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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

THE END OF WAGE BARGAINING POWER? Published on 22 Nov 2022 by Félix BERTE

Inflation seems to have peaked in June in the United States. The continuation of the momentum and the pace of disinflation will depend to some extent on easing of the tightness in the labour market, which continues to support wages. In October, the slight increase in the unemployment rate and the slowdown in  nonfarm payrolls gains could well indicate the beginning of such easing. What about wage dynamics? According to the Atlanta Federal Reserve’s Wage Growth Tracker, the first signs of a slowdown are emerging.

 This indicator measures, on a three-month rolling average, the median percent change in the hourly wage of individuals observed 12 months apart. According to this indicator a slowdown in wage growth seems to be emerging, although this is still to be confirmed. After peaking in July and August (6.7%), wage growth stood at 6.4% in October (compared to 6.3% in September).

In addition to pointing to a possible wages’ deceleration, this indicator provides another interesting information on the difference in wage dynamics depending on whether individuals are employed (job stayers) or have changed jobs (job switchers). After a strong increase, the slowdown in the salaries of job switchers seems to be well under way (7.6% in October, down continuously since its high of 8.5% in July). On the other hand, wage growth for job stayers recovered slightly in October (5.4%), interrupting a slowdown which began in June (6.1%). If this trend of a slowdown in wage growth is confirmed, which is likely, employees may be less inclined to change jobs for salary reasons, which could reduce the tightness in the labour market.

ROMANIA: A WIDENING CURRENT ACCOUNT DEFICIT IN 2022 Published on 15 Nov 2022 by Cynthia Kalasopatan Antoine

For several years, Romania has been running a structural current account deficit. This year, the deficit is expected to worsen and could come close to 10% of GDP after -7.3% in 2021.  The deficit had already reached EUR 20.2 billion over the first nine months of the year, well above the figure seen for 2021 as a whole. Romania's deficit is the largest amongst Central European countries. The main reason stems from the deterioration in the energy trade balance, which according to the latest figures reached EUR -4.5 billion for the January-July period. Imports of food and industrial goods have also contributed, but to a lesser degree compared to energy. By contrast, imports of consumer durables have remained soft. Exports were still relatively dynamic (up by a year-on-year rate of 26.2% compared to January-September 2021) but not enough to prevent a widening of the trade deficit (EUR 23.8 billion from January to September 2022). The primary income balance has also deteriorated. By contrast, the balance of services has remained in surplus and has only allowed to contain the the trade deficit by a marginal scale. Yet the worsening current account has not translated into an increased perception of risk, judging by the slight appreciation of the Romanian leu against the euro since January 2022. Romania even recorded positive net portfolio investment flows during the first three quarters, against a backdrop of outflows of this type of capital in a number of emerging countries. Financing the current account gap is not a major problem. It would mainly be covered by flows of foreign direct investment (FDI), a stable component of capital flows and European funds. FDI reached EUR 6.2 billion in the first nine months of the year. FDI and European funds would make it possible to plug around 55% of the expected deficit for 2022.

On the Same Theme

A 2023 budget facing moderate uncertainties 12/1/2022
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.  
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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