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The near-term outlook for the French economy is challenging and the provision of short-term stimulus without derailing medium-term fiscal consolidation objectives would be the main challenge for the country's fiscal policy, the International Monetary Fund said Friday.
The IMF forecasts France's real gross domestic product to drop by 3% in 2009, followed by a gradual recovery in 2010. It added that there are downside risks to this outlook due to the sensitivity of the French economy to a worse-than-foreseen contraction in the European Union and underlying tail risks, in particular in the financial sector.
After Article IV consultation with France, the International lender said the steep increase in unemployment could further shake confidence and weaken private consumption. A worsening of the financial crisis would hurt banks' balance sheets and could further depress credit growth. At the same time, lower trade openness and higher social protection are expected to continue to shelter the French economy relative to its peers.
Moreover, the IMF noted that some modest additional fiscal action might be needed if downside risks materialize, but should be focused on temporary and investment-based measures given France's limited fiscal space. At the same time, some of the IMF officials are of the view that there is no scope for additional fiscal support, in light of the sizable stimulus already in train and the pressing consolidation needs.
The IMF stressed that safeguarding medium-term fiscal sustainability and avoiding unsustainable debt dynamics is a key priority for French authorities in the coming years.
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