Political uncertainty in France has been on the rise since President Macron dissolved the French National Assembly, leading to economic consequences that are being widely debated. The resignation of the Barnier government has only exacerbated uncertainties about the country’s future. Measuring uncertainty and its impacts is a challenging task as it is not readily available in nature and must be calculated.
Economic Policy Uncertainty (EPU) has been a significant factor in recent global uncertainty shocks, from suspicions of currency manipulation in China to Brexit and unexpected political election outcomes. These events create uncertainties about the implementation of economic and social programs, affecting economies worldwide. With the use of text-mining methods, EPU indices developed by Bloom, Baker, and Davis are now available for numerous countries, including France.
- Upward Trend: Quarterly EPU for France has shown an upward trend since the early 2000s, with peaks during periods of tension in France and the wider euro area, such as the euro area debt crisis in 2012 and recent political tensions.
Amid the current post-Covid and energy crisis backdrop, France’s economic activity remains relatively stable, with an average quarterly growth rate of 0.3% (annualized at 1.2%) during the post-Covid recovery. Despite a sharp increase in ECB interest rates, France has managed to maintain growth without entering a recession.
- GDP Growth: Prior to the recent political turmoil, GDP growth forecasts for 2025 stood at 1.2% according to the Bank of France, indicating a positive outlook for the economy.
Market variables have reacted to the increased EPU, with business investment being particularly sensitive to uncertainty. The uncertain environment leads to a "wait-and-see" attitude among investors, affecting their decision-making regarding new investment projects.
- Business Investment: France has seen a slowdown in business investment over the past year, with a year-over-year change of -3.1% in the third quarter of 2024. A prolonged decline in this indicator could signal a potential recession in France, as observed by the French Business Cycle Dating Committee.
Analyzing the impact of the EPU shock on investment using the Local Projections method reveals a significant reduction in the log-level of investment six quarters after the shock. A one-standard-deviation EPU shock could lead to a 0.4% decline in investment. Given the substantial EPU shock in the third quarter of 2024, this could result in a further 2% decline in investment within eighteen months.
In conclusion, the current political and economic uncertainties in France pose challenges for investors and businesses, affecting their investment decisions and the overall economic outlook. Monitoring key indicators such as business investment will be crucial in assessing the risk of a potential recession in France. As the country navigates through this period of turmoil, stakeholders need to remain vigilant and adaptive to the evolving economic landscape.
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