A year after the start of the war in Ukraine, three years after the first lockdown in 2020, western economies have arguably withstood these shocks better than had been feared, but they still run the risk of high inflation. Countries are not all exposed to these shocks to the same extent, especially to the war in Ukraine and the energy crisis: the United States is undoubtedly less affected than Europe; and within the Eurozone, France is probably less under threat than Germany and those countries whose energy supplies before the war were largely dependent on Russian gas.

When we compare the main macroeconomic indicators published recently by INSEE to their levels a year ago and three years ago, we see both the impact of the economic shocks and the relative resilience of the French economy. At the end of 2022, French quarterly Gross Domestic Product (GDP) was slightly more than 1% above that at the end of 2019 (compared with almost -1% for Spain and the United Kingdom, 0% for Germany, and almost 2% for Italy) and 0.5% above that of Q4 2021. After the strong rebound after lockdown, French activity slowed markedly in 2022 but quarterly growth remained slightly positive at year’s end. Payroll employment was more buoyant than activity, partly due to apprenticeships: in December 2022, it exceeded its December 2019 level by 4.5%, and that of December 2021 by 1.3%. Corporate investment, driven by spending on computer services, is also very dynamic, at nearly 9% above its level of three years ago.

Conversely, the manufacturing production index was down 3% in January 2023 compared to January 2020 (and almost 1% compared to January 2022), mainly reflecting supply chain difficulties and rising energy prices. Exports of goods and services were also down (-1%) in Q4 2022 compared to the end of 2019, although they have improved by about 4% since the end of 2021.

In recent quarters, the most notable feature has been soaring consumer prices. In February 2023, their year-on-year variation was 6.3%, but the resurgence of inflation had started earlier with the result that the general level of prices increased by 10.8% compared to February 2020. Overall, the purchasing power of household gross disposable income (GDI) per consumption unit was protected during the pandemic, and in Q4 2022 it was a little over 1% above its level at the end of 2019, although almost 1% below its level at the end of 2021. Household consumption, which rebounded strongly after the lockdowns, stood at its pre-health crisis level, although it had been higher during summer 2021: it fell back by a little over 1% between the end of 2021 and the end of 2022. At the end of 2022 therefore, the household savings ratio stood at about 2 points above its pre-crisis level.

For several months, the business tendency surveys have shown a relative easing of certain supply constraints, especially supply chain difficulties. However, hiring difficulties remain close to their highest levels. On the demand side, concerns are increasing somewhat. The balances of opinion on probable changes in selling prices remain high overall and rose sharply in February in retail trade, especially food.

This increase reported in the surveys echoes recent negotiations between producers and distributors. It is difficult to predict the exact impact on changes in consumer prices in the short term. The assumption adopted in this Economic Outlook is that this impact could be spread over several months, depending mainly on the disposal of inventory already purchased by the distributors and the measures they have taken to offset price rises. Over the forecasting period (mid-2023), the year-on-year variation in food prices is expected to exceed 15%, making it still the primary contributor to inflation. The national accounting data show that agrifood industries experienced margin compression in 2021, due to the effect of the increased cost of inputs, but this margin rate recovered throughout 2022, which is perhaps a catch-up effect, at least in part.

The prices of manufactured goods and services are also likely to remain relatively dynamic. Their year-on-year variation looks set to exceed 5% and 3% respectively by mid-2023. Conversely, the contribution of energy to the year-on-year variation in the consumer price index is expected to be zero or even in negative figures by June, mainly due to a “base effect” linked to the very high prices of petroleum products in spring 2022. This effect should be enough to push down headline inflation (+5.4% year-on-year forecast in June). However, core inflation, from which the most volatile prices have been removed, is expected to continue to increase and reach +6.4% year-on-year in June.

In this context of high inflation, household confidence is still in decline, but in France, according to the business tendency surveys, the business climate continues to hold up. Many companies face high energy prices. They are reacting mainly by increasing their selling prices, and to a much lesser extent by reducing their activity. This is certainly the case for the most energy-intensive branches (e.g. the steel industry, pulp, paper and cardboard manufacturing, and the manufacture of basic chemicals), where production plummeted in H2 2022.

Manufacturing output could therefore decline slightly in Q1 2023, as the January index suggests. Market services are expected to grow only moderately this quarter, with a decline in transport, which is most affected by the ongoing social movement. Given the information available at this stage, this movement is likely to have only a limited effect at the macroeconomic level. All in all, French GDP looks set to increase modestly in Q1 (+0.1% forecast), with a weak rebound in household consumption on the demand side, and a further decline in their investment in construction, in a context of rising interest rates. Growth is likely to be a little higher in Q2 (+0.2% forecast), mainly under the assumption of stability in manufacturing output, a slight acceleration in services and, again on the demand side, support for foreign trade with new aeronautical and naval deliveries.

The annual growth overhang for 2023 is thus expected to be +0.6% by mid-year, but this forecast is subject to many uncertainties, both national (e.g. duration and extent of strikes) and international (geopolitical developments, effects of ongoing monetary tightening, stability of the financial system, etc.).

On the labour market, employment is likely to slow (+0.1% forecast in Q1 then in Q2 2023), in the wake of activity. Per capita productivity is therefore expected to remain stable, well below its pre-health crisis level, especially in industry: this gap is only partly explained by the steady growth in sandwich contracts in recent years. The unemployment rate should hold steady in H1 2023 at 7.2% of the active population.

In H2 2022, the purchasing power of household gross disposable income rebounded overall, after falling back in H1. It was pushed up by the many support measures. These included the value sharing bonus (PPV), exempt from social contributions and taxation, which was paid in massive amounts at the end of the year to almost a third of employees in non-agricultural market branches. The “windfall effect” was significant for companies, since about 30% of these payments appear to have been substitutes for increases in base wages.

The purchasing power of the GDI is nevertheless expected to decline once again in H1 2023, as a result of the dynamism of prices and the expected slowdown in income (backlash from PPV payments at the end of 2022, deceleration in employment) despite a probable new automatic revision of the minimum wage (SMIC) in spring. The year-on-year variation in the nominal average wage per capita (SMPT) in the non-agricultural market branches is expected to rise to a little under +5% in Q2 2023. Meanwhile, the carry-over in annual change in purchasing power per consumption unit is likely to reach -0.7% by mid-2023.

Not all households are affected in the same way by inflation. Differences between consumption structures are reflected significantly in inflation differentials by household category. These differences have widened in recent months, with rising food prices combined with rising energy prices for housing. In January 2023, inflation was therefore higher for the oldest households (more than 1 point higher than the average, and +2.5 points compared to the youngest households, who tend to be tenants and probably in smaller dwellings), for those living in rural municipalities and for low-income households (for whom food is basically more of a burden). Even within these categories, inflation can differ significantly between households, with an interquartile difference of about 2 to 3 percentage points.

An extra question was added to the household survey in December 2022 to try and measure changes in consumer behaviour in this context. Two out of three households say that they have changed their consumer habits in the last year, due to inflation. These tend to be young households, or households with modest incomes and/or with children. These changes usually consist in reducing their consumption of food and energy for housing, and this is confirmed by the “hard” data at an aggregated level. To a lesser extent, households report that they are moving towards new brands or product ranges. While all these changes relate to the last 12 months, it is likely that they will persist over the next few months, in a context of inflation that looks set to remain high, especially with regard to food products.