Friday, September 22, 2023

The Banque de France is more optimistic than before

The monetary institution, which now expects growth of 0.9% this year, expects inflation to gradually slow down to below 2% by the end of 2025.

After last week’s INSEE, the Bank of France is in turn more optimistic about the French economy. In its latest macroeconomic projections published this Monday, the monetary institution raises its growth forecast for 2023 to 0.9%, compared to the 0.7% initially planned. A revision linked mainly to a much better than expected second quarter (+0.5%), while GDP should progress modestly during the third (between +0.1 and +0.2%) and fourth (+0, 2%) quarters.

The Banque de France thus aligns itself with INSEE projections and is close to those of the government, which continues to expect growth of 1% this year.

For 2024 and 2025, the Banque de France, however, revises its growth forecasts downwards, to +0.9% and +1.3% respectively. This is “the upward revision of energy prices (…), and especially the downward revision of global demand directed at France.” As in 2023, growth over the next two years would be supported mainly by household consumption and business investment, thanks to a slowdown in inflation.

“Therefore, the French economy would gradually manage to emerge from inflation without recession, even if an unfavorable international context weighed on the recovery,” summarizes the Bank of France. This would contribute to the increase in the unemployment rate, which is expected to be 7.8% by the end of 2025, up from 7.2% in mid-2023.

Gradual decline in inflation

If inflation were to rebound in August in a context of rising energy prices, this “should be temporary”, estimates the Bank of France, still counting on a slowdown in price increases that should reach 4.5% by end of 2023 (in harmonized index), then 7% in the first quarter. Thus, for the year as a whole, inflation would be at 5.8% on average and inflation without energy or food at 4.2%.

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Regarding food inflation, the slowdown in prices is expected to continue until the end of the year without any declines. The Banque de France indicates, in fact, that the reopening of commercial negotiations between distributors and manufacturers during the summer “did not have any notable effect”, and the institution affirms that it does not take it into account “at this stage (…) a possible downward effect of the upcoming negotiations”.

Driven by wage increases and, in particular, the minimum wage, service prices should continue to rise until the end of 2023 before slowing. Next year, the tertiary sector would be the main contributor to total inflation, which would fall significantly, to 2.2% on an annual average. It would even fall below the symbolic 2% mark in 2025, down to 1.6%.

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Wages will catch up with inflation in 2024

In 2023, salaries will still not have reached prices, according to the Bank of France, which forecasts an increase in the average per capita salary (bonuses included) of 5.1%, below inflation. However, the trend will reverse in 2024, with wages increasing this time higher (+4.2%) than prices. The same in 2025 (+3.3%).

As the monetary institution points out, the gap between the evolution of prices and salaries “derives from the annual nature of salary negotiations, as well as the delay in the indexation of the minimum wage.”

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