France’s Labor Market Remains Key Obstacle to Growth, IMF Says

  • IMF sees French economy expanding 1.5% in both 2016 and 2017
  • French investment in cyclical recovery, net exports declining

France’s rigid labor market rules are still hampering growth and should be the focus of government efforts to modernize the economy, the International Monetary Fund said.

“A key obstacle to growth remains the labor market,” the Washington-based fund said in its Article IV report on France. “Structural unemployment is projected to remain high in the absence of additional reforms. In an environment with modest medium-term growth prospects at home and in the euro area, France thus faces two central policy challenges: to support a more rapid creation of new private sector jobs and to ensure the sustainability of public finances.”

The criticism is a reminder that the new labor law that President Francois Hollande forced through parliament despite opposition from his own lawmakers this month hasn’t substantively changed the French job market or economic outlook. The unemployment rate is stuck around 10 percent, roughly twice the level of the U.K. and Germany.

The IMF predicts French gross domestic product will expand 1.5 percent both this year and next, in line with the finance ministry’s own estimates.

“The recovery is solidifying,” the IMF said in the report issued Tuesday. Consumer spending is driving the advance and “there are also signs of a cyclical recovery in investment, and the slump in residential construction appears to be bottoming out. By contrast, net exports are declining as demand from trading partners has slowed.”

To cut unemployment, the IMF recommends more incentives for the unemployed to seek work, reform of the minimum wage and changes to education and training.

The IMF also said it sees fresh “downside risks” related to the U.K. vote to leave the European Union. French banks and insurers need to further adjust their business models to an era of modest growth and low interest rates, it added.

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