Purchasing power at half mast, inflation at its highest: the Banque de France revises growth downwards for 2022

The shock wave of the war in Ukraine continues to shake the French economy. Four months to the day after the outbreak of the conflict at the gates of Europe, the prospect of a sudden slowdown in activity is confirmed for this year. Growth in gross domestic product (GDP) would increase by 2.3% according to the latest forecasts from the Banque de France unveiled on Tuesday June 21 against 2.7% last March in their central scenario. This is a significant downgrade in just a few weeks. Above all, these figures are largely based on the relatively high growth overhang of 2021 with GDP at 6.8% after the abyssal plunge of 2020. The decline in GDP in the first quarter of 2022 and the disappointing growth in the second quarter (0 25%) testify to the strong shocks recorded by the tricolor economy.

Even if economic analysts have ruled out the dark scenario of a recession in 2022, they evoke this possibility for 2023 with a decline in GDP to 1.3% if the economic and social consequences of the war in Ukraine continue. “For 2022, the median forecast is now at +2.5%, which is consistent with a real GDP increase of +0.25% per quarter until the end of the year. For 2023, the median forecast is +1.6%, which implies a strengthening of the quarterly rate towards +0.5% q/q. The risk of recession exists but it is not currently included in the central scenario “explained Oddo-BHF economist Bruno Cavalier in a note on Tuesday.

After the slap of the legislative elections last Sunday, the government must face a particularly delicate zone of strong economic turbulence. The purchasing power package, announced by the government and postponed several times, could bear the brunt of the relative majority obtained by Macron in the National Assembly. This envelope, which must be included in a new amending budget, may not be enough to compensate for the loss of income incurred by households and businesses. Already in many sectors, discontent is growing as inflation continues to weigh heavily on the wallets of the French.

Inflation at 5.6% in 2022 and 3.4% in 2023

The war in Ukraine and the energy crisis pushed the consumer price index to more than 5% last May, a level not seen in 37 years in France. According to the models of the Banque de France, inflation could rise to 5.6% on average in 2022 and 3.4% in 2023 according to the harmonized index of consumer prices (HICP). This indicator is used in particular by Eurostat and ECB economists to make international comparisons.

As for underlying inflation, i.e. excluding energy and food, it would still be 3.3% in 2022 and 3% in 2023. This means that even if energy prices and food are marking time, inflation should remain above the European Central Bank’s (ECB) target now set at 2% in the medium term.

By confirming a rate hike in July, the Frankfurt Institute hopes to curb this surge in energy and food prices, but the room for maneuver is narrow for central bankers. Indeed, even if the tightening of monetary policy could make it possible to curb inflation, there is a great risk of causing the European economy to falter if the monetary and budgetary policies in the euro zone act in a disorganized manner.

Purchasing power at half mast

The war in Ukraine caused consumer morale and consumption to fall in the first half, while demand remains the driving force. tradition of the French economy. Workers’ real incomes, i.e. taking inflation into account, began to fall for all occupational categories in the first quarter as shown by the results of a survey by the Ministry of Labor a few weeks ago. As a reminder, if the minimum wage has remained indexed to inflation, this is no longer the case for other salaries in France since the 1980s.

As a result, many French people should continue to tighten their belts in the months to come, precipitating activity in its wake. The average real per capita wage could increase by only 1.8% in 2022, well below inflation according to central bank calculations. As for the real gross disposable income of households, it would be down to 0.8% this year, as would purchasing power (-1%).

Towards a fall in unemployment in 2022 before a possible rise in 2023

On the jobs front, the bad news could also pile up as well. After strong job creations in 2021 (507,000) and in 2022 (356,000), the French economy could again destroy jobs from next year (-78,000) and in 2024 (-25,000).

The big brake on activity and the disconnection of the aid implemented during the pandemic would lead companies to reduce the airfoil in the months to come. As a result, the unemployment rate could drop from 7.9% of the active population in 2021 to 7.4% in 2022 before rebounding to 7.7% in 2023. Emmanuel Macron’s promise to bring France back to a situation full employment is a little further away.