October 18, 2023
The British and the French like to think of themselves as belonging to two very different countries, both culturally and economically. Looking at the data, this seems to hold some true across some key variables. For example, the French public sector plays a substantially larger role in the domestic economy compared to the UK. This is reflected in quite different attitudes regarding taxation, with the French showing the second-highest tax-to-GDP ratio among OECD states at 45.1% in 2021. This compares to the UK’s ratio of 33.5%, just below the OECD average.[1]
Over recent decades, the larger size of the French state has been associated with a less dynamic private sector economy and lower GDP growth rates compared to the UK. National stereotypes of hours-long lunches and early retirement comforts for French workers further seemed to reinforce that picture.
However, on some other dimensions the two economies are actually quite similar. Both countries have transitioned to largely services-based economies with manufacturing making up an ever-smaller share of the economy, accounting for 9.3% of French GDP and 8.4% of UK GDP – compare this to the 18.5% in Germany.
As such, it is perhaps not entirely surprising that the countries performed quite similarly in the post-pandemic period. Following the latest revisions, data for Q2 2023 show that the UK economy has grown by 1.8% since Q4 2019, compared to France’s 1.7%.
And at least in the near term, the French economy is expected to outperform both the UK and – with some margin – Germany. Cebr forecasts point to 0.7% GDP growth in the French economy this year, followed by 0.8% next year. This compares to our UK growth forecast of 0.5% this year and 0.4% in 2024.
The challenges faced by both countries are not dissimilar and stem in large parts from the twin-shocks of the Covid-19 pandemic and the war in Ukraine. Inflation, while trending down, is expected to remain above target for some time, while restrictive monetary policy means that consumers and businesses will feel the sting from higher interest rates. Rising bond yields make servicing the public debt – which has shot up in reaction to the pandemic – more expensive. Meanwhile, labour shortages fuelled by an ageing population put pressure on the social systems.
What then could explain France’s expected outperformance compared to the UK over the coming year?
Looking at the trade statistics, we can see that France’s openness to trade has increased by more than the UK in recent years. In 2019, trade, expressed as the sum of imports and exports, was equal to 64.1% of GDP in both countries. This rose to 72.1% in the case of France and 68.9% for the UK by 2022. This might be a consequence of Brexit making life harder for UK firms, though future years could bring a renewed convergence in the data. Germany, France’s largest trading partner, has teetered on the edge of recession for most of the year and despite some promising data it remains too early to tell if the Chinese economy can avoid a more protracted crisis which would also have a knock-on effect on French exporters.
The tourism sector, traditionally one of France’s strong points, will have benefited from catch-up spending over the past couple of years as well as the UK’s decision to abandon its tax-free shopping scheme. This will have diverted more tourist expenditure from London to Paris. However, the recent bedbug infestation, which has already led to the closure of schools in Paris, might plausibly deter some tourist arrivals if French authorities can’t get a grip on the problem soon. To summarise, for both tourism and trade we see France leading the UK economy for now, despite some potential downside risks.
In the medium to long-term, it seems as though the two economies will remain closely matched – despite their structural differences. France benefits from a superior infrastructure network – providing 0.41km of railways and 16.3km of roads per 1,000 inhabitants, compared to the UK’s 0.24km and 6.3km, respectively.[2] But both countries will need to see substantial investments to achieve the net zero transformations they have agreed to. This will put the spotlight on the productivity of the public sector as well as the ability to attract investment into the private sector. Looking at the number of foreign direct investment projects attracted in 2022, France leads the way in Europe, followed by the UK. However, projects in the UK support more jobs than those in France, underlining again the how closely matched the economies are.[3]
The UK and France have many shared interests and face some of the same challenges – if both countries can learn from each other’s strengths, they stand a better chance of mastering them than if they were to go it alone.
Source: Centre for Economics and Business Research (CEBR)
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