Rising interest rates will weigh on growth in France

2023-05-02 07:24:25

The French economy is settling into slow-speed growth. Thanks to the good performance of industrial production due in particular to the alleviation of supply difficulties and the recovery of the nuclear fleet, and thanks to the solidity of exports, GDP increased by 0.2% in France. in the first quarter, according to the first estimate from INSEE published on Friday. A figure that already brings the growth overhang for the year to 0.4%. Something to reassure the Minister of the Economy, Bruno Le Maire, who expects growth of 1% in 2023.

The performance confirms, however, the sharp slowdown in economic activity caught in the turbulence of inflation which increased further in April to 5.9% over one year. “France manages to maintain positive growth, but for the third quarter in a row, it is flirting with zero,” notes Maxime Darmet, France economist at Allianz Trade. In the last quarter of 2022, it was also zero, instead of 0.1%, as previously indicated by INSEE.

An impact of 0.4 points

And the next few months are going to be complicated. According to economists, the effects of monetary tightening on activity will become very visible from the second half of the year. “It takes between twelve and eighteen months for them to be felt,” explains Philippe Gudin, senior economist at Barclays.

The rise in interest rates will weigh on household consumption and real estate purchases, as well as on business investment. This should cut growth by 0.4 point in 2023 (and 0.5 point in 2024), according to the OFCE, and feeds the hypothesis of a slight rise in the unemployment rate at the end of the year.

Among the experts, however, two camps stand out. With on the one hand those – the OFCE for example – who think that growth should pick up again in the second half of the year and, therefore, forecast a rise in GDP of around 0.8% in 2023 , not very far from the objective of Bercy.

On the other, those who expect the brakes to increase over the coming months. Stéphane Colliac of BNP Paribas thus anticipates “zero growth during the last two quarters of the year”. Rexecode or Allianz Trade, for their part, envisage a contraction in activity for at least one quarter, which would reduce the increase in GDP to 0.4% in 2023. “The main factor will be the scarcity of credit. This is already a reality for some SMEs,” says Maxime Darmet.

The unknown of consumption

The forecast differences between institutes are largely due to a different assessment of the evolution of household consumption, the main driver of growth in France.

In its projections, the OFCE is betting that the French will gradually reduce their savings rate to spend. This will lead to a 0.3% increase in activity in the third and fourth quarters. The Ministry of the Economy makes the same diagnosis: it also believes that consumption will start again, for a different reason. He sees inflation falling from the summer to settle on average at 4.9% this year, a scenario deemed optimistic by the High Council of Public Finances. According to the executive, it must nevertheless allow purchasing power to be maintained in 2023 (+0.5% according to the stability program sent to Brussels).

The “pessimistic” camp, on the other hand, judges that the French are not going to start spending again anytime soon. While a drop in consumption is a very rare event in France, Rexecode anticipates an unprecedented decline – except in 2020 – of 0.8% this year. “In 2012, the year of the fiscal shock, the decline was limited to 0.4% and in 2008-2009, at the time of the financial crisis, consumption had stagnated”, recalls its managing director, Denis Ferrand.

Hazards

The INSEE surveys on household morale support this scenario: they are as gloomy as at the time of the “yellow vests” crisis or the confinements linked to Covid. “For consumption to pick up again, confidence must recover and translate into purchase intentions. It will take time, ”said Stéphane Colliac.

All these scenarios nevertheless remain subject to hazards. Whether they are geopolitical or linked to the tightening of monetary policy, “very strong uncertainties remain”, affirmed the chief economist of the European Central Bank, Philip Lane, in an interview with “Le Monde” on 26 April.