-restricted credit was stimulated for much of the year by the relatively low level of real interest rates and by inflation expectations. Only in the second half of 1982 did interest rate developments play a disincentive role, a trend which continued in 1983 when, with real interest rates still high, growth of demand for non-restricted credit slowed. The gradual improvement in firms' positions also helped to curb recourse to bank lending and ease the restrictiveness of credit controls. Thus, in 1983, growth of domestic bank lending at 12.7 per cent (10.5 per cent for lending to residents) was down by 5 percentage points on 1982. There was a particularly marked slowdown in growth of cash credits between 1982 and 1983, from 19.8 per cent to 8.6 per cent for firms and from 25.7 per cent to 6.9 per cent for households, following notably the Banque de France's decision to hold lending in the form of personal loans

Table

Out¬

2.

Money and credit

1981

1982

1983

standing

1982

I

1

11

|

1983

I

II

1980

FF billion

Percentage increase on corresponding period

Not seasonally adjusted Money supply Ml Money supply M2 Gold and foreign assets Credit to government Bank credit Other

Total liquidity M3

631.7

12.6

13.9

10.1

15.1

12.8

10.6

1 314.7

12.6

12.3

9.7

12.3

12.3

10.5

8.9

73.9

6.8

-28.3

-41.3

-23.2

-34.4

-55.1

--21.5 29.3

9.6

149.8

8.7

32.1

28.9

35.5

29.3

28.5

1 386.2

18.3

17.1

14.6

16.0

18.2

16.4

13.0

295.2

35.7

32.2

29.8

28.7

35.5

30.8

29.0

1 884.2

12.5

12.2

10.1

12.2

12.3

10.8

9.4

Out¬

standing Dec.

Percentage increase di ring the period, ann ual rate

1980

FF billion

Seasonally adjusted Credit to government Bank

credit

Money supply M21 Resident money supply RM2 Annual M2 growth target

,.

.,.

.

145.1

27.4

20.0

29.3

40.3

2.7

66.2

5.2

1 510.6

15.5

17.9

13.1

20.3

15.6

13.1

13.1

1 384.0

11.9

12.2

10.2

15.9

7.5

10.7

12.5

11.0

11.0

14.2

7.8

9.9

12.1

1 326.7

10.3 10.0

12.5-13.5

9.0

M2

Liquidity ratio GDp x 100

47.5

46.6

46.1

1. In the case of annual data, three-month moving average centred on December. Sources: Banque de France; Conseil National du Crédit,

10

and cash facilities at the level reached on 30th November 1 982. It was in the second half of last

year that the slowdown in corporate demand for short-term credit was most marked and the credit control constraint weakened significantly. Central money creation stood at FF 58 billion atend-1983, or 39 per cent of the deficit to be met, from FF 32 billion at end- 1982. This was due to the widening of the budget deficit which increased by FF 63.8 billion over the period including the losses of the Foreign Exchange Stabilisation Fund (FF 5.7 billion against a profit of FF 7 billion in 1982) and which could not be financed in their entirety from non-monetary resources despite the sharp increase in the amount of bond issues and the floating of a compulsory 3-year bond issue which together made up close to 40 per cent of the Treasury's funding resources. In all, the credit to government counterpart contributed about 3 percentage points to M2 growth in 1983. The trend of the gold and foreign assets counterpart, influenced by the improvement in the current payments position, had a virtually neutral impact on M2 growth in 1983 (0.5 percentage point). All told, in 1983 M2 grew by 1 1.5 per cent (10.2 per cent for the quarterly average centred on December, compared with a revised target of 9 per cent) and the liquidity ratio (M2/GDP) again fell, to 46.1 per cent, a decline of 0.5 percentage point (against 1 point in 1982).

In addition to the stringency of credit restrictions and the maintenance of high real interest rates, the pursuit of a policy to encourage long-term saving through interest rate differentials (notably after tax) and the marketing of new financial products (in particular collective investment schemes, open-ended investment companies and mutual funds) resulted in further growth of bond issues. Gross issues totalled FF 192.7 billion in 1983, up 24.6 per cent on a year earlier. To gauge the growth of financial savings overall, to bond issues must also be added equity share issues and the compulsory government loan issue, bringing the total figure for gross financial investments to FF 209 billion. Their share in GDP has continued to increase, from 4 per cent in 1 980 to 5.3 per cent in 1 983. Issues net of redemptions and interest amounted as in 1982 to about FF 46 billion, or 1.2 per cent of GDP. The share of general government is continuing to increase, reaching 37 per cent in 1983 (including the compulsory loan issue), against 3 1.5 per cent in 1982 and 27.8 per cent in 1981. The Treasury put out four issues in 1 983 totalling FF 5 1 billion, compared with FF 40 billion in 1 982, which represented just under one-third of the budget shortfall. The expansion in the bond market was to a large extent due to a shift away from liquid and short-term saving. The creation of a new form of liquid saving with the industrial development accounts (CODEVI) in October 19834 and its rapid growth (5 million accounts were opened in the space of three months and pulled in FF 48 billion) do not seem to have brought about an increase in households' liquid saving in aggregate, but rather a switch among categories of saving, which may have led to faster growth of M2 (in which the CODEVI are included) in the fourth quarter. Under the combined effect of the external constraint and restrictive domestic economic

policy, money market interest rates fell only a little in 1 983 and early 1 984. Between January 1983 and April 1984 the call money rate declined from 12.8 per cent to 12 per cent. In real terms rates rose, since annual inflation fell by 1 % percentage points between these two dates. Long-term rates behaved slightly more flexibly and went down from 15.25 per cent to less than 14 per cent between January 1983 and April 1984. While interest rate movements reflect the constraints and thrusts of monetary policy, they give an imperfect picture of the cost of credit and of the pressures there may be on financial markets because of the high proportion of lending at preferential rates in total domestic credit outstanding. Bank of France estimates suggest that their share in total credit outstanding, while varying from year to year, has for the past 15 years been in the range of 42-50 per cent (44.5 per cent approximately from 1979 to 1983). Credit at preferential rates varies as regards the rates charged (from 7 to 1 6 per cent at

11

the beginning of 1984), the sectors to which it is extended and the proportion of such credit within a given sector. Growth of preferential credit, which mostly tends to be non-restricted, has on the whole been faster than that of total medium- and long-term credit, of the order of

17.5 percent annually from 1981 to 1983 but slowing sharply between 1982 and 1983 (from 18.4 to 15.8 per cent). According to preliminary estimates, 1983 saw a shift in preferential credit rates to non-agricultural and particularly industrial productive investment, not only quantitatively (with the amount of these loans increasing by over 40 per cent between 1982 and 1983 and their share in the total thus rising from 1 5 to 1 8 per cent) but also through the introduction of new loan allocation procedures which make such credit more accessible to firms as a whole

Diagram 1.

%

Interest rates %

22

22 NOMINAL

INTEREST RATES

- SHORT-TERM 20

20

18

18

Call money rate (private paper)

;

16

v 3 ? ? D .1 7 1 3 3

,VJ 3

3 1 1 1 1 3 ? 3 3 3 7

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