Bank of France identifies private debt and uncertainty as predictors of extreme downside risks to French growth

In a new blog post, the Bank of France examines extreme downside risks to French growth, finding that private sector debt and market uncertainty are particularly informative over one quarter, while economic uncertainty and geopolitical risks matter more over five years. Its Growth-at-Risk analysis supports monitoring different indicators according to the time horizon, complementing forecasts of average growth and existing macroprudential risk assessments. The analysis examines around 30 macroeconomic and financial variables to estimate the 5th conditional percentile of future gross domestic product growth, using a sample beginning in 1993. When indicators are assessed individually, household and corporate credit and debt, alongside market uncertainty, best predict extreme downside risks over one quarter. Economic uncertainty and composite financial conditions indices are more informative over five years. Combining indicators and their past values confirms the relevance of market uncertainty, past economic conditions and, to a lesser extent, debt in the short term. It also reveals the predictive value of geopolitical risks over five years, which is not apparent when indicators are assessed separately. For macroprudential monitoring, the findings point to quarterly changes in household and corporate debt and market uncertainty as signals of a deteriorating growth outlook, with economic uncertainty and geopolitical risks warranting greater attention over longer horizons. The importance of private debt is consistent with its existing role in calibrating the countercyclical capital buffer. These statistical results can inform policy deliberations but remain one input among a broader range of considerations.