France’s economy is in full fog ahead of inflation peaking in early 2023

Forecasting is a difficult art. In today’s geopolitical tension, energy crisis and high inflation, this is more complicated than usual. Evidence of this is that while the Banque de France predicted a better-than-expected year-end with GDP growth of 0.1% in the final quarter, INSEE revised its forecast downwards.

In its year-end economic report published on Thursday, the statistics institute expects activity to fall 0.2% over the period and zero growth already. Finally, the French economy will grow by 2.5% in 2022, or 0.2% less than Bercy expected.

This revision is mainly explained by production difficulties in the industry. The reduction in electricity production due to maintenance operations at nuclear power plants alone will cost France 0.4 points of GDP this year, according to INSEE. Added to this was the impact of rising gas and electricity prices on energy-intensive industries, as well as the impact of strikes at oil refineries in October.

At the end of the year, household consumption, the traditional driver of growth, should also fall sharply (-0.7%). The bad figure is associated with a decrease in the purchase of goods, but also with a decrease in energy consumption “due to moderate temperatures in October-November and adjustments in behavior in the face of price increases,” INSEE .

“Not a break, not even a technical recession”

For Julien Pouget, the institute’s chief economist, the end-of-year air pocket is just a simple “sag”. “Not a break, not even a technical recession because we don’t expect two consecutive quarters of declines,” he said.

Activity should pick up again from early 2023: it should advance a modest 0.1% in the first three months of the year, then 0.3% in the second quarter. A rate that is certainly firmer, but undercuts the government’s forecast with an estimated growth cap of +0.4% in mid-2023. In order to achieve the 1% growth next year that Bersi included in his budget, according to INSEE calculations, GDP should grow by 0.8% in the third and fourth quarters. Which seems unlikely.

Inflation peaked at 7% in January and February

Energy tensions will continue to worsen in early 2023. According to a survey conducted by Insee among companies on the consequences of the increase in electricity and gas prices, 7% are considering reducing their production, and 1% are considering stopping it. This means a 1.5% decrease in industrial production. Investment will be slow. In turn, household consumption should increase again, but weakly (+0.4% in Q1, then +0.2%).

And for good reason, the first months of 2023 will be remembered for rising inflation. Expected at 6.6% in December – versus 6.2% in November – inflation should reach 7% next January and February, driven by the mechanical effects of the end of the pump discount and the recalibration of the rate shield. with a 15% increase in gas and electricity prices). From March, inflation should fall to 5.5% annually in June mainly due to “base effects”.

Save or consume

Under these conditions, INSEE estimates that the purchasing power of disposable income will be negative by 0.6% (and 0.9% per consumption unit) in the middle of the year, after rising again in the second half of 2022 under the influence of wage dynamics. in social benefits and abolition of some levies (audiovisual license fee). However, households may dip into nest eggs to support their consumption. The French, who could not spend at the end of the year, actually preferred to save. At the end of 2022, the savings rate should flirt with 18% of disposable income, which is 2.3 points higher than before the health crisis.