Weekly Update - France: a less favorable economic conjuncture for the legislative elections
The first round of the French legislative elections is being held this weekend. President of the Republic Emmanuel Macron, freshly re-elected, may not have a clear majority. One of the possible reasons, beyond the purely political aspects of the electoral campaign, would be the confirmation of a less favorable economic situation. Indeed, since the presidential election, the economic situation has deteriorated, and the figures now fully include the first impacts of the war in Ukraine.
A worse than expected first quarter. In the first quarter of 2022, GDP was eventually revised downwards, with a slight decline over the quarter (-0.2% compared to Q4-2022) ( Chart 1) and the purchasing power of household gross disposable income per consumption unit fell sharply (-1.9% over the same period). Household consumption thus declined significantly over the quarter (graph 2), while business investment picked up, driven in particular by investment in IT, information-communication services and in capital goods. Finally, foreign trade, although slowing, continued to grow, with a more marked increase in exports than in imports.
And a second quarter that should be affected. In parallel with these less favorable than expected activity figures, inflation continued to surprise on the upside, at 5.8% over one year in May. This inflation, mainly in energy and food prices, is having a strong impact on household confidence and should continue to weigh on consumption. In addition, monetary and financial conditions have tightened in the wake of less accommodating central bank rhetoric and policies. Nevertheless, business confidence remains fairly high, consistent with slightly positive economic growth in the second quarter.
Supporting factors that should not be overlooked. We believe that without further pressure on energy prices, inflation should start to moderate gradually as of this autumn. On the activity side, we expect the sharp slowdown to continue, but we believe that a number of supporting factors will help avoid a major recession. Indeed, labor markets remain well oriented, corporate and household balance sheets are generally healthy, and the post-Covid normalization of activity in services is favorable, particularly for France where they represent more than 70%, of GDP.
Also, in the main events of the week, we chose to talk about the ECB announcements and about the OECD economic projections.