EcoFlash of 01 December 2022
    The downside risks are increasing for French growth, to the extent that growth could turn out to be lower than the level incorporated by the government in its draft budget bill. For 2023 we estimate that growth could be 1 pp below the government’s assumed figure and that this is likely to imply a limited gap between a deficit of 5.4% of GDP at budget implementation and a level of 5% of GDP included in the draft budget bill.Indeed, the risks appear to be moderate in nature, between a deterioration in the labour market which is expected to remain relatively limited and a cyclical rise in business insolvencies, but at a level which should remain below that of 2019. Moreover, the support of public finances, in particular for purchasing power, remains substantial.  
    EcoFlash of 30 November 2022
    The United Kingdom’s exit from the European single market and the customs union on 31 January 2020 caused a significant economic shock which has had an adverse impact on growth and inflation in the UK, particularly on foreign trade. Since 1st January 2021 and the coming into effect of the post-Brexit Trade and Cooperation Agreement (TCA), bilateral trade in goods between the United Kingdom and the European Union has fallen sharply. The United Kingdom has made changes which mean that some of its imported goods now come from countries outside the European Union.
    EcoFlash of 18 October 2022
     Though the manufacturing PMI is a good indicator for assessing the dynamics of industrial production over a long period, recent constraints on supply have again highlighted a methodological problem in the index linked to the way it takes delivery times into account. The way delivery time are handled by the manufacturing PMI must be differentiated according to type of shock, so that the index can better reflect industrial activity. We propose a method that will detect the presence of a positive demand shock or a negative supply shock. The manufacturing PMI is then rectified according to the shock.  It is also possible to recalculate the manufacturing PMI by a principal components analysis (PCA), based on all questions available in the S&P Global survey. Unlike the published PMI, the ajusted PMI shows the slowdown and subsequent drop in German industrial production from the end of 2021. It indicates that manufacturing output should continue to diminish towards the end of the third quarter.
    EcoFlash of 08 September 2022
    Cradle of social democracy, Sweden is facing a possible breakthrough of the far right. Only 12 years after entering Parliament, with only 5.7% of the vote, the Sweden Democrats (SD, far right) now threaten traditional political forces. After a campaign marked by debates on crime in Sweden, on 11 September, the current government coalition led by the Swedish Social Democratic Party could fail to secure a third consecutive term, following on from its wins in 2014 and 2018. Even though the latest polls show that the party, led by the current Prime Minister Magdalena Andersson, should get the largest share of the votes (with the Social Democrats picking up 29% of the votes), ahead of the far-right party (with 20% of the votes for the Sweden Democrats), the left-wing coalition would not get the 175 seats required in order to form a majority in the Swedish Parliament (Riksdag). If such a scenario occurs, the right-wing Alliance could take the reins of the country in the event of an unprecedented deal with the far right.
    EcoFlash of 20 July 2022
    After 2021, a year when wage negotiations were difficult against a backdrop of a fragile and uneven economic recovery, wage increases should be much higher in 2022 but insufficient to compensate workers for high inflation. The country’s most powerful union, IG Metall, has obtained a wage increase which has not been seen in the metalworking sector for 30 years: +6.5%. However, this increase should be put in perspective, since the agreement covers 18 months, bringing the annual growth rate to +4.5% in 2022. Salary negotiations in Germany are still mostly carried out at a centralised level (by industry or sector). The shift in decentralization in the 1990s mainly enabled enterprises to break out of sectoral agreements in exceptional circumstances (e.g. financial difficulties of enterprises, or unfavourable economic conditions).  The German Trade Union Confederation (DGB), a pillar of German trade unions, centralises the majority of trade union bodies and brings together almost 6 million members. DGB is dominated by two major union powers: IG Metall (metallurgy and textiles) and Ver.Di (transport, trade, banking and insurance).
    EcoFlash of 28 June 2022
    Once protected by the logic of “whatever the cost”, household purchasing power in Europe is now threatened by inflation. After the pandemic, public policies are being solicited once again to help reduce the loss of purchasing power, albeit without really succeeding. In 2022, the real disposable income of Eurozone households is expected to decline by about 2.5%. Consumption is still rising, but only because the household savings rate is declining, a trend that masks extremely diverse situations.
    EcoFlash of 19 June 2022
    The Covid-19 pandemic weakened Indonesia’s economy. Two years after the crisis, real GDP has returned to 2019 levels, but the labour market is still weak, the poverty rate is higher than before the crisis and investment remains subdued. According to the World Bank, the pandemic’s lasting impact on education and the labour market will cost the country 0.1 points of its long-term growth potential. Today, Indonesia must deal with a new unfavourable economic environment as commodity prices have dramatically increased due to the conflict in Ukraine and sanctions against Russia. Although growth is bound to be squeezed by the Ukrainian conflict, Indonesia’s external accounts should remain healthy and inflationary pressures should remain moderate. As a net commodity exporter, the country should benefit from higher prices for its export products. Moreover, to contain the impact of rising international prices on domestic prices, the government has already increased energy price subsidies and maintained pump price controls.
