The other element that was very different during the Covid period relates to business insolvencies (figure 4), which would have increased due to cash shortages which appear comparable at the start of the Covid period to those encountered during the 2008 recession (figure 7) and which at the time resulted in a marked increase in corporate failures.
REAL GDP LEVELS“Whatever it costs” therefore in fine had a much better outcome than the way previous crises were handled, in which jobs and companies were not so well protected.
The French economy has faced up to a significant new (energy) shock with the experience of how it managed to absorb the previous shock (Covid), becoming the first country in the euro zone to return to its pre-Covid level of activity from the 3rd quarter of 2021 (figure 5).
EVOLUTION OF HOUSEHOLD NET NOMINAL COMPENSATIONSSince then, France has seen lower growth than the eurozone. Inflation has had a particularly negative impact on domestic consumption, notwithstanding the substantial support from budgetary policy for household purchasing power.
Lower growth and higher inflation: a negative impact overall on the dynamics of public finances
2023 is expected to open with a recession, with negative growth in activity likely in both the 4th quarter of 2022 and the 1st quarter of 2023. This represents a difference between our scenario and the government’s one, which means we are expecting zero real growth in 2023 compared with the government's +1%. At the same time, the expected increase of the GDP deflator is the same (3.6%).
The underlying difference between these two scenarios highlights a difficult period during which we anticipate that the momentum in job creation will be interrupted and will give way to an reduction of around 50,000 positions in the 1st half of 2023, before stabilising, a shock of a moderate magnitude compared to those occurring from 2008 onwards or in 2020. Moreover, labour hoarding, i.e. retention of staff even during periods of underactivity, is likely because of the current difficulties which companies are having in recruitment.
CASH SURVEYS OF CORPORATESThe persistence of nominal growth, due to high inflation, in parallel with a drop in real activity is a major difference from previous recessions. While they had stagnated in 2009, net nominal compensation is expected to increase by 5.5% in 2023 (figure 6) because of the dual effect of higher wage increases (+5% in 2023 for basic monthly salaries based on our forecasts, following +3.6% in 2022) and high employment (which implies a favourable baseline effect, with the decline anticipated in the 1st half of 2023 unlikely to cancel out the increase seen over 2022). Therefore, after a drop which we estimate to be 0.3% in 2022, household purchasing power should rise slightly in 2023 (+0.3%), despite an inflation rate close to 2022 levels (5.4% on average after 5.3% in 2022).
At the same time, the situation of companies is more open to question, to the extent that they are seeing the end of the support linked to “whatever it costs”, which has giving rise to an increase in business insolvencies (starting from an abnormally low level, see figure 4). The increase in interest rates and the high energy costs have impacted on company cash levels, albeit to a degree which for the time being seems to be more moderate than in 2008, 2020 or even in 2011 (figure 7). In addition, both building and services are in a more favourable liquidity position today than between 2009 and 2018. This risk mitigation factor makes a normalisation of business insolvencies (continuing to close the gap on what was seen in 2019) a more likely scenario than that of a “wall” of insolvencies (as recorded between 2009 and 2015).
REAL GDP GROWTH GAP VS. GAP TO THE BUDGET TARGETDespite developments in the labour market and in terms of corporate failures which are expected to remain contained, it is however likely that, as in recent years, the 2023 draft budget bill will be followed by the adoption of amending budget laws. The volatile economic activity during Covid and the subsequent rise in inflation have necessitated the adjustment of support mechanisms. The consequences of the recession, combined with high inflation, are likely to require adjustments to the draft budget over time.
However, while the gap between the initial drafts and final execution may therefore have been significant during Covid, it should be much less so in 2022 (as the differential in nominal growth has been moderated, figure 1). As regards 2023, this leads us to expect on balance a budget deficit which should only deteriorate by around 10 billion euros compared to the draft budget bill, i.e. a higher deficit of 5.4% of GDP, instead of 5% forecast for the moment.
The very nature of an inflationary shock is in fact to generate additional budgetary resources, with revenues being better correlated with nominal GDP than with real GDP (figure 8 below, which substitutes the difference in nominal growth used in figure 1 with the differential in real growth, shows a somewhat more tenuous link with the gap to the budgetary target).
Thus, higher or more sustained inflation would not necessarily deteriorate public finances beyond mechanical effects such as its impact on the servicing of inflation-indexed debt, as well as the government’s decision to help households and businesses in the face of high inflation. Its effect on growth is different when analysed in real terms, with growth falling from 2.5% in 2022 to 0% in 2023, or in nominal terms, with a change from 4.9% to 3.6% based on our scenario.
Our anticipation of a public deficit which is likely to grow only moderately should not be called into question by the impact of discretionary measures. Although high in absolute value terms (45 billion euros), the price cap on gas and electricity benefiting households in 2023 is expected to be financed by around two thirds by the contribution from electricity producers who produce from resources (nuclear, renewable, thermal) other than gas.
