France: the decline in purchasing power weighs on household consumption

This problem should continue in the second quarter.

GDP growth slowed in the first quarter of 2022 to 0% q/q (it was 0.7% q/q in the fourth quarter of 2021). This figure masks a more marked deterioration in household consumption ( -1.3% q/q in the first quarter). The sharp rise in inflation weighed on household purchasing power, which we estimate fell by 0.6% q/q in the first quarter. This problem should continue in the second quarter: we anticipate a fall in household consumption of 0.7% q/q, prolonging the virtual stagnation of GDP (+0.1% q/q).

According to INSEE’s first estimate, French GDP growth was zero in the first quarter of 2022. The slowdown in activity is notable compared to the fourth quarter of 2021 (growth of +0.7% q/q), d especially since the performance of the first quarter benefited from a positive contribution from foreign trade (+0.1 point) and inventories (+0.4 point). Corporate investment also maintained its growth (0.7% q/q), even if it should slow down due to the rise in uncertainty.

Household consumption suffered a decline (-1.3% q/q), under the weight of a multiplication of constraints. To the supply difficulties which concern several items (automotive and textile consumption lower in the first quarter by 11.1% and 5.3% respectively than their average level of 2019 pre-Covid), were added power issues. which started to affect previously resilient spending (1.7% q/q decline in food consumption), while households also reduced their energy consumption (-2.7% q/q).

The sharp rise in inflation (4.8% y/y in April compared to 2.9% y/y in December 2021) is in fact putting a significant strain on household purchasing power, of which we estimate the down to -0.6% q/q in the first quarter. The fall in household consumption (following +0.6% q/q in Q4 2021) reveals the strong constraint exerted by the loss of purchasing power. According to our calculations, the tariff shield (including the increase limited to 4% in February of the regulated electricity tariff) and the payment of the remainder of the inflation check which had not yet been paid in 2021 (for 15 million French people) made it possible to limit this loss of purchasing power which, without this aid, might have reached -1.6%.

Fiscal policy support for households did not prevent the sharp deterioration between February (96) and April (88) of the household confidence index following the sharp rise in fuel prices in March, and despite the reduction of 18 centimes per liter granted from April. The INSEE survey shows in particular a marked deterioration in the opinion of households on their ability to save (evidence of the shock to their purchasing power) and on the advisability of making major purchases (-13 points in two month). The deterioration of 14 points in two months in the business climate in retail trade is another warning signal. We are therefore expecting a further deterioration in household consumption in the second quarter (-0.7% q/q according to our forecasts), leading to further virtual stagnation in GDP (+0.1% q/q ).