The war in Ukraine is a geopolitical event with significant economic consequences, both in the short term (by stoking inflation) and in the long term (with the probable reorganisation of some value chains). It is taking place in a context already affected by strong price pressures associated with the buoyancy of the global recovery in the wake of the health crisis.

The magnitude of the immediate economic consequences of this new “exogenous” shock is of course not on the scale of that of March 2020, and it operates through different channels, but again it makes economic forecasting particularly uncertain, precisely because it depends partly on factors that do not fall within the usual scope of short-term economic analysis, such as the development of the military situation or of sanctions against Russia.

In these rapidly changing circumstances, this Economic Outlook offers a complete short-term diagnosis for Q1 2022; and for the near future it provides an assessment of the situation rather than forecasts. This assessment consists of conditional estimates based on macroeconometric models, and on early results from the March business tendency surveys, published exceptionally in this edition, before publication of the full results at the end of March.

The first three months of 2022 have been full of contrasts. As expected, in January the shadow cast by the Omicron wave was contained and proved temporary. In February, most health restrictions were lifted and the business tendency surveys were sending out signals that suggested an acceleration in activity. March has already been affected by the first consequences of the war in Ukraine, exacerbating the price tensions that were already present and lowering expectations regarding activity, as reported by business leaders in the surveys. All in all, the forecast for GDP growth is maintained at +0.3% for Q1 (after +0.7% the previous quarter), but with more uncertainty than usual, especially for March.

Domestic demand excluding inventories is expected to be at a standstill overall in Q1, under the effect of its components moving in opposite directions. Household consumption is likely to slip back, due to the Omicron wave in January and sluggish winter sales. Conversely, government consumption is expected to be driven by tests and vaccinations. Corporate investment should remain dynamic, but decelerate somewhat. Foreign trade should also slow after its sharp acceleration at the end of 2021. Finally, the contribution of inventory change is expected to be positive this quarter.

Payroll employment looks set to slow this quarter (+0.1% forecast between December and March) and the unemployment rate should stabilise at 7.4% of the active population. In February, the year-on-year change in consumer prices reached 3.6%. It would have been around 5% were it not for the “tariff shield” on regulated sales tariffs for gas and electricity. In March, inflation is likely to exceed 4% year-on-year: energy is expected to account for about half of this year-on-year change. Due to the rise in prices and despite the solid performance of earned income, the purchasing power of households’ gross disposable income is likely to decline in Q1 2022 (–1.4% forecast per consumption unit, although one percentage point of this is due to the after-effects of accounting for the inflation compensation payment in Q4 2021).

In the first analysis, the war in Ukraine and the sanctions against Russia affect the French economy via several channels. First is the energy and commodities price shock, but there is also an uncertainty shock and a foreign trade shock. The shock on prices of some imports may also be coupled with a shock on volumes, with the risk of an increase in supply chain difficulties –at a time when pre-existing problems, for example the case of semiconductors, do not yet seem to be resolved.

Early results from the March business tendency surveys, collected between 25 February and 14 March, provide first indications of the way businesses have adjusted their expectations since the start of the war in Ukraine. General prospects, as well as personal prospects for activity appear to be particularly affected in industry, and also in wholesale trade and some services. However, at this stage, the outlook for employment seems relatively unchanged.

Logically, growth should feel the effects in the coming months. By way of illustration, if the energy import prices seen at the beginning of March, which were admittedly very volatile, were to hold up until the end of the year, the associated loss of activity for the French economy could be almost one point of annual GDP in 2022, compared to the changes that could have been expected if there had been no war. These figures are provided by a macroeconometric model, and take into account the effects of international closure, but without considering either economic policy responses – likely to reduce the impact of the shock – or the other channels mentioned above – likely to worsen it. However, this is not a “central” assessment of the effect of the conflict, given the very high volatility of energy prices at present, and more broadly the degree of uncertainty over the development of the conflict.

The inflation outlook for the coming months is also uncertain, especially for energy, although the “reduction at the pump” is likely to ease the increase in fuel prices. Food prices could be driven up by commodity prices, but also as a result of trade negotiations between producers and distributors. The overall year-on-year price shift could thus be around 4.5% between April and June.

All in all, annual growth in 2022 should benefit from a strong carry-over effect (+2.7% at the end of Q1) linked to the dynamism of recovery after the health crisis, but there are expected to be considerable uncertainties over activity in the next few quarters. In addition to developments in the conflict itself, and any associated sanctions and economic policy responses, these uncertainties also concern the consequences of the confidence shock, for example, and the scale of supply chain problems, whether they are linked to the war or to a possible resurgence of the pandemic, if this were to lead to a halt in activity, especially in China.