Political uncertainty, unemployment: 2025 looks set to be painful for the French economy, warns OFCE

Four months after the dissolution of the National Assembly, now divided into three large blocs without a clear majority, political uncertainty continues to weigh on the French economy.

According to the OFCE, the economic research center of Sciences Po Paris, which published its new economic outlook on Wednesday, this uncertainty could reduce French growth by 0,1 points of gross domestic product (GDP) in 2024 and by 0,2 points in 2025.

For OFCE economist Mathieu Plane, "it remains relatively limited but it is not negligible", at a time when the institute anticipates modest GDP growth in 2024 (1,1%) as in 2025 (+0,8%).

According to the OFCE, "growth would be penalized in particular by the weakening of investment" by companies, which political uncertainty encourages to be cautious.

As MPs begin to examine the 2025 budget project, economists are also noting the negative impact on activity of the measures to reduce public finances.

The budgetary effort envisaged by the government, which hopes to reduce the public deficit from 6,1% of GDP in 2024 to 5% in 2025, "would lead to a reduction in growth of 0,8 points of GDP in 2025", calculates the OFCE.

The institute also disputes the executive's figures, according to which a clean-up effort of 60 billion euros is necessary in 2025, based for one third on tax increases and two thirds on cuts in public spending.

According to its calculations, the cleaning up of public accounts "would be of the order of 44 billion euros" in 2025. "Around" 60% of the effort would come from the "increase in revenue" and 40% from the "reduction in public spending", details the OFCE.

"Despite the planned budgetary adjustment program," the research center anticipates a deficit of 5,3% of GDP at the end of 2025, a figure slightly higher than the government's commitment (5%).

"Seesaw"

The recovery of public accounts, which will notably involve reduced funding for employment policies, could also have consequences on the unemployment rate.

Measured at 7,3% in the second quarter, it could climb to 7,5% at the end of 2024 and even 8% a year later, according to the economic outlook published on Wednesday.

"We have slowed growth, a less supportive employment policy," explains Mathieu Plane, "and we expect 143.000 job losses in 2025, which is quite a significant shift" after the nearly 500.000 jobs created in 2022 and the 210.000 creations still recorded in 2023.

The individual purchasing power of the French would fall by 0,2% in 2025, after an increase of 1,1% the previous year.

The cause of this slight decline: "the contraction in employment, the weak growth in social benefits, with in particular the postponement of the indexation of pensions to July, and less dynamic income from assets, with the expected drop in rates and lower dividends paid", explains the OFCE.

On a more positive note, inflation is expected to continue to slow to an annual average of 2% in 2024, exactly the inflation target pursued by the European Central Bank, and 1,5% in 2025.

A less dynamic rise in prices which would logically push households to spend more. In 2025, household consumption should be "the main source of growth" and grow by 1,1%.

At the same time, the percentage of income that the French put aside rather than spend (savings rate) would fall by 0,7 points to 17,1% at the end of 2025, a level which remains, however, significantly higher than that observed before the pandemic.

The expected reduction in household savings in 2025 can be explained by both the slowdown in inflation and less attractive remuneration of savings products.

Be careful though: if the savings rate were "pushed to the extreme by political, economic and budgetary uncertainties" and remained at its end-2025 level in 2024 (17,8% of income), the OFCE would have to lower its growth forecast to 0,5% due to household consumption below expectations, economists warn.