Transcript: Interview with French Treasury Chief Economist Rouzet
27 January 2025

By Marta Vilar – MADRID (Econostream) - Following is the full transcript of the interview conducted by Econostream on January 21 with Dorothée Rouzet, Chief Economist of the French Treasury.
Q: A few days ago, the French government revised its economic growth forecast for 2025 from 1.1% to 0.9%. What led you to this revision?
A: We revised our forecast in the context of the amended budget bill that is now being discussed in Parliament. Since our previous forecast exercise in October, we have seen a deterioration in the latest survey indicators, i.e. business surveys and household confidence. This is mostly the effect of increased uncertainty on the national front due to the fall of the Barnier government in December and the delay in the adoption of the budget. But also international uncertainty, because when we elaborated our October forecast we were agnostic about the outcome of the US election therefore did not include what is not heightened uncertainty around our external trading environment. We have also had growth revised downwards for our major trading partners, especially Germany, which also has an effect on the French economy.
Q: Some analysts think a contraction is the most likely outcome for French GDP in Q4 2024, the preliminary estimate of which will be published on January 30. Do you agree?
A: All recent forecasts, like INSEE (the statistical office) and Banque de France’s, expect growth at zero for Q4. But you have to take into account that there is a statistical artifact behind it from the Olympic games in Q3. The sales of tickets and TV rights for the Olympic Games were all counted in Q3. This has somewhat artificially boosted Q3 growth, which was 0.4%, and then you have the countereffect in Q4. If you net it out, it means the underlying growth trend is around 0.2% per quarter, which is slightly below trend, but clearly not zero.
Q: Business surveys have been pointing to a grim outlook for France recently amid uncertainty. Do you think the picture is now darker for France than it was a few months ago?
A: In the short term, surveys point to activity that has been slowing in the past few months and probably will stay below potential in upcoming months. We think this is the result of uncertainty, which is fostering a wait-and-see approach among firms, mostly on investment, and probably among households on durable goods purchases. For us this is the main factor behind the picture having darkened somewhat. Some of this uncertainty can be undone in the next few months when a budget is passed. Some of the fiscal uncertainty will be removed, some of the political uncertainty can also be removed. So, at least part of the uncertainty effect should be reversible.
Q: A budget might not be the solution to all of France’s problems, but it would solve a lot of them, as I understand.
A: Yes, it would help of course. Some of the other sources of uncertainty will stay. The fact that our international environment has become less predictable is not going to be reversed in the next few months. But uncertainty at the national level could be reversed at least to some extent.
Q: Is a recession for France out of the question?
A: I don't see a scenario now in which France could enter a recession. We are hovering around a growth rate of 1%. We will have probably grown at a 1.1% rate in 2024 and we are forecasting 0.9% for 2025. It's a bit below potential growth, which we estimate to be 1.2%, but is quite far from recession. And if we look back to the last few years, France has actually withstood crisis quite well, having rebounded fast from the Covid crisis and having been quite resilient through the energy crisis. We don't see any reason to have a very dark picture right now.
Q: Which factors can explain France's current weakness? François Villeroy, governor of the Banque de France, has long insisted on the lack of skilled workers. Does this still hold true or have other problems become bigger than this?
A: I think we must distinguish between cyclical and structural weaknesses. On the cyclical side it's a bit of a stretch to describe 1% growth as being weak. But it's undeniable that the current situation is weighing on economic growth by causing this wait-and-see attitude among economic agents. On the more structural side, it's true that skills are a concern. We've had historically high levels of hiring difficulties during the pandemic and the energy crisis. They have eased since 2023 but remain fairly high. The main concern is, if we look at cross-country comparisons on skills, France is below the OECD average, according to the OECD survey on adult skills. We also saw a drop in French performance in education in the latest edition of the Pisa report. That is worrying as human capital is crucial for long-term productivity. The recent governments have therefore taken a number of measures to improve both the education system’s ability to deliver core skills, and training for young adults and the unemployed.
Q: To what extent do you think that the weakness seen in France is going to have an impact on the rest of Europe? France is the second-largest economy in Europe.
A: European economies are interlinked, but I don't think this is necessarily the right way to look at it. Growth for 2024 is expected to have been at 1.1%, which is higher than the euro area average of 0.8%. France is growing slower than Spain but quite significantly stronger than Italy and Germany.
Q: How worried are you that the feeble German economy is going to be a drag on French growth for the foreseeable future?
