Economic activity is set to slow down significantly in the second half of 2022 and in 2023 amid important supply disruptions and higher inflation triggered by the energy crisis. The rise in inflation is set to be sizeable and persistent (5.8%, 4.4% and 2.2% in 2022, 2023 and 2024), although largely attenuated by the measures adopted to mitigate the impact of high energy prices. The general government deficit is forecast to fall to 5.0% of GDP in 2022 and to reach 5.3% in 2023, and 5.1% in 2024. Public debt is set to decline to some 110% of GDP by 2024.
Last update (forecast)
Last update (11/11/2022)
|GDP growth (%, yoy)||6,8||2,6||0,4||1,5|
|Inflation (%, yoy)||2,1||5,8||4,4||2,2|
|General government balance (% of GDP)||-6,5||-5,0||-5,3||-5,1|
|Gross public debt (% of GDP)||112,8||111,7||110,8||110,2|
|Current account balance (% of GDP)||-0,8||-2,5||-1,3||-0,8|
Mild recession in sight
After the strong rebound of 6.8% in 2021, real GDP is set to expand by 2.6% in 2022. GDP surprised on the upside in the first half of 2022. However, rising inflation, triggered by high energy prices, and continued supply chain disruptions are taking a toll on growth, with GDP decelerating to 0.2% in the third quarter. Specifically, private consumption was flat amid a significant decline in consumers’ confidence while investment picked up strongly, mainly driven by transport equipment. GDP is expected to contract by 0.2% in the fourth quarter. The government measures aimed at mitigating recent losses of households’ purchasing power caused by rising inflation are set to provide some impulse to private consumption. In turn, investment is set to decelerate in the last quarter of 2022 due to rising costs and the decline in final demand.
Economic activity is expected to remain subdued over the first half of 2023, after a mild contraction in the first quarter, with investment falling on the back of higher production costs and heightened uncertainty. However, the projected moderation of inflation, mainly from energy, is set to allow for a gradual recovery in the second half of the year, with private consumption gaining momentum and investment growth resuming to positive territory. Net exports are forecast to post a slightly positive contribution to growth. For 2023 as a whole, GDP is set to expand only slightly, by 0.4%.
The French economy is projected to keep gaining momentum until the end of 2024 along with the ongoing moderation of energy prices. The gradual rebound is expected to be driven by domestic demand, whereas net exports’ contribution to growth is set to turn moderately negative. For the year as a whole, GDP is projected to expand by 1.5%.
Labour market to remain resilient but less
The labour market remained dynamic in the first half of 2022, leading to further declines in the unemployment rate. However, employment is set to decline in the second half amid an increase in hours worked per employee, thereby reducing labour hoarding. Thus, total employment is set to slow down in 2022 (1.0%, still supported by a strong carry-over) and to contract mildly in 2023, by 0.1%. The unemployment rate is expected to fall further, to 7.7% in 2022 and to rise to 8.1% in 2023, before declining again to 7.7% in 2024.
Inflation to remain high in 2023
Inflation is set to increase to 5.8% in 2022, from 2.1% in 2021. Energy prices will be the main driver behind such an increase, although their effect is expected to be largely mitigated by the government’s support measures, mainly the cap on electricity and gas regulated prices, which could contribute to reducing overall inflation by more than 3 percentage points. As high energy prices and rising wages are expected to partially pass through onto non-energy goods and services, core inflation is set to accelerate in the coming quarters and to remain relatively high. Thus, despite the projected slowdown in energy inflation as of the second quarter of 2023, inflation is expected to stand at 4.4% in 2023 as a whole, before dropping to 2.2% in 2024.
Deficit to increase in 2023
The general government deficit is forecast to narrow to 5.0% of GDP in 2022, from 6.5% in 2021. The decline is set to be driven by continued dynamism of tax revenues supported by high inflation, the phasing-out of most pandemic-related measures and the lower amount of measures under France Relance compared to 2021. These deficit-reducing effects are expected to be partly offset by the measures adopted to mitigate the impact of high energy prices, the budgetary impact (net of indirect tax revenues from renewable producers) of which is estimated at EUR 30 bn. (1.1% of GDP). These measures include, on the one hand, the cap on electricity and gas regulated prices, as well as the discount on liquid fuels aimed to contain price increases and, on the other hand, the indexation of pensions and social benefits, aimed to assuage the effect of higher inflation on households’ purchasing power. These projections also incorporate the budgetary impact of the investment plan France 2030 (0.1% of GDP) and the estimated cost to host people fleeing Ukraine, which is assumed to be limited.
The revenue-to-GDP ratio is expected to rise by ½ pp., mainly due to high receipts from indirect and corporate income taxes. In turn, the expenditure ratio is set to decline by some 1 pp.
The government deficit is forecast to rise in 2023, to 5.3% of GDP. Such an expected increase is due to the projected slowdown in economic activity weighing on tax revenues, alongside the extension of measures to mitigate the impact of high energy prices on inflation and on households’ purchasing power. The revenue-to-GDP ratio is expected to decline only marginally, whereas the expenditure ratio is set to fall by ¼ pp.
For 2024, the government deficit is set to decline to 5.1% of GDP. While the revenue ratio is expected to decrease by almost 1 pp, the expenditure ratio is projected to decline by some 1 pp., mainly due to the unwinding of measures aimed to mitigate the effects of high energy prices.
From 112.8% of GDP in 2021, public debt is set to decrease to 111.7% in 2022. Thereafter, public debt is forecast to keep falling further, to some 110% of GDP by 2024. The decline in the debt-to-GDP ratio over the whole forecast horizon is expected to be mainly driven by the dynamic nominal growth that is expected to prevail due to the high growth of the GDP deflator.