Short-term pain before long-term gain? A look at French labor reform and economic growth
The French economy has come under the spotlight again after disappointing GDP growth in the third quarter. Even the French government has now finally admitted that its 1.5% growth forecast for 2016 is overly optimistic, long after our analysts downgraded their forecasts. Ironically, one of many factors that has dragged on economic growth in France this year has been the ostensibly pro-growth labor reform introduced in the summer, or rather the strikes over it. These weighed on domestic demand earlier this year and will thereby play a part in penalizing France’s overall GDP growth in 2016. This calls for a closer look at the labor reform and what it means for French GDP growth going forward, particularly in a short-term perspective. Such a structural reform, if introduced in an already robust economic context, should have positive consequences for the economy almost from the outset. In the current environment of weak demand and constrained macroeconomic policy, however, the potential losses of the reform could well exceed the potential gains in the short-run, regardless of the eventual benefits that should hopefully win over in the medium- to long-term.
Click the image to open full-size infographic
Our latest November Consensus Forecast for France, obtained by polling 36 leading macroeconomic analysts, sees French GDP growing a mere 1.3% in 2016 and 1.2% in 2017—forecasts which have been gradually downgraded throughout this year from 1.5% and 1.6% respectively back in January. French GDP unexpectedly contracted for the first time in over three years in the second quarter this year on the back of a sharp deterioration in domestic demand, particularly the components of private consumption and fixed investment. Much of the poor performance was due to one-off factors—including strikes over the labor reform proposals at the time—and so GDP unsurprisingly picked up again in the third quarter. However, an initial estimate released in late October puts Q3 growth at a meagre 0.2% in quarter-on-quarter terms, which is still an undeniably disappointing result. Year-on-year, GDP grew at the slowest rate in a year.
Given that France’s current account deficit is one of the largest in the Eurozone and the external sector detracts from growth, the country is reliant on domestic demand, especially private consumption and to a lesser extent fixed investment, to fuel its weak expansion. But the signs of robustness that private consumption showed early in the year have not lasted. Private consumption failed to grow from the second to the third quarter, which contributed to the failure of domestic demand to improve on its weak Q2 performance. Overall, our panel of analysts foresees private consumption increasing by 1.6% in 2016 before decelerating to a 1.3% increase in 2017, but uncertainty over changes in the labor market is one among several risks that might cause private consumption to decelerate even further. Private consumption is the growth component most likely to suffer in the short-term when structural reforms that are ultimately intended to be growth-enhancing are introduced in a tough economic climate.
The experiences of southern Eurozone countries in recent years have sparked attempts to better understand the impact of structural reforms on demand—and thereby economic growth—when they are introduced in a context where internal and external demand are already weak and there is limited scope for demand-management policies. In fact, an published this year found that the risks of failing to lift activity in the short-term or even further depressing demand were particularly high in the case of reforms easing employment protection on regular contracts or reforms of collective bargaining arrangements—two key features of the recent French labor reform. Why? Because during an economic downturn, the outflow from unemployment following such a structural reform may take more time to exceed the rise in the inflow rate than in normal times. And the uncertainty regarding the impact of such reforms on citizens’ personal economic situations also tends to pose a downside risk to consumer confidence and therefore spending. This situation is particularly likely in environments where there is little scope to accompany such structural reforms with macroeconomic policies to support demand, as is currently the case in the Eurozone, where accommodative fiscal policies are discouraged. While the ECB has attempted to spur economic activity through record low interest rates and also through unorthodox measures such as quantitative easing, the effects on growth have been limited.
There is a chance that domestic demand could receive a bit of a boost in 2017 if, as analysts fear, the beleaguered French government ups its spending to attract votes from an austerity-weary electorate ahead of the 2017 general elections. At its 2017 budget presentation in September, the government announced plans to lower taxes and increase spending. Any potential upside effects on demand in this case would however be limited at best and would not outweigh the sizeable risks of further weakening France’s public finances, putting its required fiscal consolidation in jeopardy.
The labor reform in more detail
The French government finally forced its controversial labor reform through parliament in July, which dares to allow companies to negotiate working hours beyond the sacred 35-hour week and made it more feasible for them to cite economic reasons as a justification for layoffs. Moreover, companies large enough to have union representation should now be able to bypass sector- or industry-wide collective agreements to negotiate company-specific arrangements on overtime and wages with staff.
Nevertheless, the reform in its final format was watered down in significant respects compared to the initial proposals, following intense opposition. For example, some of the crucial provisions about limiting severance payments were dropped. And the ability to prioritize company-level arrangements applies only to companies large enough to have union representation, meaning that most SMEs—which are the most likely to need flexibility to enable them to create jobs—are still tied to collective bargaining arrangements at sector level. In reality, very few see the reform as satisfactory: while employees and trade unions claim it goes too far, employers’ associations widely see it as failing to go far enough.
Structurally, the French economy has long suffered from a lack of competitiveness and persistently high unemployment. Although unemployment did not increase as rapidly during the financial crisis as in some other Eurozone countries, it had already been stuck at around 8% since the early 1980s—now it is around 11%—with youth and the long-term unemployed the worst affected. While criticism of France’s inflexible and overly protectionist labor market has existed for decades, pressure from EU authorities in recent years finally spurred efforts to do something about it.