A: German GDP has declined for two years in a row, and it is no higher than it was in 2019. So that's a concern. Germany is France’s main customer with about 14% of our exports going to Germany. The German economic stagnation does have an impact on the French economy through this trade channel. The impact is significant but not massive: we usually estimate that for every percentage point of German growth, the spillover effect on French growth is of 0.1 percentage point.
Q: Inflation has been under 2% in France since August 2024. Are you concerned about France undershooting the ECB inflation target?
A: It is good news to have inflation under control after an inflationary crisis. It is positive for consumers. Households have been hard hit by the high inflation episode, and the fact that energy and food prices are still well above pre-war levels remains a driver of the weakness in consumption. In this context, having inflation coming down below 2% is good news for consumption prospects. We forecast inflation in France to be at 1.4% in 2025. It is below 2%, but it is also far from deflation, and you have to factor in the fact that the normalisation of energy prices is still pushing inflation down this year with retail electricity prices falling by 15%. Besides, the ECB target is 2% for the Eurozone on average, which is consistent with more mature economies like France being somewhat below and economies that still have some catch-up to do being somewhat above. I think there's no inconsistency there.
Q: So, it is currently not a matter of concern for the French Treasury?
A: No, I think at this point we're more seeing the benefits of having inflation under control.
Q: What is the biggest force leading inflation downwards in France now: economic weakness, uncertainty or the ECB’s monetary policy?
A: Mostly the reversal of past shocks and the effect of monetary policy. The disinflationary process has been driven by the reversal of the previous inflationary shocks, starting with supply chain bottlenecks and energy prices. The ECB’s monetary policy played a significant role in ensuring that this temporary inflation surge did not actually translate into sustained medium-term inflation. I would say it has been both of these factors.
Q: So, you don't think that economic weakness is playing an important role in such low French inflation?
A: It’s playing a minor role. We estimate the French economy has a moderate negative output gap, so that would be consistent with inflation slightly below its long-term average, but that’s probably not the first factor.
Q: In 2023, the US was France’s 4th customer behind Germany, Italy and Belgium, and its 5th supplier. What would the impact of potential tariffs against Europe be for France?
A: We are concerned about the risk of a trade war. During the campaign President Trump talked about across-the-board tariffs, including 10% or 20% levies on EU exports. But these tariffs were not part of the first series of executive orders after his inauguration. So, it's a bit early to know exactly which scenario to think about. France is exposed to the risk of US tariffs, both directly but also through our European partners, especially Germany, which has a bigger share of exports to the US in its GDP. But our exposure should be put in perspective. More than half of our exports go to within the euro area. The impact of potential tariffs could also be partly mitigated by the impact of other areas of US policies, especially the Trump administration’s fiscal plans, which look like they're going in the direction of fiscal expansion. That would have positive spillovers on the French and European economies.
Q: Do you have any estimates on how big the hit would be on French economic output?
A: CEPII, a French research institute, has elaborated some estimates about the impact of a trade war. Again, it depends on what you incorporate in the scenario. They've modelled the impact of a 10% across-the-board tariff and a 60% tariff on Chinese exports with equivalent retaliation, and they get to a mild effect on the French economy : -0.1% of GDP by 2030, which is less than the impact on the US economy itself. However, this aggregate number masks potentially large differences across sectors, depending on their reliance on the US as a customer but also on how their international supply chains are organised. We have to look behind the GDP number to see where exposures are. But even in this scenario, which is hopefully maximalist in terms of the level of tariffs, the overall hit to the French economy from the tariffs would not be massive.
Q: Do you think a weak euro can be a boost to French exports?
A: The depreciation of the euro does strengthen France’s price competitiveness, and that should have an effect on the volume of exports of goods, but particularly tourism in the French case. But that effect of a weaker euro has to be put in some perspective. First, because the Eurozone accounts for 55% of our exports, where of course there is no exchange rate effect. And even in our extra EU trade more than half of it is denominated in euros. So there again, there is no exchange rate effect.
Q: So, the impact would in fact be limited, right?
A: Yes, the impact is probably positive but quite limited.
Q: Are you worried that there would be strong competition from the very cheap Chinese products in the event of a trade war?
A: That’s definitely a concern. If the US shuts down to China, the redirection of Chinese exports to the European market could be quite disruptive. However, compared to the situation during the first Trump presidency, the European Commission has at its disposal an expanded toolkit to deal with unfair competition and overcapacities in a fully WTO-compliant manner. There are more than 180 trade defence measures in place. If the US were to impose large tariffs on Chinese products and these exports were redirected to the European Union, we have specific tools to address that: we always have the possibility to activate safeguard measures, like we did for steel in 2018.
