Eco Perspectives

The shock to purchasing power is smoothed but not fully eliminated

06/29/2022
PDF

The French economy is stuck between three developments with different effects: an inflation shock that is denting consumer spending, a negative supply shock (supply constraints in industry) and the lifting of public health restrictions (benefiting growth as of the second quarter, having held it back in the first quarter). Government measures that have limited inflation were unable to prevent negative growth in the first quarter. However, the positive impact of the lifting of public health restrictions and a rebound in purchasing power should allow for a recovery towards positive growth in the third quarter (+0.3% q/q).

Inflation spreading more and more

The inflation shock that rattled France during the last year stems from energy prices (+28% y/y at the end of May). We expect energy prices to stabilise at their current high level between now and the end of this year. Meanwhile, all other prices should continue to rise. According to our calculations, future increases in food prices (+4.2%) and services (+2.2%) are similar to those already seen over the first five months of 2022 and higher in terms of manufactured goods (+2.9% vs. 1.9%). This means that inflation has not yet reached its peak and is expected to near 6.5% y/y in September.

GROWTH & INFLATION

This brisk inflation is denting household purchasing power (-1.8% q/q in the first quarter according to INSEE) and consumer spending (-1.5% q/q). The reduction in purchasing power has been limited by the measures adopted by the French government but not avoided. The freeze on regulated gas prices at the October 2021 level, the 4% cap on electricity price rises in February 2022 and the rebate of EUR0.18 per litre on fuel (until July 2022, and likely to be extended) have avoided 2 points of inflation (according to our estimates and those of INSEE). However, a rebound in purchasing power is not likely until the third quarter (+0.9% according to our forecasts).

A new package of measures is expected in the coming weeks, including an increase in civil servant wages and pensions (costing EUR4bn and EUR5bn respectively in 2022, assuming an increase of 4%) and a possible one-off “food cheque” planned in September (which we estimate at EUR1.2bn). Ultimately, loss of purchasing power should reach 0.8% in 2022 on our estimates, slightly lower than in 2013 (-1.1%), the worst level in history, but with a different cause, having previously been due to higher taxation. In 2022, according to our calculations, the government’s policies will be favourable, as the loss of purchasing power could have reached 3.1% without anti-inflation measures.

As a result of this more severe than previously anticipated inflation shock, we have cut our 2022 growth forecast by 0.9 percentage points to an average of 2.3% for the year.

The existence of other growth drivers

To achieve this level, growth in France will have to improve gradually. We expect zero growth in the second quarter and a slight rebound of 0.3% q/q in the third quarter. This is not by any means because of the inflation shock no longer having an impact, or even having less of an impact, but because of other growth drivers becoming apparent. The economy is only partly back to normal post-Covid and the lifting of health restrictions as of February 2022 should have a favourable impact. It is therefore likely that the accommodation and catering sector and transportation services will return to their pre-Covid level between now and the third quarter.

At the same time, aeronautics made a significant contribution to growth in exports in the first quarter. As of the second quarter, tourism should add to this. For example, the Greater Paris region welcomed around 12.1 million tourists between January and May, 80% of whom were foreign (compared with 3.7 million and 15.1 million over the same period in 2021 and 2019). These two factors will mask momentum in other types of exports, for which the picture is more mixed (in keeping with the slowdown in growth in other countries, particularly in the eurozone), but they should allow for further growth in exports.

These growth drivers should enable the French economy to return to growth as of the third quarter and provide more moderate support thereafter. Household spending and investment – the decisive factors behind growth – will therefore have to firm up for this to continue.

THE ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE

Other articles from the same publication

Global
Increasing concerns about the growth outlook

Increasing concerns about the growth outlook

The level of activity in the US and the euro area is very high but growth has already slowed down significantly and quarter over quarter growth should remain low for the remainder of the year [...]

Read the article
United States
Accelerated normalisation of monetary policy

Accelerated normalisation of monetary policy

Inflation’s unexpected rebound in May forced the Federal Reserve (Fed) to accelerate the normalisation of its monetary policy. In mid-June, the Federal Open Market Committee (FOMC) decided to raise the fed funds rate by 75 basis points (bp) [...]

Read the article
China
Weakening economic growth outlook

Weakening economic growth outlook

China’s economic activity contracted in April and May 2022 because of stringent mobility restrictions introduced in major industrial regions such as Shanghai. Since late May, restrictions have eased gradually and activity has started to rebound [...]

Read the article
Japan
Can Japan assume its singularity much longer?

Can Japan assume its singularity much longer?

Since early 2022, inflation has been rising, albeit moderately, for the first time since 2014, while growth contracted in Q1 [...]

Read the article
Eurozone
More inflation than growth

More inflation than growth

Until May, Eurozone growth has been relatively resilient to the series of shocks that have swept the region, but its pace should slow more significantly in the months ahead [...]

Read the article
Germany
After imported inflation, domestic inflation?

After imported inflation, domestic inflation?

Germany is one of the Eurozone countries hit hardest by the Russia-Ukraine war, which is leading towards feeble growth prospects and high inflation. German GDP is expected to barely increase by 1.3% in 2022, compared to a Eurozone average of 2.5% [...]

Read the article
Italy
A better recovery in a more complex world

A better recovery in a more complex world

In contrast to the previous recessions, the Italian economy has already recovered what it lost in 2020. The carry over for 2022 is 2.6%. In Q1 2022, real GDP rose by 0.1%, with an annual growth rate above 6% [...]

Read the article
Spain
Significant resilience to shocks

Significant resilience to shocks

After a weaker economic rebound than its European neighbours in 2021, Spain is expected to report solid growth of more than 4% in 2022 [...]

Read the article
Netherlands
Inflation, but not just consumer price inflation

Inflation, but not just consumer price inflation

With an energy mix comprised of nearly 90% fossil fuels, the Netherlands have been hit by the full brunt of the sharp rise in oil and gas prices since the outbreak of the Russia-Ukraine war [...]

Read the article
Belgium
Wait for the rebound

Wait for the rebound

Belgian GDP grew by 0.5% in the first quarter of 2022, as inflation continues to reach new all-time highs. Consumer confidence took a hit at the start of the Russian invasion, with growth subsequently likely to have come to a standstill [...]

Read the article
Greece
Prospects are still encouraging

Prospects are still encouraging

After surging above 10% this spring, inflation will be the main headwind hampering Greek GDP growth in 2022. Yet the economy has proven to be resilient so far [...]

Read the article
United Kingdom
Heading toward recession?

Heading toward recession?

Inflation continues, driven by factors specific to the UK economy. On the one side, we have a labour market with full employment, favouring wage rises [...]

Read the article
Denmark
Industrial sovereignty: from dream to reality

Industrial sovereignty: from dream to reality

Denmark stands out for its vigorous economic recovery, which was much stronger than that  in the other European countries. The Danish economy quickly returned to pre-crisis levels and even exceeded its pre-pandemic growth trend [...]

Read the article
Norway
To address inflation, a coordinated tightening of the policy mix

To address inflation, a coordinated tightening of the policy mix

After being severely hit by the Omicron variant, economic activity picked up again as of February, and the recovery is expected to continue with growth reaching 4% in 2022 [...]

Read the article