France – Scenario 2024-2025 : Economy recovering as shocks dissipate
After a soft landing, economic activity should accelerate over the next two years as past shocks dissipate. Lower inflation and still buoyant wages should enable the consumption rebound to continue. Investment, which should be more durably affected by monetary tightening, will not really pick up again until 2025, with the first effects of the expected monetary normalisation.
The French economy is making a soft landing following the post-COVID economic recovery in 2021 and the adverse effects of the outbreak of the war in Ukraine in 2022. The economy is in fact dealing with two powerful shocks: high, albeit falling, inflation affecting household consumption in particular, and the fastest monetary tightening in the ECB’s history, which is weighing on investment.
After two quarters of positive growth in early 2023 (+0.1% qoq in the first quarter and +0.6% in the second quarter), activity decreased slightly in the third quarter (-0.1%) but the economy is expected to avoid a technical recession, with a slight increase in activity expected in the last quarter (+0.2%). Disinflation should pave the way for a rebound in household consumption and thus a gradual acceleration in activity in 2024. The end of monetary tightening, followed by the start of normalisation, should see investment pick up again by the very end of 2024, then accelerate in 2025. Annual growth is expected to come out at 0.9% in 2023, 1.0% in 2024 and 1.3% in 2025.
Growth stalled in Q3 2023, due to a decline in foreign trade and inventory changes. It is important to put this decline in activity into perspective, however. Total domestic demand excluding inventories recovered after three quarters of sluggish activity, with a notable rise in household consumption (which had previously been lacklustre) and resilient business investment. Certain factors are driving activity, helping the French economy withstand an unfavourable environment, including the normalisation of global value chains which fuels supply and helps lower inflation. Caution continues to prevail among households, however, with confidence on the low side (but increasing in recent months) and a high savings rate. Government support for businesses is less abundant, but margins have been restored in many sectors and tax pressure continues to ease.
Uncertainty remains high, particularly since the outbreak of the conflict in the Middle East, and downside risks persist in our economic activity scenario. Energy prices are currently lower than last year but could rise again, for example if the conflict in Ukraine or the Middle East further deteriorates. Lastly, with the rise in interest rates weighing on investment, the aggressive continuation of the monetary tightening cycle could curb investment and have significant repercussions on the labour market, especially as fiscal policy will be less expansionary going forward.
Main components of the scenario:
- Household consumption should continue to rebound at the end of 2023 and more significantly in 2024, remaining dynamic in 2025. This trend should be driven by declining inflation, dynamic wages and a savings rate set to decrease slightly over the forecast horizon.
- Business investment is expected to dip slightly at end-2023 and in H1 2024, affected by amid tighter financial conditions. It should start to recover in late 2024 and then more significantly in 2025, as the tightening cycle comes to an end and monetary normalisation begins.
- Inflation should continue to wane but remain above the European Central Bank target of 2% over the entire forecast horizon. In particular, service inflation is liable to persist, triggered by wage hikes.
- Foreign trade is expected to make a slight contribution to growth starting in H1 2024, stemming from sluggish global demand for French goods and services. For full-year 2023, however, it will make a positive contribution owing to strong overhang from H1 2023.
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