The publishing of the 1st estimation of French growth during the 2nd quarter, which has been confirmed one month later, has created a nice surprise. The 0.5% GDP increase has by large overpassed the forecasts which rather saw it around 0.2%, which would have just erased the diminution observed during the first quarter. The acquired growth for 2022 is now 2.5%, which means that if the economy is stagnating during the second half of the year, it is this number which will the rate for the full year, which would put France in a good position among the euro zone economies, Germany, for instance being facing a real risk of recession.
But this result conceals some heterogeneity of the demand components. Household consumption doesn’t rebound, to the opposite, because after the 1.3% reduction during the 1st quarter, it again drops by 0.2%. To the opposite, investment expenditures by enterprises and local authorities are still growing to the same 0.5% rate. The main cause of the economic rebound is the very positive contribution (0.4%) of foreign exchanges, wrongly qualified of foreign trade. It comes from the strong rebound of foreign tourist arrivals in France which has generated high growth (near +9%) of the hotels and restauration expenditures. But we must not be wrong, the trade balance which counts the exchanges of goods not to be confused with services exchanges, has remained heavily in deficit and this deficit has even increased since the beginning of the year. One of the major weaknesses of the French economy is not going to be corrected.
This growth rebound has had a positive impact on employment. The number of unemployed in the A category had fallen by 169 100 units during the 1st quarter. This trend has gone on but with a much smaller rate with a reduction of 26 500 jobless during these last three months, which more reflects the structural difficulty of the job market to find a good adjustment between the supply and the demand, than an activity not strong enough. Nonetheless, the number of employed people in the private sector increased by more than 100 000 persons during the 2nd quarter. Unemployment rate has continued to be reduced to reach 7.5%, a level much higher than the one of many French economic partners, but which had not been hit since near 20 years.
Third positive point, the financial environment seems, at least for now, more favorable. The exchange rate between the euro and the dollar has stabilized above 1, after a 10% fall since the beginning of the year and the financial markets seem to be reinsured by the compromise found between the central banks between the necessary action to cope with inflation and the indispensable prudence to adopt in order to avoid the start of a major financial crisis. The first rise of the director rate of the European Central Bank for more than ten years as the successive rate increases by the Federal Reserve in Washington, have been welcomed.
So the CAC 40 index has known a strong rebound in July, erasing more than half of the losses observed since the beginning of the year thanks also to the profits, in a high augmentation, of most of the listed companies. In the same time, which has been poorly noticed, the long-term interest rates paid by the State, has known a spectacular fall. Above 2% in June, the 10 years bond fell back to 1.35% August 1st. If the spread with the German Bund with the same maturity remains high and superior to 50 basis points, that fall signals the trust of the investors in the French economy and its capacity to restore its public finances.
The main, if not the only weak point, is about inflation, which is certainly inferior to the other members of the eurozone ones, but very high, which so constitutes a threat on household consumption and growth. Against what was thought, the phenomenon has not been a transitory one but a slowing is foreseeable during the coming months due to a “basis effect”. Energy prices will not know a new and violent rise in the coming months as that one occurred during the first semester and the index will include this situation, which could be transferred to the other goods.
As a whole, the French economy situation is better than expected but that must not make forgotten the major risks to which it is still confronted with and the uncertainness regarding the euro zone. The war in Ukraine is far from being finished and the tensions on the fossil fuels supply will remain. A natural gas shortage could hurt some European countries, at the first place is Germany, even if the country decided to extend the activity of its last nuclear power plants. The German industry could also be forced to close some production centers, which would certainly have consequences in the whole Europe.
The international environment is gong to be less favorable. The United States went into a recession, even if, thanks to the cautiousness of the Federal Reserve, that has not provoked a financial market deep fall, with the consequences on the other financial places. China is confronted with structural problems which will inevitably weight on its growth, a less favorable demography, a real estate crisis which is going to paralyze a key sector of the economy and the rests of the zero-covid policy which are going to affect during a long period many industrial sectors which are strategic for the European companies which supply themselves there for their components and spare parts.
But the major worry could be the strength of the euro zone. Until now, the unique currency has allowed to the States to financing their policy to fight against the economic consequences of the pandemic in the best possible conditions. The European Parliament has adopted a large rebound program, with a community financing, which has constituted a major innovation. The European Central Bank went farer and has just adopted measures to intervene on the public debts market dedicated to reduce the interest rates spreads between State-members and to strengthen the monetary union. So it inscribed itself in the line of the Mario Draghi action which, ten years ago, had adopted a voluntarist policy with the “whatever it costs”.
As the chief of the Italian government, he had contributed to the strength of the euro zone through reestablishing the credibility of his country which is the third economy of the European Union. The political crisis which has just occurred, his resignation, first refused and after confirmed due to the rupture of the coalition which brought him into power and the convocation of snap elections in September constitute for Europe and for the euro a major threat. Until now, the currency markets have not taken into account this risk. But the eventual publication of poll opinions in September making possible that the country could be impossible to be governed, or, which would be worst, that an anti-European and supporting sovereignty majority could win, could not be without heavy economic and financial consequences on the whole euro zone.
So the warning lights are rather green for the French economy but the September return to activities will be all but peaceful. It was worried that the lack of an absolute majority paralyzes the government action. Until now that worry has not been validated. To the opposite the apparition of an absolute majority in Italy which is against Europe carries a real and systemic risk.