The French economy should avoid the worst. One year to the day following the outbreak of war in Ukraine, fears of recession are gradually dissipating. After a strong post-pandemic rebound in 2021, activity stalled sharply in 2022. Quarter-on-quarter gross domestic product (GDP) growth accelerated by just 0.15% on average. But the tricolor economy has not recorded two consecutive quarters of negative growth. Looking to 2023, growth is expected to be slightly better than expected.
During a hearing at the National Assembly on Wednesday March 1, the Governor of the Banque de France, François Villeroy de Galhau, tried to reassure the parliamentarians who came to question him on the national and international situation. “No recession but still too much inflation. Although slowing down, activity is showing better resilience than expected. Purchasing power was finally preserved in 2022. The risk of recession can be ruled out today, barring a major global event,” he said during his speech.
A few weeks before the presentation of the new forecasts of the banking institution, François Villeroy de Galhau announced that “Growth should be weakly positive in 2023, slightly above our forecast of 0.3%. Recovery is expected to take place in 2024.” Last December, the Banque de France’s forecasters forecast in their central scenario GDP growth of 0.3% before a rebound of 1.2% in 2024.
A spike in inflation expected in the first half of the year
Inflationary pressures have far from died down in France. In February, the consumer price index rose to 6.2% once morest 6% in January, according to the latest figures from INSEE released on Tuesday 28 February. Food prices (+14%) are accelerating much faster than average inflation, while energy prices have started to slow down or even fall. “This inflation might peak in the first half of the year. It might slow down but it’s still too high. Core inflation remains at 4.5%,” indicated the governor in front of the deputies.
As a reminder, underlying inflation corresponds to the evolution of prices without the most volatile components (energy, food). “For months, the main factor was energy. Today it’s food. These phenomena are very strong but temporary. The shock of food prices on inflation is expected to last for months but should gradually diminish by the end of the year,” he added.
Rate hike might continue until September
Faced with soaring prices, the European Central Bank (ECB) decided to take a tougher stance by announcing a series of rate hikes since last summer and the end of quantitative easing (QE, quantitative easing) implemented in 2015. The objective of the Frankfurt institution is to bring inflation down to 2%. During his hearing, François Villeroy de Galhau declared that “on the calendar, it is a question of reaching a terminal rate by the summer (the rate from which the central banks must lower their rates to avoid negative growth Ed), that is to say that rates might rise until the end of September. » To justify this timetable, he mentioned as “criterion the reversal of underlying inflation. We are not at that turning point. »
In Frankfurt, the next meetings of the governors promise heated debates between “the hawks”, supporters of an orthodox monetary policy and “the doves”, supporters of more accommodating measures. Indeed, the pursuit of a more restrictive monetary policy might lead to a more drastic tightening of access to credit, a more marked drop in demand and an increase in unemployment. “I want to dispel a fear,” tried to reassure François Villeroy de Galhau. “The disinflation that we are going to carry out will not lead to recession given the resilience of activity and employment. On the contrary, it would be a lasting inflation which would be the worst enemy of growth. »
Few concerns regarding PGEs
After the outbreak of war in Ukraine, the sudden slowdown in the economy has raised serious concerns regarding the ability of companies to repay state-guaranteed loans implemented during the pandemic. On this point, François Villeroy de Galhau wanted to be reassuring. “No widespread concern regarding PGE reimbursements. Since February 2022, we have received 671 deferral requests [auprès du médiateur du crédit]this represents less than 0.1% of the total PGE granted, he explained. Of the 143 billion euros granted, 46 billion euros have been reimbursed and 95% of companies reimburse their PGE well” he continued.
The specter of business failures dismissed
Regarding the situation of French companies, he called for “vigilance” but “ don’t be alarmist ». “The deterioration in cash is more noticeable in industry than in services, but we are not seeing a return to the specter of failures. The number of failures is increasing at the end of January. It is at 43,000 over the last 12 months. This is above Covid years but this level was kept artificially low,” he explained, recalling that the average over the period 2010-2019 was 59,000. Fiscal tightening, continued rate hikes and sluggish growth might amplify the challenges for many energy-intensive sectors.
ZOOM – Inflation stabilizes in Germany
Inflation across the Rhine stabilized in February, at 8.7% year on year, due to measures taken by the government to stem the rise in energy prices, according to official figures published on Wednesday.
The indicator remains below its peak of 10.4% reached in October but calculated according to a revised method in January (recalculated to 8.8% according to the new method), indicated in a press release the Destatis institute.
On the other hand, the harmonized price index, which serves as a benchmark for the European Central Bank, rose by 9.3% in February over one year, or 0.1 point more than in January. Inflation continues to soar in the euro zone’s largest economy, following record levels last year.
Two other eurozone economies experienced an acceleration in prices in February, France (6.2%) and Spain (6.1%). Eurostat publishes Thursday its first estimate for the euro zone.