Inflation and deficit: how to preside over France in a threatened economy

"Undoubtedly, we are going to have to go through more difficult economic times. The French economy is moving forward on a road that has become more slippery", warned in the intervening rounds the governor of the Banque de France, François Villeroy de Galhau.

While French growth reached 7% in 2021, one of the highest in the euro zone after the record 8% recession of 2020, the landscape has darkened in recent weeks.

“We had succeeded quite well in France in emerging from the Covid-19 crisis, and even in a surprising way”, underlines Patrick Artus, chief economist of Natixis, referring to the low number of bankruptcies, controlled corporate debt and the fall in the unemployment.

But the war in Ukraine has aggravated the disruption of business supply chains, curbing activity in industry, and has reinforced already high inflation (4,5% in March) due to soaring oil prices. energy and raw materials.

"The conflict is further weakening the growth which was in the process of settling, with inflation which is eating into the purchasing power of households and eroding the margins of companies", estimates Emmanuel Jessua, economist at Rexecode, counting on inflation around 4% this year.

With no doubt in prospect a "gradual impact" on wages and selling prices, which will increase to follow the upward movement, which will "further fuel inflation" in the coming months, as we are already seeing. in the United States, he adds.

For now, the French economy still seems to be resisting, with GDP growth expected at 0,25% in the first quarter according to the Banque de France, and 0,3% according to INSEE, but the two institutions are showing great more cautious for the future.

The war causes "a shock of price, uncertainty and confidence", summarized Julien Pouget, head of the economic department at Insee, in mid-March.

Households and companies are already showing signs of pessimism which could weigh on consumption and investment.

“Huge problem” of public finances

"I think we're going to lose 2 points of growth this year compared to the 4% we could expect," said Patrick Artus. Lower growth to which will be added a loss of purchasing power, which will hit the poorest households more, more sensitive to increases in energy and food prices.

The IMF has also lowered Tuesday by 0,6 point to 2,9%, its forecast for France.

How, in this context, to finance the necessary investments for the ecological transition, education, skills and health? And how to support the reindustrialization of France when the trade deficit has reached record highs? This is the whole challenge of the next five-year term.

The future President of the Republic will undoubtedly have to strengthen his action against the effects of the conflict, and in the first place inflation.

Marine Le Pen notably proposes a reduction in VAT, when Emmanuel Macron promises, for example, targeted aid and a reassessment of retirement pensions next summer.

All in a tense budgetary context, with a deficit (6,5% at the end of 2021) and a gigantic debt (112,9%) at the end of the health crisis.

"We have quite expensive programs - even if that of Emmanuel Macron is much less than that of Marine Le Pen - and whose funding is not always explicit", points out Emmanuel Jessua.

The president-candidate has estimated his at around 50 billion euros, financed in part by the pension reform and the achievement of full employment, while Marine Le Pen plans 68 billion euros in expenditure, including the planned financing is questioned by most economists.

"Whoever is the elected candidate, in any case he will have a huge problem of public finances and we must not believe that we can pass this by the wayside", warns Patrick Artus.

A situation that is all the more worrying since the European Central Bank has paved the way for raising its interest rates to deal with inflation, which could further hamper growth.