    EcoFlash of 08 June 2022
    In 2021, sales by foreign subsidiaries of Japanese industrial companies accounted for nearly a quarter of total sales. China is the main anchor country, particularly for the automotive industry. Despite this, Japan has retained a larger industrial base than most other OECD countries. The sector accounted for more than 20% of total national value added in 2021. The share of goods exports in GDP has also increased, reaching 16.4% in Q1 2022. This production structure for Japanese companies, based on the complementarity between domestic facilities and foreign subsidiaries, has helped support profits, which climbed to a record as a share of GDP in Q1 2022. Industrial production in Japan is continuing to shift towards capital goods and away from final consumption goods, largely in response to the increasing competition from other Asian countries in the latter segment.
    EcoFlash of 18 May 2022
    The sharp rise in energy prices since April 2021 has been the main driving force behind the current surge in Eurozone inflation. The outbreak of war in Ukraine on 24 February accentuated this trend, sending the energy component of the harmonised index of consumer prices (HICP) up 44.4% y/y in March 2022. Faced with this situation, the governments of the four main Eurozone economies under review in this article have acted to try to buffer the shock on economic players, and notably on household purchasing power, via direct subsidies, tax cuts, price regulations and measures to boost nominal incomes.  Although their actions have clearly helped ease the rise in energy costs, they have not prevented a loss of household purchasing power thus far in 2022, even though it is expected to be relatively mild. Moreover, they have not prevented inflation from spreading to other components of the consumer price index.
    EcoFlash of 28 April 2022
    The Spanish housing market is building momentum again after its deep correction between 2008 and 2013, which erased part of the excesses created over the early 2000s. In 2021, transaction volumes hit their highest level for twelve years. House prices have been growing at an average of 5% per year over the past six years. Housing activity is now benefiting from multiple sources of support: the post-Covid economic recovery, higher levels of household savings, growth in employment, low borrowing rates. Rising housing prices are driven by limits on housing supply, which are likely to persist, given rising construction costs as a result of higher materials expenses. A tightening of lending conditions would be less problematic than in 2008: household indebtedness and debt service have fallen significantly over recent years. However, these price increases are contributing to the rise in inequality in the country. The “right to housing law” bill, currently in discussion at the parliament, seeks to regulate various areas of the real estate market (better access to housing, regulation of evictions, increase in social housing supply, rent controls), but this will only partly address the problem of a shortfall in building.

On the Same Theme

France: Households’ property purchasing capacity is improving in Paris and has declined in the provinces since Covid-19 11/29/2022
Our households’ property purchasing capacity indicator tracks the development in the maximum purchasable area of a representative household in France. Before rebasing (Q1 2000=100), it compares borrowing capacity expressed as an amount (calculated according to the average household income, fixed interest rates and the average duration of loans) to the price of old housing per square meter. In the provinces, Households’ property purchasing capacity was significantly higher than its 1990–2021 average (+21%) in the second quarter of 2022; however, in Paris, where the long-term average takes into account the 1990 property bubble which had undermined households’ property purchasing capacity, it was almost equal to its 1990–2021 average (+2%). Starting in 1990 from a particularly deteriorated level (peak of the bubble), Households’ property purchasing capacity more than doubled until 1998 in Paris (+143%) not only due to the deflation of the bubble (drop in prices of 34%), but also to the increase in household income (+14% between 1991 and 1998) and the reduction in the cost of credit (from around 11% to 6%).[1] In the provinces, the rise in prices over the same period absorbed a large part of the positive effects of income and credit conditions, so that purchasing capacity increased more moderately, by around 39%. Between 2000 and 2007, the reductions in households’ property purchasing capacity were more homogeneous between Paris and the provinces due to comparable price increases.  Between 2008 and 2020, the positive effects of the continued drop in interest rates and the lengthening of the average duration of loans were almost completely wiped out by the rise in prices in Paris (+69%), where purchasing capacity even fell by 2.7%.  On the contrary, these same factors supported households’ property purchasing capacity in the provinces (+49.7%), where price growth was limited to +4.7% over the same period. Since 2020, the Covid-19 crisis and the price levels reached have been shuffling the deck: Paris is losing its appeal to the benefit of medium-sized cities, which have become more attractive due to the lockdowns and teleworking opportunities.  Prices are slowing in the capital (+1.2% between Q1 2020 and Q2 2022 compared with +18.2% in the provinces). In a context of relatively stable credit conditions, the main determinant of the development in purchasing capacity was the gap between rises in households’ income (+7.2% over the same period) and that of house prices. It therefore recovered in Paris (+6.9%) while it declined in the provinces (-8.5%) from a record level in 2020. In the coming quarters, the impact of the sharp rise in bond market rates since the beginning of 2022 on bank loan conditions could contribute to an adjustment in prices that could alleviate the effects on households’ property purchasing capacity. [1] Narrowly defined effective rate (NDER) , source: Banque de France
A positive surprise in 3rd quarter growth, which makes a downturn in Q4 more likely 11/13/2022
The French economy saw GDP rise by 0.2% q/q in the 3rd quarter, a performance which indicates a high level of activity, following on from the previous positive growth figure in the 2nd quarter (+0.5%). After tourism and catering/accommodation in the 2nd quarter, the positive surprises in the 3rd quarter were corporate investment and manufacturing production. While the automotive sector is one of the sectors that is suffering most from supply problems, which implies a mismatch between production lower than before Covid compared with a strong order book, some of the lag was caught up in the summer, resulting in an increase in manufacturing production (+0.6% q/q), which contributed to significant growth in corporate investment (+2.3% q/q). 
