Hiring, investments, growth… Does the current political uncertainty threaten the French economy?

In the absence of a government and an absolute majority in the Assembly, the Banque de France is alarmed by a “shock of uncertainty” among business leaders. INSEE predicts growth of 1.1% in 2024, but considers that the current context constitutes “a significant risk of the scenario”, which could affect long-term measures.

While it is still unknown who will succeed Gabriel Attal as Prime Minister, the business world is issuing warnings. The uncertainty of entrepreneurs is reaching “its highest levels” since 2022, warned the Banque de France on Wednesday, July 10, in its monthly economic study.and governor of the institution, François Villeroy de Galhau, expressed concern on franceinfo about this “uncertainty shock”, which may turn out to be according to him “very negative for growth and for employment.”

The Banque de France survey, conducted among 8,500 entrepreneurs from June 26 to July 3, in the midst of legislative elections, highlights the fears of business leaders who see that their customers are procrastinating and prefer for the moment “save rather than consume”The day after the second round, the Confederation of Small and Medium-Sized Enterprises (CPME) also regretted the absence of a clear majority in the chamber, “which is not likely to reassure entrepreneurs.”

From the announcement of the dissolution, “we have entered a period of glaciation”judges for his part the boss of Medef, Patrick Martin, with the Echoes. The uncertainty indicator, which nevertheless remains below the thresholds crossed during the health crisis, “progressing in all sectors, and particularly in services (notably temporary work, accommodation and catering, transport, advertising) where it was initially the lowest”, highlights the investigation by the Bank of France.

“Many business leaders mention the wait-and-see attitude of customers, a postponement of investments, including those coming from abroad.”

The Bank of France

in its monthly economic survey

However, it is difficult to quantify this phenomenon. “Investment decisions are made based on a whole range of criteria such as demand, availability of financing…”, recalls Sylvain Bersinger, chief economist at the Asterès firm, to franceinfo. “Political uncertainty is just one factor among many”the expert puts it into perspective. In its latest economic report published on July 9, INSEE is counting on a “stabilization” investments in the coming months, while recalling that these forecasts could change depending on the measures taken by a future government, or “in the event that the direction of economic policy remains uncertain for a long time.”

Business leaders also mention to the Bank of France “a freeze on recruitment, due to lack of visibility on possible changes in salary costs”. A trend confirmed by the Deputy Director of the Hellowork recruitment platform, who reports to The Express a 5.5% drop in the volume of job offers in June 2024 compared to June 2023, mainly among fixed-term contracts and to a lesser extent temporary assignments.

“Among small and medium-sized enterprises in particular, we are seeing decisions to wait before hiring, to see what economic programs will be implemented.”confirms expert Anne-Sophie Alsif to franceinfo. Some measures, such as the increase in the minimum wage to 1,600 euros defended by the New Popular Front, “generate apprehension”supports the chief economist at the audit firm BDO France.

However, these uncertainties have not yet had any structural repercussions. “Inflation is slowing down and we are on a trend of growth recovery”continues Anne-Sophie Alsif. According to the‘Insee, the French economy should grow by 1.1% in 2024 compared to 0.9% in 2023, and benefit from hosting the Olympic and Paralympic Games. The evolution of the political situation, however, constitutes “a significant hazard in the scenario”qualifies the institute, which will publish its first estimate of growth in the second quarter at the end of July.

On the financial markets side, “There was a small effect on sovereign interest rates, that is to say the rates at which France borrows,” in the days following the dissolution, “but it calmed down”, adds Sylvain Bersinger. The expert believes that France’s creditors feared the prospect of a clear majority for the National Rally or the union of the left. Conversely, “The political chaos, which is pushing back the prospect of radical measures, is almost enough to reassure the markets. We also saw a small effect on the CAC 40 which fell a little.adds the economist, but it is also becoming normalized.”

“There have been some minor turbulences, which are not at this stage capable of really changing the trajectory of the French economy.”

Sylvain Bersinger, economist

to franceinfo

If the specialists rule out a “short term danger” For the economy, however, they warn of a lasting political freeze. “If the blockage continues into the fall, we will enter another scenario”sketches Sylvain Bersinger. “We could then see sovereign rates increase further, because investors will start to say to themselves that the country is incapable of being governed.”he anticipates.

The examination of the draft finance bill from the start of the school year promises to be crucial, as the European Commission placed France in excessive deficit procedure last June. After a deficit slippage to 5.5% last year (instead of the anticipated 4.9%), the outgoing government had committed to cleaning up public finances to bring the deficit down to 5.1% in 2024, then gradually below the target of 3% in 2027.

Now, these “unrealistic goals” are based on growth assumptions “too optimistic” and assume savings “unprecedented”, as “significant increases in compulsory levies which are not specified”the Court of Auditors warned on Monday. “Whatever the next government is, it will have to take charge of this situation of public finances, it will have to reduce our debt,” for his part, warned the first president of the institution, Pierre Moscovici, on France Inter. “Without serious adjustment” of the budgetary trajectory, “It will be difficult to achieve the objectives of a return of the deficit to 3% of GDP by 2027”added Tuesday theThe chief economist of the International Monetary Fund, Pierre-Olivier Gourinchas.

“The next budget and public deficit forecasts will be examined closely.”

Anne-Sophie Alsif, economist

to franceinfo

An examination which will be particularly scrutinized by the rating agencies. “The approach to public finances and economic and budgetary reforms by the new government will be decisive for France’s credit”has already warned the Standard & Poor’s agency, which had downgraded, last May, the French rating concerning the evolution of public debt, going from “AA” to “AA-“.

The adoption of a budget could prove to be difficult in a fragmented Assembly. For its part, the rating agency Moody’s expects a budget to be voted, but notes a “high risk that it will contain additional spending measures, exacerbating fiscal challenges”The risk management firm, which gave the country an “Aa2” rating with a stable outlook in late April, could lower its outlook to “negative” depending on the impact of political negotiations on the budgetary or growth trajectory.