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The horizon at the end of the tunnel is still far from clear. After two long years of pandemic, the French economy went through strong areas of turbulence during the first quarter. Between the Omicron variant contamination explosion earlier in the year and the outbreak of war in Ukraine at the end of February, economic activity in France stagnated between January and March. Added to this are skyrocketing prices and increased tensions in supply chains.
For the time being, the Montrouge-based institute has not conjured up the dark scenario of “stagflation”, bad memories of the 1970s marked by slow growth and inflation at an all-time high. ” Stagflation is stagnant activity and inflation for a sustained period. Our scenario for the second quarter is one of modest growth with high inflation. We don’t have a scenario beyond the middle of the year.” explained the head of the economic cycle department, Julien Pouget, during a press conference on Monday. Insee also did not mention a recession scenario. As a reminder, a technical recession corresponds to two consecutive quarters of falling gross domestic product (GDP).
President Emmanuel Macron, who could announce his next government this week, will have the difficult task of not sinking the French economy if he wants to be able to fulfill the promises of his presidential program from the first months of his mandate.
Eurozone: Christine Lagarde (ECB) refuses to talk about “stagflation”
INSEE forecasts GDP growth of 0.25% in the second quarter
Despite the clouds gathering over the French economy, growth should pick up slightly in the second quarter, according to INSEE. The different surveys carried out by the statistics institute illustrate an increase in uncertainty but also “a resistance of the business climate”, underline the authors of the economic situation. ” The central scenario of our forecast shows modest growth of 0.25% with recovery effects and a relatively resilient employment climate. However, there are risks for household consumption, international risks,” Julien Pouget summed up. China’s zero covid policy continues to disrupt supply chains around the world.
Excess growth in 2022, that is, the level of growth that would be registered if nothing happened, would be 2.6% in the middle of the year compared to 2.7% in the March economic report. This achievement is largely due to the mechanical pick-up in 2021 GDP growth in 2021 (+7%) after the dramatic drop in 2020 at the height of the pandemic.
Inflation above 5%
Inflation gauges continue to rise. After hitting 4.8% in April, the consumer price index could top the 5% token bar in June. ” Negative supply shocks with the war in Ukraine and the zero covid policy in China are increasing tensions in quantities and prices. As for prices, they have reached unprecedented levels since the beginning of our series in agriculture (+69% for cereals), industry. These producer prices continue to feed into consumer prices.” Julien Pouget explains. ” In March 2022, the production prices in the French industry increased by 24.4% in one year. This is the largest increase since these series were calculated, January 1995”highlights a recent INSEE blog post.
Core inflation, which excludes the most volatile prices (energy, food) could rise to 3.5% in June from 2.5% in June. As an annual average, core inflation was 1.1% during the year 2021. The European Central Bank (ECB) is currently at a crest line. Although it has already announced a tightening of its monetary policy via the end of the pandemic emergency purchase program (PEPP), the governing council must avoid slowing activity in the euro zone already entangled in slow growth in the first quarter .
Purchasing power at half mast
The war in Ukraine considerably affected confidence and household consumption, the traditional engine of the French economy during the first quarter. The purchasing power of French households fell by 1.5% between January and March and could fall again by 0.5% during the second quarter. ” There has been a very clear drop in household confidence since the start of the war in Ukraine. The indicator that measures the opportunity to make important purchases is falling. At the same time, the indicator that measures the opportunity to save has not really decreased since the beginning of the health crisis”, underlines Julien Pouget.
Despite all the measures to fight against the increase in the cost of living (tariff shield, discount at petrol stations, inflation control), purchasing power, a subject of great concern for the French, is losing ground in this context particularly disturbing.
Industry in the red, services resist
On the business side, the situation is especially critical in sectors highly dependent on fossil fuels or abroad to obtain raw materials or metals. In the automotive industry, most major groups and their subcontractors are still in the red. The automotive sector continues to be marked by supply tensions. “ In March, car production was still a third below its pre-health crisis level.says Julien Pouget. On the other hand, certain sectors in IT in particular are still doing well, taking advantage of the digital boom in businesses since the pandemic.
On the household side, the situation is mixed. The rise in price fever in recent months has mainly penalized the most modest households and those who depend on their vehicle to get around. Largely untargeted executive actions have failed to offset the damaging effects of this runaway price increase on the wallets of families at the bottom of the distribution. This could have significant implications for GDP growth. Given their propensity to spend, these families could further curb their consumer spending in the coming weeks.