The publication by INSEE of its first estimation of the French growth during the 1st quarter has surprised and disappointed. GDP has stagnated. During the same time inflation reached year on year 4.8% and it was not needed more for the spectre of stagflation to be reminded, the worst situation an economy can know with, in the same time inflation and the growth stoppage, which frequently constitutes the preliminary signal of a recession. These worries are yet excessive and the figures are less alarming than they look like because this stagnation occurs after a strong rebound in 2021 and because France has been confronted, during the 1st quarter, with a set of very unfavorable conditions due to the international environment. Other countries did much less well to start with the United States where GDP fell by 1.4% during that period.
The three previous quarters had, to the contrary, known a strong rebound (+1.5% then +3.0% and at last +0.8%) to the point that the 2022 acquired growth, i.e. the growth of the year if the economy stagnates until its end, is 2.4%. So it would be more appropriate to talk about consolidation instead of stagnation. The main cause has been household consumption fall (-1.3%) when enterprises investments were still growing (+0.7%) after a 11.9% increase in 2021. We don’t have at our disposal the quarter financial data but it is likely that household have started again to save and to feed, as during the first phase of the crisis, their financial saving accounts. Homes building, after several quarter of rebound, have also fallen, probably due to the acquirers wait-and-see attitude in front of the degradation of the sanitary and international environment.
This quarter has been affected by a set of deeply unfavorable factors to economic activity. There has been first at the beginning of the year the rebound of the pandemic. Its consequences the previous years were still in the memories, which has not incited household to spend. The disruption of the supply chains had not been resolved and even before the Chinese situation was a new source of problems, many scarcities had appeared, especially in the car industry, which were weighting on goods supply. In the middle of the quarter, has occurred Ukraine invasion, which has increased the worries about the future and has generated a brutal rise of the energy prices. At last, the comeback of pandemic in China and the very restrictive measures adopted by the country leaders has even added to all these already unfavorable elements a negative factor. For some enterprises, the Middle Empire is an essential market, to sale or to get spare pieces and that will have inevitably consequences on the 2nd quarter activity.
So, all these factors have contributed to weight both on the supply and on the demand and have generated, due to the foreseeable penuries of many commodities and to the scarcities on the supply chains, new prices increase. So, the economic stagnation and the inflation observed during the 1st quarter mainly do have external origins and are quite independent from the government action and from the economic agents situations. It is what makes the difference with the Seventies, frequently put forward as a comparison point, whose unbalances were coming from the perverse effects of prices controls on inflation, from the sharp increase of unemployment and of the trade deficit.
But this very unfavorable international environment is occurring at a time when the French economy will have to answer to many strategic challenges because nothing will be quite as it was before. The supply chains have to be rebuilt in order to be less dependent from foreign sources, at least from countries outside of the European Union. The energy transition will have to accelerate both to reduce greenhouse gas emissions and to cast off the imports coming from Russia in a fossil fuels price context which will durably remain high. The public finance situation, which deteriorated itself due to the sanitary crisis, will have to be corrected.
The measures adopted to soften the inflationist shock and to protect household purchasing power have been justified but they can only be transitory ones. So wages increases to come will weight on enterprises costs at a time when many among them are facing with a new production paradigm. It is why a new economic policy must be put in place which couldn’t be limited to the activity support to overpass the current slowing. Such is the challenge of the five coming years for France.