Inflation is falling, growth is hesitant Economic Outlook - June 2023


Conjoncture in France
Paru le :Paru le26/06/2023
Conjoncture in France- June 2023


Conjoncture in France

Paru le :26/06/2023

Jean-Philippe Cotis, former Director-General of INSEE, has passed away. The Economic Outlook was a publication for which he felt a great affection, particularly appreciating its analytical quality and its relevance. The example he set continues to be a source of inspiration.

Bolstered by the normalisation of production conditions, yet subject to tightening monetary and financial conditions, the main world economies are evolving in different ways

By mid-2023, the global economy seems less constrained than a year ago by the direct consequences of the shocks experienced in recent years (notably the Covid-19 pandemic, and the war in Ukraine). Health restrictions have been lifted completely in China. Supply chains in industry are now less disrupted. Energy prices and the prices of many commodities have fallen back significantly from the peaks of spring 2022.

However, this gradual normalisation of production conditions is not without its questions and uncertainties. In China, the potential for catch-up seems tempered by concerns over demand and there are already signs of a slowdown in production. Meanwhile, United States activity is gradually losing momentum. In Europe, it may take some time for the drop in energy prices to benefit some companies, given that contractual commitments are sometimes fixed in advance. Fluctuations in commodity prices too may take several quarters to impact retail prices.

Western economies are therefore facing both inflation that remains relatively high (despite the beginning of a reduction, in particular with regard to the energy component) and the first consequences of the monetary tightening introduced by the central banks to curb it. High inflation is holding back household consumption, while high interest rates are hampering both corporate and household investment. The real estate market in particular has recently turned around in many western countries.

By the end of 2023, economic activity in the Eurozone is thus expected to improve modestly, in the absence of any marked boost in domestic demand. As an annual average, there are several factors that can account for contrasts between European countries: Spanish and Italian growth are likely to continue to benefit from their catch-up potential in terms of investment, with strong European budgetary support. Conversely, German activity appears to be most exposed to shocks affecting industry. French growth, meanwhile, is expected to remain in an intermediate position. The UK economy, for its part, looks set to continue to be hampered by high inflation and supply chain problems.

The signs of a decline in inflation are starting to be seen

In May 2023, for the first time in a year, the year-on-year variation in consumer prices in France, at +5.1%, came down from its plateau of around +6%. This decline in inflation is due mainly to the fall over one year in petroleum product prices, which are now lower than they were just after the outbreak of war in Ukraine (“base effect”), but also to the slowdown in the prices of other goods and services, including those of food (which nevertheless increased by more than 14% over one year, and 19% over two years).

This slowing is confirmation of the warning signs that have been evident over the last few months in the agricultural and industrial production price indices (“farm gate” or “factory-gate” prices), also in the results of the business tendency surveys. In April 2023, for example, the agricultural production price index was 7% below its April 2022 level (but nevertheless 22% above that of two years ago), thus reflecting recent movements in world agricultural commodity prices. These movements have a delayed impact on production prices in the agrifood industries (which slowed in April, but without falling) then on consumer prices. Our estimates therefore suggest that fluctuations in agricultural commodity prices will be passed through to retail prices to the tune of around 50% after three quarters, and 80% after one year.

During H2 2023 and provided they follow their usual determinants, consumer prices of food products could slow significantly, although without their average necessarily falling. The year-on-year variation would then be halved by the end of the year to between +7 and +8%. Consumer prices of manufactured products are also expected to slow. However, services are likely to contribute more and more to headline inflation, which would then be back to +4.4% year-on-year in December. Core inflation is also expected to fall back (+4.1% year-on-year forecast for the end of the year).

After declining in H1 2023, household gross disposable income (GDI) purchasing power is expected to stabilise during the second half of the year

In this context, it is likely that in the course of the year the buoyancy of wages will gradually catch up with that of consumer prices. As an annual average, the average wage per capita (SMPT) in the non-agricultural market branches should therefore increase by 5.1%, a similar pace to the expected annual change in the consumer price index (+5.0%).

After a further decline forecast for Q2 2023, household GDI purchasing power is then expected to stabilise in H2, mainly due to the slowdown in prices and the relative buoyancy of earned income. On average over the whole of 2023, purchasing power looks set to increase slightly (+0.5% forecast). Measured by consumption unit to take demographic changes into account, it is expected to be stable (0.0% forecast in 2023), after a slight drop (-0.4%) in 2022.

Regarding companies, the buoyancy of the per capita wage in a context where prices are slowing is likely to have an impact overall on variation in the margin rate of non-financial corporations (NFC). Conversely, however, this rate is expected to be sustained by domestic terms of trade, given the prices of value added which are expected to become more dynamic than consumer prices once again. All in all, the margin rate of NFCs is therefore expected to be virtually stable in H2 2023, at around 32%.

French growth is expected to remain hesitant

For several months, the economic climate in France has been eroded, according to the business tendency surveys. The latest available data, covering May 2023, show an increase in this trend, in all sectors and especially in wholesale trade. Thus the business climate indicator for France has returned to its long-term average. This gloom mainly reflects some more serious concerns over demand. The index of household confidence in the economic situation remains very much in decline: it has never really recovered since spring 2022.

French GDP growth is therefore expected to remain modest over the next few quarters (+0.1% forecast in Q2 2023, +0.1% in Q3, and +0.2% in Q4). This would be more or less the average pace observed since early 2022, the date of the post-Covid return to normal. As an annual average, growth is expected to be +0.6% in 2023, after +2.5% in 2022.

Among the main demand items, household consumption is expected to falter in the spring due to a further downturn in food consumption, then pick up only slightly in H2. Corporate investment looks set to rebound occasionally in Q2, mainly as a result of the renewal of fleets of professional vehicles, then it will be at standstill, with investment in construction continuing to decline in a context of high interest rates. This context is also likely to affect household investment, which is expected to continue its sharp decline. Lastly, exports should provide some support in the spring, then again in the autumn, mainly as a result of aeronautical and naval deliveries, whereas imports are expected to be sluggish, in the wake of domestic demand.

Among the main sectors of activity, manufacturing industry could fall back in Q2, adversely affected by the most energy-intensive branches and by coke and refined petroleum production, then stabilise from the summer onwards. Energy production, especially electricity, is likely to continue to catch up. Growth is expected to be modest in market services. And lastly, in construction, activity is expected to remain on its downward trend.

The unemployment rate is expected to remain stable until the end of the year

Despite relatively weak growth, the momentum in employment did not wane in Q1 2023, raising more queries about the change in productivity. However, payroll employment could slow by the end of the year, against a background of modest growth in economic activity. All in all, at the end of 2023, the net number of jobs created year-on-year is expected to stand at 175,000, compared to 445,000 at the end of 2022.

The active population is also expected to increase more moderately in 2023 than in 2022, given the less sustained momentum in sandwich contracts and despite the first effects of the retirement reform from September. The joint slowdown in employment and in the active population is expected to result in stability in the unemployment rate (at 7.1% of the active population) until the end of 2023.

The uncertainties of forecasting relate not only to the behaviour of economic players in France but also to the international environment

This forecast is still surrounded by uncertainty, both nationally and internationally. Changes in consumer prices, especially food prices, depend in part on margin behaviour by the agrifood industries and distributors, and partly on the results of trade renegotiations. The consumption forecasts presented in this Economic Outlook assume that the household savings ratio will remain at around 18%, significantly higher than the pre-crisis level (15%). Any drop in this rate would tend to bolster consumption. Lastly, the reports on monetary tightening and the speed at which it is transmitted to the real economy remain uncertain in the western countries, while questions persist about the future pace of Chinese growth.