A Survey of Macro Economy of France - Report Example

Swarna Word count: 1889 P. swarnalatha ID # 5448 Order # 186626 d 15th October 2007 A survey of macro economy of France Introduction Macroeconomics helps us in understanding and explaining real world developments. Different parameters like income, consumption, exports, unemployment and inflation of any country would be well explained in its macro economic policy. This needs the critical analysis of macro economic data from time to time and thorough review of economic theories. In other words, macroeconomics tries to describe and explain the economy wide movement of prices, output, and unemployment (Ray Fair, 2004). Various schools of thought have emerged over time like Keynesian, monetarist, new classical, and others to explain the macro economic scenario of several countries. It has also been split between theorists and empiricists. However, the field cannot advance without the discipline of testing how well the models approximate the data. This needs using a multi country econometric model, and examining several important questions, including what causes inflation, how monetary authorities behave and what are their stabilization limits, how large is the wealth effect on aggregate consumption. France is one of the most advancing economies of the world with its significant growth rate annually. However its macro economic indicators have to be analyzed to conclude about its further economic prospects, economic strengths and weaknesses. More importantly the analysis of its fiscal policy would be of immense use in future economic planning of France in a significant rate. Keeping these things in view, the macro economy of France is discussed here as follows. 1) Analysis of indicators of macro performance of France over the last 4 years. The Gross domestic product at market prices has been increased from 1550 billion francs to 1793 francs in 2006 which accounts for 16 % growth which is quite significant (Table 1). Similarly real GDP growth has been increased from 1.1 % in 2002 to 2.2 % in 2006 (Economic structure, 2007). The increase in GDP could be attributed to the significant rise in service sector over the last four years. However its growth rate has not been satisfactory. It is mainly because of hike in unemployment and inflation during this period. The GDP growth rate was poorest when France recorded dismal 0.1 % growth during July – September, 2004 which was mainly due to higher unemployment and poor consumer spending (BBC News, 2004). These type of intermediate weak periods resulted in overall slowdown of GDP growth of france. Consumer price inflation has been reduced marginally from 1.9 % in 2002 to 1.7 % in 2006. It touched all time high during 2003 and 2004 which disturbed the overall economic growth rate of France. Both exports and imports of goods have been jumped significantly over last five years. The current account balance is projected at –27.7 billion US $ in 2006 and the foreign exchange reserves (excluding gold) have touched 42.7 billion US $. Table 1 : Macro economic indicators of France   2002 2003 2004 2005 2006 GDP at market prices (€bn) 1,550 1,596 1,658 1,716 1,793 GDP (US$ bn) 1,464 1,805 2,061 2,136 2,252 Real GDP growth (%) 1.1 1.1 2.3 1.7 2.2 Consumer price inflation (av; %) 1.9 2.1 2.1 1.7 1.7 Population (m) 59.9 60.2 60.4 60.6 60.9 Exports of goods fob (US$ bn) 307.2 361.9 421.3 439.2 483.6 Imports of goods fob (US$ bn) 299.6 358.5 429.9 471.4 514.6 Current-account balance (US$ bn) 11.0 11.8 -6.8 -33.3 -27.7 Foreign-exchange reserves excl gold (US$ bn) 28.4 30.2 35.3 27.8 42.7 Exchange rate (av) US$:€ 0.94 1.13 1.24 1.25 1.26 One of the main reasons for poor GDP growth is due to lower contribution made by infrastructure and construction sectors and other industrial sectors. It is evident from the fact that major share of gross domestic product of France comes from market services (55.5 %) followed by that of non-market services and industry (Table 2). Interestingly agriculture contributes only 2.3 %. As far as the components of gross domestic product are concerned, house hold consumption takes lion share followed by government consumption. The poor contribution from agriculture results in uncontrolled inflationary rate, which slows down the overall economic growth of France. Intermediate goods constitute major portion of exports and imports from France followed by that of capital goods (Table 2). Similarly, Germany is the major exporter and importer for France goods. Other significant exporting countries include Spain, Italy and United Kingdom. Among importing countries, Italy and Spain constitute major importers after Germany. Insufficient growth in exports of agricultural produce like processed foods and industrial goods like motor vehicles resulted in poor foreign exchange returns compared to some other European economies. Moreover, the inflation could not be controlled at required level due to higher unemployment resulted due to slow growth of agriculture and industrial sectors. Heavy dependence on consumer goods and energy might have also led to higher inflation, which in turn affected the macro economy of France significantly. Overall, Keynesian theory of monetary policy may be applicable to analyze the macro economic indicators of France. According to this, the supply of money in market has no direct link with the price levels and inflation. However it has an indirect effect. As France opened the economy to the outside world in the name of globalization and privatization, the financial institutions were encouraged to provide loans to industries at lower interest rates that resulted in higher industrial growth rate and GDP growth. However, the rate of increase in industrial growth has not been phenomenal and hence unemployment could not be tackled effectively leading to inflation and slow GDP growth rate. In addition, political factors like anti Israel stand and disagreement with United states over some global issues also led to poor GDP growth and change in polity in the form of new government and President would certainly result in positive change in macro economy of france. Table 2: Origins and components of gross domestic product and principal exports and imports of France, 2006 Origins of gross domestic product 2006 % of total Components of gross