The French economy is exposed to contradictory trends, drawing a complicated picture when trying to interpret how it is looking. While interest rates rose and inflation hit a new high in February, growth began to look slightly rosier again duringQ1, standing at 0.2% q/q, after two quarters of near-stagnation.
The first key feature at play here is the boost provided by exports during the Q1, in particular due to strong growth in transport equipment (+9.5% q/q), notwithstanding the moderate growth in the eurozone both during Q4 2022 (0%) and Q1 2023 (0.1%),
The main reason for this upturn is the easing of supply constraints which were limiting production. As a result, car production was only 0.5% below its pre-Covid levels in February 2023, compared to almost 25% a year ago.
Aeronautics’ output was also up, rising from 35% below pre-Covid levels a year ago, to 25% in February 2023. However, there are seemingly still noticeable production and delivery delays, suggesting that this output may recover further in the quarters ahead.
The second key feature is about household food consumption. Per capita it has reached its lowest level since 1987, driven by food inflation, which peaked at 15.8% y/y at the end of March.
However, the national accounting system adjusts these consumption statistics based on the quality of food consumed. When this quality lowers, as occurs during periods of inflation, it looks as if households are consuming less. Of course, in parallel, households may had really purchased less food.
It's not easy to disentangle between these two effects, but, according to our estimates, almost one third of the 8.3% y/y food consumption fall observed during Q1 2023 is due to this food-quality effect and two thirds is due to the reduction in the quantity of food purchased. This fall in household food consumption is expected to gradually ease as inflation abates.
And disinflation has started: with fresh food prices, which had been driven up by the higher proportion of crops grown in greenhouses during the winter, starting to fall by 3.3% in April. Prices may yet fall back further, as they are still 7.5% higher than their December 2022 level. As a result, food consumption may well already have reached its trough.
The third key feature is households’ investment drop. These investments had already been falling due to housing prices rises, as well as vanishing post-Covid effects, which had seen more households purchasing a house, fading out.
The rise in interest rates rapidly accelerated the downturn in housing purchases. As a result, the total dip in household investment stood at 4.1% y/y during Q1 2023, which is skewed particularly heavily towards individual housing units. Unsurprisingly, the number of households stating that they intended to buy a house during the next two years fell from 12% in January 2022 to 8.5% in April 2023.
During the quarters ahead, French growth is expected to be constrained by a rising pass-through from higher interest rates to economic conditions. This increasing constraint explains of growth forecast for 2023, at 0.5%, as in parallel disinflation should remain gradual.
