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Inflation, interest rates, energy: is France winning on the economy?

Partner article: Christopher Davenport of Kentingtons looks at how France is managing its economy compared to other European countries

The UK had dominated foreign direct investments (FDIs) in Europe for 18 years, but France took the title in 2019, 2020 and 2021 Pic: esfera / Shutterstock

With talk of a recession in the UK, it is interesting to look at how the French economy is doing, including implications for savings and investments in both countries.

Over the last two decades, perhaps longer, it could be argued that of the big three European economies of France, Germany and the UK, France has been the laggard.

Now, however, with Germany battling with an energy crisis and the UK searching for direction, could it finally be time for France’s economy to shine brightest?

Third-lowest inflation in Europe

As anybody who follows the English Premier League will know, regional dominance cannot last forever. Just ask Manchester United fans.

The same goes for economies.

In August, France had the third-lowest inflation rate on the European continent (only Liechtenstein and Switzerland had lower). 

At 5.8%, inflation in France was nearly half that of the UK (at time of writing).

This is important, as it means the purchasing power of the French people has been less eroded, so they have more money to spend on non-essential items. 

This keeps the cogs of the economy turning, warding off a recession.

Read more: Explained: How France’s new budget will affect French residents

Swift action on energy prices

Energy prices are a big part of this differential. The French government has been quick to help French households and businesses by, for example, capping electricity and gas prices, as well as subsidising petrol purchases.

Read more: How your gas and electricity bills will change in France in 2023

Months later, Germany and the UK are stepping in to help their respective citizens, but the damage might have already been done.

Ironically, perhaps, the gilets jaunes protests, caused by high petrol prices in 2018, were a blessing in disguise for President Macron. This time around, he was quick to offer help.

The UK, however, now seems to be going through its own protest movements, with strike action becoming increasingly regular.

Read more: Most strikes in France are on a Tuesday or a Thursday. Here’s why

Interest rates and mortgages

Central banks are raising interest rates to combat inflation, with rates in the UK approximately 1% higher than in France. 

This is good news for savers (relatively, at least), but not so good for those with mortgages, as mortgage rates are intrinsically linked to interest. 

It is interesting to note that, here again, France stands on a firmer footing. 

This is because in France the great majority of mortgages are at a fixed rate, with terms of 20 years common.

In the UK, however, most mortgages are at variable rates, thus repayments rise with interest.

If the mortgage is fixed, it is usually only fixed for two or three years, meaning people are currently having to refinance at higher rates.

Mortgage rates are still relatively low in France, so it could be a good time to lock in at a low rate of interest.

Is France on track to have best economy in Europe?

Coming back to the football analogy, so far that makes it 2-0 to France. 

Could it be that President Macron, without people really noticing, is quietly turning France around?

One of the first things he did in 2017 was to introduce a flat tax (maximum 30%) on capital gains. 

This has encouraged more foreign investment in France. 

The UK had dominated foreign direct investments (FDIs) in Europe for 18 years, but France took the title in 2019, 2020 and 2021. 

This year, according to the Elysée, global companies are expected to invest €6.7billion in France. 

Another major focus of President Macron is training and re-training, with employability being the end goal.

The fact is, France has a long-term structural unemployment problem. 

Since 1982, unemployment in France has never been lower than 7%, with more than two million people unemployed since 1983. 

When President Macron came to power, unemployment was over 9%; today it stands at 7.4%. 

Lucky timing, or good economic management? 

Geopolitical and economic spanners in the works allowing, time will tell…

Read more: France moves to clamp down on workers’ training course scams

So what does all this mean for you and me? 

Well, one thing we need to think about is currencies.

France is not alone, of course, being part of the eurozone. 

Currency movements are intrinsically hard to predict, but when a currency slides, it can do so very quickly.

We would encourage people to hold at least five years’ worth of living expenses in the currency where they live, so if you live in France, this means euros.

The French football team is rated the best in Europe. 

Is it possible that one day we will be saying the same thing about its economy?

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