Income growth has stalled as prices for essential goods and energy rise. New figures from the National Institute of Statistics and Economic Studies (Insee) indicate that France could enter a period of stagflation.
Rising prices and weak economic growth could create the perfect conditions in France for stagflation, some analysts warn. The combination of inflation and stagnation is an economic contradiction that risks damaging the quality of life of many French people. While slow growth normally means rising unemployment which lowers purchasing power, rising prices mean that the money available to consumers begins to lose value.
A comparable economic situation has not been seen since in France since the 1980s: inflation rose again in April to reach 4.8%, according to initial estimates published on 29th April by INSEE. Inflation reached 7.5% during the same month in the euro zone, the highest rate ever recorded since the introduction of the common European currency.
“Inflation is mainly due to the rise in energy prices,” said Thierry Breton, the European commissioner for the internal market, in an interview with France Inter radio on Saturday.
Price increases for essential and agricultural commodities accelerated as the global economy recovered from the initial stages of the Covid-19 pandemic, then accelerated due to the war in Ukraine. Supply chain disruptions in China, exacerbated by Beijing’s zero Covid strategy, are also pushing prices up.
“In France and in all European countries, transport and energy expenses have become a huge burden on household budgets,” economist Stéphanie Villers told FRANCE 24. consumption in the first quarter. they understand that price increases will affect their purchasing power, but household spending is the main driver of economic growth.
Insee data shows household spending in France fell 1.3% in March, correlating with a first quarter that saw gross domestic product come to a halt. In the euro zone, GDP rose only 0.2% in the first quarter, while in the United States it fell slightly. After a euphoric post-pandemic rebound in 2021, global economic growth has slowed.
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“The first signs” of stagflation
“If the upward price trend continues, [stagflation] is a risk. We could see the first signs now,” Villers said.
To be officially called stagflation, the combination of inflation and stagnation must last “at least” for several quarters, Pierre Jaillet, a researcher at the Jaques Delors Institute think tank, told AFP. France calculates its annual financial cycle in quarters instead of the four quarters used in Britain and the United States.
As such, it is too early to tell whether France is on track for stagflation similar to that experienced in the 1970s following two global oil crises.
“A question that arises now is to what extent the future government will take this loss of purchasing power into account,” Jaillet said.
In addition, these new economic risks follow the generous financial aid offered to many French people during the economic uncertainties of the pandemic.
Certain economic indicators suggest that there is reason to be optimistic and cautious. Despite an overall slowdown, business investment in France continued to grow in the first quarter. The unemployment rate also fell to 5.3% among active job seekers.
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However, the fall in the unemployment rate in France has now “probably reached the limit”, says Villers. “Companies are faced with rising production costs and expenses for essential materials. They see an accumulation of negative financial signs. We therefore cannot expect further reductions in the unemployment rate in the coming quarters.
“Historically high” prices until 2024
Prices are expected to continue rising for the foreseeable future, according to a report released Tuesday by the World Bank. “The war in Ukraine has caused a major shock to commodity markets, altering global patterns of trade, production and consumption in ways that will keep prices at historically high levels until the end of 2024,” he said. he declared.
“It’s hard to know how long this price pressure that affects all goods and services will last,” Villers said. “It really depends on how long the conflict in Ukraine lasts.”
So how can France and other countries avoid falling into the vicious circle of stagflation? There is no simple answer for central banks, which have two main levers to reduce inflation: by reducing the assets they buy, which limits the amount of liquidity in the market to avoid stimulating inflation. inflation (we then speak of quantitative tightening), or by increasing their interest rates. .
“The risk of this strategy is that it will become more difficult to obtain credit. This could reduce consumption and therefore growth, which is already not the best,” explained FRANCE 24 economic journalist Joanna Sitruk.
European Central Bank (ECB) President Christine Lagarde on Wednesday raised the possibility of an interest rate hike this summer if inflation continues at its current rate. “The ECB’s objective is to create price stability,” said Lagarde, France’s former finance minister.
The ECB in March ended its emergency program to support the economy during the Covid-19 crisis and said it would reassess its net asset purchases from July. The result, he hopes, will be to keep prices in check as we wait for better days.
This article has been adapted from the original in French.