Is the French economy threatened by the dreaded stagflation?

Is the French economy threatened by the dreaded stagflation?


With zero economic growth in the first quarter and accelerating inflation, the risk of stagnant inflation hangs over France.

Sudden cessation. With zero growth (0%), the French economy stopped in the first quarter, according to INSEE. The main culprit: the decline in household consumption by 1.7% in the first three months of the year in a context of inflation and war in Ukraine. Inflation also continued to rise in April, to + 4.8% over the year, after + 3.6% in February and + 4.5% in March. A level never experienced by those under 40.

Zero growth and high inflation: all data are now able to see the spectrum of stagnant inflation reappear. This phenomenon – a contraction of “stagnation” and “inflation” – is indeed characterized by a regime of low or even zero growth combined with a significant and generalized rise in prices. Or just the table for the first quarter compiled by INSEE.

The morale of the household is declining

If it follows the trajectory, it is still too early to say with certainty that the French economy will enter a period of stagnant inflation as it experienced in the 1970s and 1980s. This would require confirmation of the economic slowdown in the first quarter:

“With the Omicron variant of the Covid-19,” we had a very special first quarter, limited in spending (…). Denis Ferrand, CEO of Rexecode.

This is all the more true since household consumption is known to be the main driver of economic growth in France. Wednesday’s publication of the Household Ethics Survey in April is not reassuring, however: at 88 points it reached “a level close to the low points recorded at the end of 2018 during the yellow vest movement and in 2020 during the restrictions. noted INSEE.

Growth overrun 2.4%

On the contrary, some indicators show the relative resilience of economic activity to the threat of short-term stagflation. Starting from business investments which, if slowed down, increased by 0.2% in the first quarter. Foreign trade continues to recover, albeit at a slower pace than in the previous quarter, with an increase of 1.5% in exports and an increase of 1.1% in imports.

Above all, the growth surplus for France will reach 2.4% in 2022, according to INSEE. In other words, if GDP remained stable in the second, third and fourth quarters, the tricolor would be 2.4% for the whole year. Far from the 4% that the government hoped for, of course, but not the sluggish growth that characterizes periods of stagflation. Therefore, the risk will mainly concern the year 2023.

Inflation is accelerating in food

Even if growth remains acceptable, inflation will remain high in the coming months. Especially since after energy, food products are the ones that have seen their prices rise significantly in recent weeks (+ 3.8% over a year in April). Hence the morale of households in the half mast.

This increase reflects the implementation of contracts concluded between distributors and manufacturers in the context of trade negotiations. And the trend should continue as negotiations are reopened by the government to take into account the effects of the war in Ukraine on production costs.

However, in contrast to the stagnant inflation of the 1970s and 1980s, there is currently no massive wage increase in France. In any case, not at the level of inflation. This eliminates at this stage the risk of triggering a price-wage loop that would only fuel the general rise in prices.

What will the ECB do?

The European Central Bank, which has always refused to raise interest rates until now, will of course have a role to play in the coming months. For the Frankfurt Foundation, the dilemma remains the same: raise interest rates with the risk of slowing economic recovery or doing nothing at the risk of letting inflation soar.

“With an appropriate political response, we can mitigate the economic consequences of the war in Ukraine and manage the high levels of uncertainty we face,” said ECB President Christine Lagarde in late March, calling stagnant inflation the “recession of the economy.” on a permanent basis and high inflation, which continues to rise “could be avoided.

With eurozone inflation at 7.5% year-on-year in April, it is a safe bet that the ECB will end up raising interest rates in the coming months, but undoubtedly very gradually. Otherwise, the threat of stagnant inflation could give way to an even greater risk in 2023: that of a “fall in inflation”, a combination of high inflation and recession.


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