Q: China could again export deflation to Europe. But is that a bigger threat than other inflationary forces potentially caused by a trade war?
A: If we look beyond the cyclical inflation dynamics, the concern more generally is to avoid going back to structural weak growth, demand, productivity and inflation, rather independently of a potential China effect. When I worry about Europe going back to low dynamism, the return to this secular stagnation is what I worry about most – and avoiding it is more about boosting our own productivity and innovation that in our external environment.
Q: So, do you think that it is more likely that Europe would end up being in a more lowflationary situation than in an environment where inflation is again a concern?
A: I think it's more of a concern, yes.
Q: In the last few years Europe has been very vulnerable to different crises due to its dependency on non-friendly allies (be it Russia or China, now maybe even the US). Can Europe do something to reverse this?
A: A lot has already been done, first to understand our vulnerabilities, doing the analysis product by product to see where we have very concentrated imports of strategic goods from a single country, and if possibilities of diversification are limited. Secondly, a lot has also been done at the EU level to develop a strategy to counter these dependencies, especially in critical raw materials, and also tools to counter their potential weaponisation. Now we need to ramp up our forces to not shy away from using trade defence tools when we need to, and to diversify away from these strategic dependencies. This work is already in motion and has to continue.
Q: Turning to markets, lately bond yields have increased significantly almost everywhere. The situation in the UK reminds investors of what happened in 2022 under Liz Truss’ government. Do you fear a similar situation now?
A: The cause of the general movement in the sovereign debt markets has mostly been related to the expected impact of Trump’s policies on the fiscal balance and inflation, which have increased expectations for Fed rates. That also combined with a reassessment of the risk premium on British assets due to fears about the budget and the domestic economy. The situation in the UK now is quite different from the mini-budget episode of 2022, which then was amplified by the liquidity requirement of British Pension funds. At the time that was very specific to the UK. And even now in the UK there are no major liquidity problems for these funds. What is also very different is that at the time we were in the phase of monetary tightening, which amplified the effect on the gilt market, whereas now we are in the phase of monetary. Of course, we are monitoring closely what happens to long-term bond yields, but I don’t see any immediate cause for concern.
Q: How worried are you about rising bond yields while the global economy is clearly weakening? Do you sense a global shock coming?
A: We are seeing rising term premia while monetary policy is easing on short-term rates, but it is explainable. The fairly sudden increase in long-term rates sovereign rates over the past month is primarily due to changes in expectations for the Federal Reserve’s key rates, expectations about inflation in the US, and the amount of sovereign bond issuances that will have to be absorbed by markets. That part of the increase is still cyclical, and it's not certain that it will last over time. As for the French situation, we had provisioned for a movement like this in the interest rate assumptions that underlie the budget bill, which have always been more prudent than market forecasts. Therefore, we had some room in our debt servicing cost projections for interest rates to increase without affecting our public finance trajectory, because we were more conservative than the markets. French debt also has a fairly high average maturity, over 8 years, so it takes some time for movements in long-term rates to actually materialise on the debt servicing costs.
Q: So, I get you weren’t very concerned when the French spread with the German Bund surpassed the Greek spread some months ago. It was all over the media back then.
A: Two things about that. First, for us, the main change was when the French spread to German bonds increased significantly and that was at the time of the snap elections in June last year. Since then, the spread has been fairly stable. If the Greek spread goes down, then that’s good news for Greece. As for the comparison on benchmark titles, French sovereign yields are close but lower than those of Greece. Second, such comparison is of limited relevance because Greece has a much smaller issuance program. It's only €8 billion of medium and long-term issuance, whereas France’s is €300 billion net of buybacks. And most of the Greek debt stock is held by supranational investors, by the Eurosystem, so it's not on the market. For us the more relevant comparison is with German bonds, where the spread has been more or less stable since political uncertainty increased in the middle of last year.
Q: Do you envision another significant rise in French bond yields versus the German bunds, or do you think that the situation is much more calm?
A: The situation is much more calm now. The government has committed to a fiscal trajectory that has been approved by EU Finance Ministers, with a gradual but consistent fiscal consolidation bringing the deficit from 6% of GDP last year to 5,4% this year and below 3% by 2029. The Prime Minister has been clear about the fiscal targets and has tried to reach a political consensus with some opposition parties around the amended budget. There is therefore more clarity on the fiscal path than we had in the middle of last year and the adoption of the budget should help.