Banque de France governor: “Growth to reach 0.3% in 2023”

François Villeroy de Galhau, governor of the Banque de France, presents his quarterly macroeconomic forecasts to JDD, strongly marked in the context of the war in Ukraine and inflation.

Fears of recession are growing. Are they set up?
We strive to combine clarity with confidence in the face of uncertainty. The French economy, like the European economy, suffered and is still suffering from a major external shock since the start of the Russian war in Ukraine. This results in an “external duty” with an increased bill for imported energy, which reduces our incomes and accelerates inflation. We estimate it to be around €50 billion, or about 2% of GDP. The state can temporarily soften this shock with subsidies. But he cannot overcome it.

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How is the French economy currently reacting?
He shows some endurance. In 2022, growth reaches 2.6%, which is a satisfactory indicator. But the slowdown will be clearly marked in 2023, the growth will be about 0.3%. This is the logical consequence of the external duty. The French economy will then adjust to this new situation, with growth expected to reach 1.2% in 2024 and then 1.8% in 2025.

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French inflation stands at 7.1% in the harmonized European index today, against the eurozone average of 10%

Will inflation go down?
Rising prices are the first concern of the French, and this is quite normal. Inflation in France is now 7.1% in the adjusted European index, against an average of 10% for the euro zone. This favorable difference is explained by the tariff shield, which protects households in particular. But in both cases, inflation remains very high. Rising energy and now food prices account for almost half of this. The summit should be reached in the first half of 2023. It should then decline steadily, returning to around 2% at the end of 2024, unless there is a new energy shock.

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Is monetary policy appropriate in the face of inflation?
Yes. We have moved quickly and strongly since the spring, which saw imported energy inflation spread to the rest of the economy. A monetary policy that addresses this broad “core” inflation (excluding energy) is necessary and effective. Therefore, our interest rates have already been raised four times in a row from -0.5% to 2%. And we are willing to go beyond that to beat inflation, although our goal is not to cause a recession. Even so, it takes eighteen months to two years for anti-inflationary monetary policy to take effect, hence the end-2024 commitment I mentioned.

The International Monetary Fund has recently been criticizing the state of our public finances…
We should never again pass the bill for the current shock to future generations, as we did for the exceptional shock of Covid. We have to face it and adapt. I believe deeply in the European social model, but in France it is costing us dearly, ten points of GDP more than the average of our neighbors. We almost always expect solutions from the state, but we don’t want to reform it, and we see that we pay a lot of taxes to it. That’s why we tend to solve every crisis by increasing the government deficit and debt.

Banque de France surveys 8,500 businesses every month. What conclusions do you draw from this?
In general, the order books are fairly well kept. But companies are facing challenges with supply – a reduction – and recruitment for 53% of them. This second point is partly a positive signal: France has never had more people working, and the unemployment rate is at its lowest level in more than two decades. For companies more exposed to energy shocks, including the industrial sector, margins are shrinking after a very favorable 2021. The deterioration in cash flow is becoming noticeable to some, but not universal. This requires a case-by-case approach.

Today cannot be the new “at any cost”.

Concerns about repayment of state-guaranteed loans (PGEs)? Especially for SMEs?
More than 95% of companies and SMEs-VSEs now pay their PGE correctly. The general shocker – it will further increase our public debt – would therefore not be justified, but the Credit Intermediation of the Banque de France has been mobilized to deal with the most difficult tasks. PGEs remain a true French success: they helped around 700,000 companies in the Covid crisis.

Should we fear an increase in business failures in 2023?
Fewer than 40,000 bankruptcies have been registered in the past twelve months, compared to 50,000 in the pre-Covid years. The latest increase follows a very marked drop in bankruptcies during the pandemic. We are on the lookout for next year, but not afraid of big waves of bankruptcies.

What other means can the state use to support the economy?
The state has already absorbed almost half of the energy shock! But it cannot be the new “whatever it takes” today: our national debt is too high and increasingly expensive with rising interest rates. We have to get out of emergency social measures and adapt to the new economic situation. To do this, we will need to share this rising energy bill fairly between companies and individuals. Then, over time, reduce our dependence on imported fossil fuels and strengthen our production capabilities. We need stronger growth, but also greener and fairer.

Also Read – Should we open PEL with investment rate increase to 2% in 2023?

How to build it?
The best way out of the current crisis is to succeed in the triple transformation. The first is the energy transition with carbon-free energy production on European soil. The second is focused on innovation and digitalization, where Europe is lagging behind. Finally, we must win the battle for skills in France. Even with the unemployment rate falling, we are still far from full employment as companies struggle to hire! That is why we need more and better transformation of work in France. There is no greater priority than giving every young person a chance through training, vocational training and enhanced educational development.

Perhaps we see our weaknesses more than our strengths.

How is the real estate market?
We have extremely low interest rates for five years. Real estate loans are normalizing today with average interest rates, excluding insurance, of about 1.8%, still well below the average rates of about 3.3% over the past two decades. However, total loan output will remain historically high in 2022. Compared to the rest of Europe, the loan offer in France is the most plentiful, the cheapest and the safest, as 97% of the loans granted are with a fixed interest rate. . The interest rate allows interest rates to rise gradually and proportionately: after an increase of almost 0.5% at the end of September, it should experience an even more significant increase by the end of December.

Do households have more debt?
Fortunately, since 2014, we’ve seen a significant drop in file submissions, about 50% overall. This year, this trend continues with a decrease of 7%. However, we continue to mobilize around split payments, which are particularly prevalent in e-commerce.

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Is France going through an unprecedented crisis of confidence?
We live for a country that likes to debate and protest, but at the same time has a taste for big plans and reason. Perhaps we feel the great uncertainties of the present more than others. Thus, the Banque de France and the ECB are fighting defiantly against inflation. Inflation under control will help restore confidence. It will also allow for a recovery in household purchasing power growth, which increased by an average of 8% between 2015 and 2021. It’s not so bad, although all those who suffer more should be very careful. We have also been able to make progress in areas such as learning or the competitiveness of our companies: the IMF you mentioned has just reminded us of this. Perhaps we see our weaknesses more than our strengths. Let’s be both clearer about the challenges and more confident in ourselves and our adaptability. This great French team is showing us the way!

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