Growth at half mast and unprecedented inflation: France threatened by "stagflation"?

This is unheard of since the mid-1980s. Inflation continued to accelerate in April in France to reach 4.8% over one year, according to an initial estimate published Friday, April 29 by INSEE.

In the euro zone, the figure even reached 7.5% for the same month, the highest since the introduction of the single currency.

"This inflation is mainly due to the increase in energy prices," European Commissioner for the Internal Market, Thierry Breton, recalled on Saturday during an interview with France Inter radio.

First driven by the post-Covid-19 economic recovery, the rise in the prices of raw materials and agricultural products experienced a new boost with the war in Ukraine.

Breaks in supply chains in China linked to Beijing's "zero Covid" strategy are also playing a role in this outbreak.

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"In France and in all European countries, spending on transport and energy weighs heavily on household budgets," notes economist Stéphanie Villers.

"The first effect is a slowdown in consumption in the first quarter. Households prefer to be cautious because they have integrated that this rise in prices would permanently penalize their purchasing power. However, household consumption is the main engine of growth" tricolor, adds the economist.

According to INSEE data, household consumption fell by 1.3% in France.

Result: the gross domestic product (GDP) is at a standstill in the first quarter.

In the euro zone, it rose by only 0.2%, and even fell slightly in the United States.

After the euphoria of the post-pandemic recovery observed in 2021, global growth seems to be marking time.

"The beginnings" of stagflation

In this economic configuration combining rising prices and weak growth, the specter of "stagflation" reappears in France, a mixture of inflation and stagnation of economic activity.

"If this price movement is sustainable, there is a risk. We may be at the beginning," says Stéphanie Villers.

To be able to speak of stagflation, this situation would have to persist "over at least several quarters", confirms Pierre Jaillet, researcher at the European Jacques-Delors Institute, interviewed by AFP.

It is therefore still too early to say that the country is heading towards stagflation such as it experienced in the 1970s, at the time of the two oil shocks.

"One of the questions that now arises is to what extent the future government will weigh on the loss of purchasing power", after the enormous means deployed by the public authorities to help households and businesses since the pandemic, explains Pierre Jaillet.

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Several economic indicators point to cautious optimism: despite a slowdown, business investment rose in the first quarter in France.

As for the unemployment rate, it continues to decline with -5.3% of category A job seekers.

“We have probably reached the bottom level”, however predicts Stéphanie Villers.

"Companies are faced with production costs that increase with the price of raw materials. They are seeing the negative signals accumulate. We should therefore not expect a further drop in unemployment in the quarters to come".

High prices until 2024

Especially since the surge in prices is not about to die out, if we are to believe a report published Tuesday by the World Bank.

Its experts predict that "prices will remain at historically high levels until the end of 2024".

The authors of the report note that "the war in Ukraine has caused a major shock to commodity markets and changed the pattern of trade, production and consumption around the world."

"It is difficult to know how long this pressure on prices will last, which is spreading to all goods and services. Much will depend on the duration of the Ukrainian conflict", assures Stéphanie Villers.

>> To read

How then to avoid getting engulfed in the vicious circle of stagflation?

The equation is far from simple to solve for central banks.

To limit inflation, they have two levers: reduce their purchases of assets on the markets or raise their interest rates.

"The risk of this strategy is that it becomes more difficult to obtain a loan and this could lower consumption and therefore growth which is already not looking good", analyzes the economy columnist for France 24, Joanna Sitruk. .

05:56

The President of the European Central Bank (ECB), Christine Lagarde, on Wednesday opened the possibility of a first increase in key rates this summer if inflation continues to rise.

“The mission of the ECB is price stability,” said the former economy minister.

The ECB had already stopped in March the emergency program intended to support the economy during the crisis caused by Covid-19 and declared to stop net purchases of assets from July.

A way to keep rising prices under control, while waiting for better days.

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