After a second half-year 2022 during which growth weakened markedly, Q1 2023 saw a relative rebound, which should be confirmed in Q2: a rebound rather concentrated in some sectors, mainly transport equipment and tourism. However, economic surveys have deteriorated since March, reaching relatively low levels, particularly in manufacturing. Housing, business services and exports are all areas of concern which, taken together, are likely to have a more pronounced negative impact in the second half of 2023, both in terms of growth and job creation, which are continuing for the time being.
Growth is holding up. Excluding the limited contraction in Q1 2022 (-0.1% q/q), with the outbreak of the war in Ukraine, the French economy avoided negative growth despite successive headwinds. In 2022, corporate investment and restocking, as well as the upturn in services after Covid (including transport services and accommodation/catering) offset the drop in household investment, as well as that of their food and energy consumption. At the beginning of 2023, confirmation of the upturn in the automotive and aeronautics sectors supported the economy, despite a new inflation peak.
In H1 2023: resilience factors still present but more limited
This balance between strong headwinds and pockets of growth continues to structure the French economy. The former intensified in Q1: including the contraction in household investment (-2.3% q/q) which accompanied the sharp drop in housing (sales of new housing and second-hand transactions), after a marked drop in lending for house purchase (by almost half y/y in Q1). The sector is suffering from the impact of rising interest rates and the increase in construction costs, which is continuing and worsening the situation for new housing. CPI Inflation peaked in February (7.3% y/y, according to the harmonised index) and household purchasing power contracted by -0.6% q/q in Q1 (per unit of consumption), despite income growth (+1.6% q/q). This last evolution can be explained by the continuation of significant job creation (nearly 90,000), as well as by larger wage increases (which we expect to reach 5% on average in 2023). These factors, in addition to savings in energy consumption, have enabled an increase in the savings rate, and to maintain growth in consumption of services. These factors are not expected to significantly alter in Q2, with miscellaneous evidence suggesting a still positive situation in accommodation in particular.
The other favourable factor is the recovery of automotive production to its pre-Covid level, due to the relative drop in supply constraints. However, although this allows for the processing of accumulated delays, it should not mask the fact that new orders have decreased.
Growth and inflation
Deterioration under way
INSEE’s business climate deteriorated in Q4 2022 due to fears of an energy shock, before a favourable upturn in Q1 2023. Since March, it has clearly been heading downwards: in May, the synthetic indicator returned to its long-term average (100), below which it has not fallen since May 2015 (with falls in industry, services and construction).
The recent trend in volume of foreign trade confirms these negative signals. While exports of transport equipment increased by 2.7% q/q in Q1, manufacturing exports excluding transport equipment fell by 0.7% q/q (and 3% y/y), while exported transport services fell by 6.7% q/q (after a sharp increase in 2022). In terms of imports, other industrial products, a category which brings together many cyclically sensitive inputs (chemicals, metals, minerals, wood/paper), saw their imports fall by 4% q/q in Q1 (-6% y/y). This is a leading indicator of French industrial production which is likely to follow an unfavourable trend in the coming months.
Finally, although consumption of services has proved resilient in recent months, it is partly due to a return to normal post-Covid (leisure, tourism) but also to substitution effects: recovery of catering to the detriment of food consumption in shops. The latter, penalised by inflation and these substitution effects, has fallen to its lowest level since 2005. In Q1 2023, it was 9.6% lower than its level in Q4 2021 before the surge in food inflation (these figures also incorporate the effect of a drop in the quality of products consumed). Consumption of goods excluding energy and food is more stable, especially due to an upturn in transport equipment; if this category of goods is excluded, consumption was down 2.3% between Q4 2021 and Q1 2023. Above all, the opportunity to make major purchases reached its lowest ever level in April (6.5% of households, compared with an average of 14.6% over the last twenty years), even below the low point of June 2008 (7.7%), heralding a significant drop in demand. It is therefore likely that the disinflation we are beginning to observe is not enough, in particular because it is too gradual (5.6% on average in 2023 according to our forecasts compared to 5.9% in 2022) to have an impact on household willingness to spend.
Stéphane Colliac