France: Inflation spike? Not yet 11/3/2022
Inflation has accelerated markedly during 2022. After a limited disinflation during the summer, driven by lower gasoline prices, the inflation rate has reached a new peak in October. Core inflation is accelerating, and expected food and energy price increases are suggesting even higher inflation during Q12023, before a gradual disinflation. In parallel, as wage growth should accelerate moderately, household purchasing power should exhibit a modest increase in 2023.
A growing risk of recession 10/10/2022
In France, inflation fell to 5.6% year-on-year in September after reaching a high of 6.1% in July, but its decomposition has changed. Food prices (with a year-on-year increase of 9.9% in September) became the main contribution to inflation for the first time (representing a third of the 5.6% figure observed in September), exceeding that of the energy component, the reduction of which owes much to the discount applied to the litre of fuel (which grew from 18 to 30 cents). In 2023, the increase in regulated gas and electricity tariffs will be capped at 15% instead of 120%, which will prevent 5 inflation points (overall), according to our estimates. 
Is a recession coming? 9/29/2022
French growth was surprisingly up in the second quarter (+0.5% q/q), supported by the positive impact of the lifting of Covid-19-related restrictions on tourism and leisure. The rest of the economy was almost flat according to our estimates (+0.1% q/q) due to accelerating inflation. After a negative first quarter (-0.2% q/q, including "after adjustment"), this indicates a narrowly avoided recession. Looking ahead, however, the deterioration in business surveys, the impact of energy prices on businesses, the drought and the decline in electricity production increase the recessionary risk.
France: After inflation comes recession? 9/23/2022
After inflations comes recession? Not systematically, but the nature of the inflation observed since early 2022 lets expect an increased risk of recession for the French economy. During H1 2022, already, the French economy has avoided a recession mainly thanks to the recovery of tourism. However, a couple of shocks has materialized, from drought to higher energy prices and including increasing constraints to energy supply. Corporates have already planned production cuts and the probability for a recession during the next 6 months is increasing.
Downside risks to growth outlook in the second half of the year 9/11/2022
The French economy sprung a pleasant surprise in view of the headwinds that have been picking up since the start of 2022. Growth was 0.5% Q/Q during Q2, mainly due to the upturn in tourism and leisure business activity after COVID restrictions were lifted from March onwards. However, inflation continued to have an impact, as seen in the further fall in consumer purchasing power during Q2 (-1.1% Q/Q, following on from -1.6% during Q1). This inflation hit 6.1% Y/Y in July before falling back to 5.8% in August (according to the French National Institute of Statistics and Economic Studies (INSEE) national measurements). 
Reconciling short-term and medium-term challenges 7/26/2022
Over the next five years, French economic policy will have to continue to deal with structural issues, such as full employment, the delay of companies in terms of robotisation, the competitiveness of companies and the place of industry. It will most likely also continue to focus, at least in the short term, on supporting household purchasing power, as it has done since 2019. These projects, which will have to be carried out in parallel, will have to be reconciled with the cost of the ecological and energy transition against the background of public debt that has already risen sharply and interest rates that are moving higher, albeit in a controlled way.
An economy weakened by the spread of inflation  7/4/2022
Inflation has continued to accelerate, at 5.8% y/y in June, and has not yet reached its peak. Most significantly, the energy component saw a further monthly rise of 5.3% in June, having already risen by 9% in March. Not only had the initial shock not yet fully passed through into other prices (food, manufactured goods, services), but this new increase signals a further acceleration in inflation, particularly in the food component which suffered the most from the initial shock (1.4% increase month-on-month and 3.1% over 3 months): In June, this food index has increased by 5.7% y/y, below July 2008’s 6.4% peak, but should rise above and reach 9% in December 2022, according to our forecasts.

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