Is France mirroring Spain?
The French labor reform bears several similarities to its equally controversial Spanish 2012 equivalent, particularly in terms of giving priority to firm-level over sector-level agreements and making it cheaper for companies in financial trouble to lay people off. And yet four years after the Spanish labor reform, debate continues to rage about whether it has done more good or harm in that time. Proponents of the legislation attribute improvements in job creation seen since then to a reform which they laud for taking significant steps towards making the labor market more flexible. Its detractors, however, argue that the still meagre job creation has been thanks to the strength of Spain’s GDP growth rather than the reform, which they suggest has only served to increase short-term precarious contracts while failing to significantly reduce Spain’s stubbornly high unemployment rate.
Unlike Spain, France does not currently benefit from a robust growth rate. And of course, unemployment in France is not simply caused by the nature of French labor legislation, but also—as detractors of the reform have repeatedly pointed out—by feeble economic growth, which could be dragged further down in the short-term by structural reforms that may not start to produce economic benefits until later on. Potential transitional losses also risk eroding the already minimal public support for additional reforms going forward. And so the vicious circle continues, which risks postponing the upside effects of structural reforms which France desperately needs further into the future.
Author: Caroline Gray, PhD, Senior Economics Editor
Date: November 8, 2016
TagsEmerging Markets Unemployment rate Venezuela Tunisia Healthcare USA Gold Banking Sector Commodities Euro Area China Australia Asia United Kingdom Energy Commodities Argentina Cryptocurrency Germany Brexit Nordic Economies Canada G7 Trade Vietnam UK Investment Iran Forex Bitcoin Brazil Oil Company News Russia Spain Mexico TPP Italy United States Economic Growth (GDP) Precious Metals Commodities Sub-Saharan Africa Portugal oil prices European Union Base Metals Commodities Ukraine Inflation Exchange Rate France Eastern Europe Latin America Turkey Agricultural Commodities MENA Japan India Greece South Africa precious metals Major Economies Housing Market Infographic IMF Africa OPEC Colombia Consensus Forecast
Met the why particular forecasts a 15.9% annual increase in Agricultural commodity prices in Q4 2018. Read more:
29 minutes ago
Houseold spending and exports are expected to drive growth this year, however, uncertainty over NAFTA continues to…
1 hour ago
Brazil's growth forecast was chopped for a third consecutive month as the truckers' strike, a less supportive globa…
4 hours ago
Stay tuned for announcements of iMoney Expo's Speaker Hall keynotes and panels, as well as a variety of workshops ¨…
19 hours ago
As a net energy importer, inflation in the Central America and Caribbean region will be driven higher this year by…
20 hours ago
- Can the Wisdom of the Crowds predict the results of the 2018 World Cup?
- Railway Mania: The Largest Speculative Bubble You’ve Never Heard Of
- From Riches to Rags: Have Cryptocurrencies Crashed for Good?
- Investment looks to Latin America, but forecasts are not encouraging
- Turkey: Erdogan has cemented his grip on power - now what about the economy?
- 50 Top Economics Influencers to Follow
- How can Latin America’s business environment benefit from technological change?
- Mexico: A look at the past, present and future as elections yield AMLO victory
- Italy’s New Populist Government and the Eurozone: Prelude to a Crisis?
- Latin America moves toward increased integration as U.S. protectionism grows
- How can Latin America increase productivity without affecting the quality of employment?
- How will Saudi Arabia's economy benefit from lifting the women's driving ban?
- Which countries are the most prepared for the upcoming digital revolution?
- India Under Pressure from the U.S. on Trade Policy
- The Story of Steel
- Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
- What the TPP means for trade in Latin America
- Elections in Russia: Analysis and Implications
- Nearly a Third of Latin Americans Have No Right to a Pension
- A Look at Healthcare Models Around the World
- The Poorest Countries in the World
- Newly-elected Chilean President Sebastian Piñera faces a myriad of challenges - economic and otherwise
- The Economic Effects of Trade Protectionism
- Regional Disparity: The Dark Side of Inequality in Latin America
- Coal: The story of the world's most abundant fossil fuel
- Gold: The Most Precious of Metals (Part 3)
- Venezuela's Electoral Conundrum
- Trump's 1st Year: 95 Analysts Surveyed on U.S. Economy
- The Latest on China and What's in Store for 2018
- An in-depth look at the Eurozone’s booming economy and the challenges that lurk in the shadows
- China’s growing influence on the Latin American economy
- Top Economics & Finance Blogs of 2018
- How Latin America emerged from recession in 2017
- Is this the beginning of the end for Bitcoin?
- Risks and Opportunities for 2018 - Daniel Lacalle
- Emerging Markets 2018 Economic Outlook
- The role of FDI in Vietnam’s socio-economic development
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- What will be the most miserable economies in 2018?
- The World's Top 11 Largest Economies
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- Met the why particular Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 110-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Russian economy update in wake of OPEC deal announcement
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- Met the why particular partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit
- Brazil's Perilous Economic Situation in 2015
- Met the why particular Launches Sub-Saharan Africa Report, Expands Coverage to 117 Countries
- How do the European Commission's Forecasts and Met the why particular' Forecasts for Europe compare?
- How will the South African economy weather recent challenges?