As we move into 2024, Europe’s second largest economy is likely to need to weather many storms before its economy reaches a stable point.
The recent controversial immigration bill will create further challenges for France which needs to address its ongoing labour shortages while facing the threat of the far right taking over the helm of affairs.
French manufacturing worsened towards the year end and, with the level of ongoing geopolitical uncertainty at present, its recovery will not be smooth. The extraordinary debt levels across the major economies in the world pose a risk to France, too, as it faces the threat of an austerity budget which directly impacts the financial health of households and consumers.
Labour shortage/immigration bill
The shortage of labour is one of the most common challenges of the economic sector in France. According to a European Commission report published in July 2023, shortages “are expected to persist in both high skills and low skills occupations, driven by the creation of new jobs and the need to replace workers who retire”.
A solution to the problem is to rely on the migrant labour force whose contribution can result in net positive economic and fiscal gains.
However, politicians in the French parliament have approved recent legislation in favour of strict control on migration. The bill mainly won support from the National Rally (RN) and was passed through the lower house as well. This move turns out to be one of the gravest challenges in the way of employing migrants in order to overcome labour shortages.
Rise of the far right
While support for far-right groups across Europe is surging, the magnitude of the problem in France seems particularly strong. The police killing last June of a 17-year-old French boy of Algerian descent in the suburb of Nanterre, was followed by various protests and riots involving members of far right. It seems as if there is a strong inclination within the population to support extremist ideas initiated by the far right groups.
Owing to the widespread dissatisfaction with President Emmanuel Macron’s government, the far right is gaining widespread strength as we move into 2024. The party of Marine Le Pen looks all set to gain seats in the Parliament elections taking place in June because of higher inflation and the continuing cost of living crisis.
Decline in manufacturing
The French manufacturing sector remained low throughout the year, sinking deeper at the end of 2023. If output remains at the same level, there is the possibility of a “technical recession” within the sector.
The Purchasing Managers’ Index of HCOB France, as compiled by S&P, records 45.7 points in December. These points turn out to be better than the estimation of 44.3 point despite the raise of 0.3 points as assessed in the month before.
Owing to various factors such as the decline in productions, worsened purchasing activity, capacity pressures and falling outputs, the sector may face unemployment and a downward spiral.
French Finance Minister Bruno Le Maire has announced France will be facing an “austerity budget” in 2024. Speaking to the media, he revealed that, after ruling out tax hikes for the household, the budget contained €16 billion savings to reduce the deficit to 4.4% of economic output this year. In addition, the budget included €7 billion dedicated to green transition and zero carbon emissions.
The finance minister seemed to overlook the banes of austerity measure and instead emphasised on the economic growth by stating: “This budget represents a notable effort, and is the first step on the trajectory of an ambitious plan to restore our public finances.”
If France continues to operate on rising borrowing costs and slowing growth, then there is a real possibility it will run to one of the biggest budget deficits in Europe this year.
The eurozone as a whole will is likely to continue to feel the impact of a global economic slowdown which can be seen with world PMI index as compiled by S&P Global Market Intelligence that further slipped in December, extending the slowdown to 22 months.
The PMI New Export Orders Index stood at 48.3 in December vs 48.5 in November. The French economy, like other European economies, will need to be vigilant throughout 2024 in order to stablise the economy. It will be a tough year ahead.