EcoTV Week

France: A “phony” recession


The French economy is exposed to both negative and positive factors. The recession risk is significant, as inflation acceleration has weighed and should continue to weigh on consumer appetite. However, some factors may drive growth, as e.g. the gradual recovery of their output to pre-Covid levels. Many sectors have already reached this target, but the manufacturing sector (particularly automotive and aeronautics) still experiences various factors limiting their production. If these bottlenecks ease, growth may well surprise on the upside.


Like all other European countries, France is experiencing a complex economic situation. Growth has been hindered during the last 3 years by obstacles which restrict it and which at the same time are able to support growth when they are removed.

Covid has been one of these. The pandemic began before companies had time to smooth the impact that it was likely to have on their production, resulting in a sharp recession when substantial health restrictions significantly reduced activity. However, when the restrictions were lifted, growth returned faster than one could have expected, initially in 2021, but also in 2022, when tourism, catering and transport services recovered to pre-Covid activity level.

Today, some industrial sectors are still struggling to get back to their pre-Covid production levels, such as the automotive and aeronautics sectors, even though the demand is there. More generally, industry and the construction sector report more difficulties in terms of production than problems with demand.

Another obstacle first seen at the end of 2021, and which widened during the course of 2022, is energy. Firstly, a price constraint, which has resulted in a sudden fall in consumer spending since the 1st quarter of 2022. Another price constraint, with an increase in electricity prices which reached its peak in the summer of 2022, exacerbating the pressures on companies. Lastly, a potential quantity constraint, when it became clear that electricity production this winter would be much lower than in previous winters.

However, there has been an even greater average reduction in electricity consumption. For example, at the start of January 2023 consumption was one quarter lower than the average for the last 5 years, when production had fallen by only one sixth according to RTE data. The risk of power cuts has therefore been avoided for the time being.

However, the effects of this energy shock, through its price component, have not yet been seen fully. Companies’ production costs are rising and inflation is expected to accelerate further. If we look at core inflation, which is the best way to observe the second-round effects linked to the transmission of the rise in energy prices to other sectors, disinflation is not imminent: our forecasts indicate that core inflation will therefore remain above its December 2022 level (4.2% y/y according to the harmonised index) for most of 2023. Enough for consumer spending to remain depressed during 2023. This factor should pull growth in the economy downwards. But we may observe in parallel some sectors able to reduce the obstacles which are limiting their production levels and so manage to surprise us, just as the recovery in catering surprised us in the spring of 2022.