domestic product 2006 % of total Agriculture 2.3 Household consumption 57.0 Industry 14.5 Government consumption 23.5 Construction 6.2 Gross fixed investment 20.3 Market services 55.5 Exports of goods&services 26.9 Non-market services 21.6 Imports of goods&services 28.6         Principal exports fob 2006(a) US$ bn Principal imports cif 2006(a) US$ bn Intermediate goods 148.8 Intermediate goods 157.9 Capital goods 118.3 Capital goods 110.8 Consumer goods 73.6 Consumer goods 84.0 Motor vehicles&transport equipment 65.1 Energy 80.0 Processed foods&drinks 40.9 Motor vehicles&transport equipment 56.9         Main destinations of exports 2006 % of total Main origins of imports 2006 % of total Germany 14.5 Germany 16.2 Spain 9.9 Italy 8.5 Italy 9.1 BLEU 8.7 UK 8.5 Spain 6.9 BLEU 7.8 UK 6.8 EU27 68.3 EU27 64.6 (a) Not comparable with balance-of-payments data shown in table above. Bottom of Form 2) Discussion of main economic strengths and weaknesses of France. No doubt, at this moment, it is really felt that France is in the midst of transition from a well-to-do modern economy that has featured extensive government ownership and intervention to one that relies more on market mechanisms. One of its major strengths is in the form of liberalization, privatization and globalization. The government has partially or fully privatized many large companies, banks, and insurers. It retains controlling stakes in several leading firms, including Air France, France Telecom, Renault, and Thales, and is dominant in some sectors, particularly power, public transport, and defense industries. The telecommunications sector is gradually being opened to competition. Moreover, Frances leaders remain committed to a capitalism in which they maintain social equity by means of laws, tax policies, and social spending that reduce income disparity and the impact of free markets on public health and welfare. The government has lowered income taxes and introduced measures to boost employment and reform the pension system. Its main weakness is its slowest pace of growth rate in terms of gross domestic product. Other problems include the high cost of labor and labor market inflexibility resulting from the 35-hour workweek and restrictions on lay-offs. Similarly, the tax burden remains one of the highest in Europe (nearly 50% of GDP in 2005). The lingering economic slowdown and inflexible budget items have pushed the budget deficit above the eurozones 3%-of-GDP limit; unemployment stands at 10% which is very critical for its sustainable economic development (Macroworld investor, 2007). 3) Evaluation of current Fiscal or Monetary policy. For controlling the non performing assets and unnecessary expenditure, the fiscal policy of France must be well planned and executed. Present scenario reveals that despite the structural weakness of the public finances, fiscal consolidation is likely to slow as the new right-of-centre government privileges tax cuts over reductions in public expenditure. As a result, the general government financial balance will remain in deficit throughout the next five years. It is forecasted that official euro area interest rates will reach 4.25% before the end of 2007, but they are likely to stabilise as average euro area growth moderates (Country briefings, 2007). Real GDP, which expanded by a relatively modest 2.2% in 2006 (one of the slowest rates in the EU27), is forecast to slow to 1.8% in 2007 as consumer spending moderates. The growth rate of France economy is a worrying fact. Although economic activity should pick up slightly in 2008-09 as the contribution from net trade turns broadly neutral, France will struggle to grow much faster than an annual average of 2% over the forecast period as a whole. Controlling inflation is also very crucial in this regard. Favorable base effects, a strong exchange rate and weak domestic price pressures should keep a lid on inflation in 2007-08. Although the euro is forecast to depreciate in the second half of the forecast period, lower international energy prices should help keep average annual inflation below 2%. Similarly, Frances trade balance will remain poor throughout the forecast period, but it will be partly offset by surpluses on the services and investment income accounts. Conclusion It may be concluded that macro economic indicators of France give a mixed picture i.e. strong prospects and challenges. The weaknesses have to be solved strategically and strengths of economy have to be consolidated. Hence the design of fiscal rules and frameworks of France economy must be good to solve these above mentioned problems. Certainly France faces substantial public finance challenges over the next decade like high levels of outstanding public debt, the consequences of a rapidly aging population for future social spending, and the need to ensure adequate scope for reduction of the still-high tax burden while maintaining an adequate level of public sector capital spending (Teresa Dabán, Enrica Detragiache, Gabriel di Bella, Gian Maria Milesi-Ferretti, and Steven Symansky, 2003). At present, fiscal frameworks are geared to achieving medium-term balances around zero. It is suggested that France should maintain medium-term targets for the budget balance and the stock of public debt and then it should target long-term policy objectives. References: BBC News. 2004. France’s economic growth slowing. Dated 12th November, 2004. http://news.bbc.co.uk/2/hi/business/4005861.stm. Country briefings. France. 2007. http://www.economist.com/countries/France/profile.cfm?folder=Profile-Economic%20Data Economic structure. 2007. Country briefings. France. Economist.com.http://www.economist.com/countries/France/profile.cfm?folder=Profile%2DEconomic%20Structure.Dated July 11th 2007. Macroworldinvestor.France.http://www.macroworldinvestor.com/m/m.w?lp=grp&Page=3&cntry=GPFR®id=81. Ray Fair. 2004. Estimating how the macro economy works. Harvard University Press. P: 314. ISBN-10: 0674015460 Teresa Dabán, Enrica Detragiache, Gabriel di Bella, Gian Maria Milesi-Ferretti, and Steven Symansky. 2003. Rules-Based Fiscal Policy in France, Germany, Italy, and Spain dated November 18, 2003 . International Monetary Fund. World retail banking report. 2006. France macro economic indicators.http://www.efma.com/wrbr06/dash_indicators.php?country=France. Read More