France can bolster growth through fiscal restraint, further reforms

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Page 352

The cyclical recovery of the French economy was interrupted in the first half of 2005 as previously strong domestic demand faltered and the external sector continued to exert a drag on growth, the IMF said in its annual economic review. Because growth in 2004 was faster and more consumption-driven than in other large euro area countries, the fall in private consumption in the second quarter of 2005 was unexpected and possibly related to stagnating unemployment, rising oil prices, and political turmoil surrounding the rejection of the European Union constitution. Growth is likely to pick up, however, driven by an improvement in the external environment and a return of domestic demand to a normal pace following the mid-year clarification of the direction of economic policies. Indeed, the thirdquarter data, not available at the time of the IMF Executive Board's November discussion, came in strong, prompting the staff to revise its growth projection upward.

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The Board commended the authorities for continuing to pursue fiscal consolidation and structural reforms amid the weak economic environment and difficult political circumstances.

France's 2006 draft budget targets a reduction in the general government deficit to 2.9 percent of GDP from 3.0 percent of GDP in 2005 and 3.6 percent of GDP in 2004...