Economic outlook, 5 May 2023

In April 2023, the year-on-year variation in the consumer price index stood at 5.9%, after 5.7% in March. For the eleventh consecutive month inflation is therefore on a plateau at around 6%. Since January 2021, the price index has increased by 12% overall, with contrasting trends depending on the different consumption items: energy prices rose by 41% between January 2021 and April 2023, food prices by 20%, the prices of manufactured products by 8% and finally the prices of services by 7%. It was energy that drove inflation first in 2021, before food gradually took over during 2022. In April 2023, food accounted for 40% of inflation, although it represents “only” 16% of the average consumption basket.

Changes month by month in the year-on-year variation in prices reflect both monthly price variations and their situation a year earlier (“base effect”). With regard to petroleum products, for example, the decline in prices year-on-year was less pronounced in April 2023 than in March because it was one year earlier, in April 2022, that the discount at the pump was introduced as a reaction to the sharp rise in fuel prices after the outbreak of war in Ukraine. Regarding food, fresh food prices have been fairly volatile, and decelerated year-on-year in April, but other food prices increased year-on-year by around 16%, as they had also done in March. Finally, the prices of services accelerated a little in April, increasing their contribution to headline inflation.

These slight changes in direction in April should not be over-interpreted, although they do outline some key questions for the trend in inflation over the coming months, particularly with regard to food, manufactured products and services: when can we expect the prices of food and manufactured products to begin to slow, in the wake of certain world commodity prices? To what extent could inflation spread further in services?

While the scale of current developments presents few recent points of comparison, thus making any forecast uncertain, some indicators suggest, if not a decline, then at least a slowdown in the prices of certain manufactured products over the coming months. This shift has been observed in recent months, for example, in the producer prices (“factory gate” or “farm gate” prices) in some industrial and agricultural sectors (Figure 1). This is confirmed by the balances of opinion collected in the monthly tendency surveys in industry on probable change in selling prices over the next three months (Figure 2 and Box). In the tendency survey in services however, it does not appear at this stage.

Regarding food products (excluding fresh produce), agricultural production prices have been falling for several months, although they remain well above their pre-health crisis level. However, producer prices in the agrifood industries have shown no sign yet of a similar trend. Over the forecasting period (June 2023), consumer food prices are expected to maintain a steady rate (between 15 and 16% year-on-year). This does not exclude a possible slowdown subsequently, after the trade renegotiations announced for the end of spring.

Meanwhile, the year-on-year variation in the prices of manufactured goods is expected to remain a little below 5% by mid-2023. Prices of services could pick up slightly, with a year-on-year variation of +3.5% forecast for June, against the backdrop of a further increase in the minimum wage (SMIC) on 1st May. Conversely, and assuming a Brent price of €75, energy is expected to contribute, via the “base effect”, to slowing down the year-on-year variation in the overall index, forecast at +5.7% in May then +5.4% in June (Figures 3 and 4). Our assumption for the price of Brent is that it should be similar to that observed at the end of April, but higher than at the beginning of May when volatility was greater.

The slight slowdown in headline inflation forecast for mid-2023 is not necessarily an indication of the trend for the second half of the year. Some major uncertainties remain, notably over future changes in food prices and possibly a more significant dissemination of inflation than currently in the services sector.

For several quarters, the context of high inflation has weighed heavily on household consumption. In Q1 2023, as in the previous quarter, it was at the same level as just before the crisis (i.e. Q4 2019), despite exceeding this level between mid-2021 and mid-2022. Food consumption in particular fell sharply in volume (around -9% year-on-year in March). This decline may reflect an effective drop in the quantity consumed, but it also indicates changes in the range of products bought (Box). The strikes that punctuated Q1 do not seem to have had any significant effect on consumption, however, except probably for rail transport.

Household confidence in the economic situation was still weak in April, despite a slight upturn. In Q2 2023, consumption is therefore likely to remain at a standstill: consumption of goods, especially food consumption, is expected to continue to fall back, while consumption of services is likely to increase again slightly with spending on energy continuing to rebound.

Investment is also unlikely to boost growth: corporate investment could continue to slow in spring, against a background of rising interest rates. Household investment is expected to slow further, in line with the fall in the construction of new housing and real estate transactions. Foreign trade could support growth slightly in the spring, as it did in Q1.

Business climates, calculated from company responses to surveys, reflect an economic situation that remains hesitant (Figure 6). Since the summer of 2022, quarterly GDP growth has been relatively modest, at around +0.1% on average. It shows some resistance to the massive rise in prices, but remains below what could have been expected in the absence of an inflationary shock.

In manufacturing industries, supply chain difficulties are continuing to recede, although they are still greater than before the crisis. Conversely, concerns related to demand are tending to increase (Figure 7). Inventories of finished products are also considered higher in April than in March. Manufacturing production could dip in Q2, despite the relatively good performance of the manufacture of transport equipment. Industrial activity as a whole could improve, however, as a result of the continuing rebound in electricity production.

In construction, economic activity looks set to continue to decline in the spring, as suggested, for example by the survey of real estate developers, or the slight downturn in payroll employment in this sector in Q1. Activity in trade is expected to be sluggish, whereas in services it is likely to pick up slightly, sustained, among other things, by a rebound in transport services.

All in all, GDP growth in Q2 2023 is expected to settle at +0.2%, the same as in Q1 (Figure 5). This forecast remains unchanged since the last Economic Outlook. Meanwhile, the growth overhang for 2023 is likely to be +0.5% coming out of Q2.