What Might We Expect From The French Economy in 2024?

What Might We Expect From The French Economy in 2024?

Dec 27, 2023

As we move into the New Year, I was asked what we might expect from the French economy over the next 12 months. Whilst, like many before me, I am happy to speculate, I am also perfectly aware of the fact that nobody knows what is around the corner. To quote Milton Friedman, “Economics is the only calling in which one can have a lifetime reputation as an expert without ever once being right!” We can, however, look at what we do know, and this can be extremely helpful when planning our personal finances.

Some might argue, for example, that the main French stock market (known as the CAC 40) has been defying logic. With interest rates rising to 4.5% (at the time of writing) in an effort to slow the economy, and thus inflation, as well as wars in Eastern Europe and in Gaza, you might have been surprised to see the CAC 40 making new all-time highs in 2023.

The fact that the main French stock market set new records this year suggests that the French economy must be reasonably healthy, which, given the circumstances, it is. You might wonder why that is?

We noted in an earlier article that since gaining power in 2017, President Macron has cut various taxes, including taxe d’habitation for all main homes in France, as well as introducing a capital gains flat tax for individuals. For companies, he has lowered corporation tax from 33% to 25% today.

Remaining on the tax theme; in recent years, the French government has helped to protect purchasing power by raising tax bands roughly in line with inflation. For the 2022 tax declaration, tax bands were raised by a generous 5.4% and for the 2023 income tax declaration they will again be raised, this time by 4.8%.

Furthermore, when inflation started to rise sharply in 2021, even before Russia’s invasion of Ukraine, the French state notably helped to soften the blow. The most significant move Macron made was, very early on, to put caps on gas and electricity price rises. Energy price rises were a significant part of inflation across Europe, but these price caps meant French inflation remained consistently one of the lowest in Europe during 2022 and through the first half of 2023.

All these measures have certainly helped the French economy, but nevertheless, darker clouds have been accumulating, so 2024 may not be quite so simple for the French consumer.

In 2023, energy companies have finally been allowed to significantly raise their prices, with prices likely to rise again in 2024. This means that French residents will have to spend proportionally more on their utility bills, which would not be a positive for overall consumption within the French economy.

What about interest rates?

The good news is that at 4.5%, interest rates may now have peaked. The bad news is that they have risen throughout this year, making it more and more expensive to borrow money. It is thought that interest rates will remain around current levels for at least the next six months, which will be another drag on the French economy.

Interest rates affect housing, as it becomes harder and more expensive to borrow money. Most mortgages in France are fixed rate mortgages, so current homeowners do not need to worry about re-financing. However, the recent rise in interest rates has led to a notable slowdown in the number of transactions. House prices themselves have so far remained relatively stable, although obviously inflation has reduced real property values.

It is the long-term rental market that is seeing the most stress, particularly in large towns such as Paris or Lyon. With people unable to afford to buy, there has been an increase in demand for rental properties; however, this has been met by a reduced supply as landlords prefer to do short-term holiday rentals or exit the market altogether. Landlords have been put off by increasing property taxes, general expenses and bureaucracy (such as new norms for energy efficiency). Yields have been squeezed and landlords have left the market.

A lack of available and/or affordable housing stock is negative to the dynamism of any economy.

Coming full circle, back to our earlier points, we note there are many potential dangers out there, yet the French economy continues to chug along.

This all helps to illustrate the difficulties of investing. Economists tend to get significantly more wrong than they do right. Furthermore, markets can remain seemingly irrational for long periods of time. Clearly market volatility makes market timing extremely difficult, which is reflected in the fact that most actively managed equity funds do not beat their benchmarks. Kentingtons therefore recommend a more passive, diverse, low-cost strategy for the long-term investor. As the legendary investor Warren Buffet once said, “The stock market is a device for transferring money from the impatient to the patient.” The point is, we do not know what will happen in 2024, but we do know that historically patience has been rewarded.

This article was first published in the Connexion December 2023

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 Disclaimer: The information in the above article concerning taxation is based upon our understanding of the taxation laws and practises in France at the time of writing. These taxation rules are subject to change and as such, Kentingtons cannot be held responsible for any inaccuracies that may occur. The information in this article does not constitute personal advice. Individuals should seek personalised advice in relation to their own situation.

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