France: Low growth and inflation increase risk of stagflation

Rising prices and weak economic growth could create the ideal circumstances in France for stagflation, some analysts warn. The combination of inflation and stagnation is an economic contradiction that risks undermining quality of life for many in France. While slow growth normally means an increase in unemployment that decreases spending power, rising prices mean the money consumers do have begins to lose value.

A comparable economic situation has not been seen since in France since the 1980s: inflation rose once again in April to reach 4.8%, according to initial estimates published April 29 by Insee. Inflation reached 7.5% in the same month across the eurozone, the highest-ever rate since the common European currency was introduced.

"The inflation is essentially due to increases in energy prices," said Thierry Breton, the European commissioner for the internal market, in an interview with France Inter radio on Saturday. 

Price increases for essential and agricultural goods kicked into gear as the global economy resumed after the initial phases of the Covid-19 pandemic and then accelerated due to the war in Ukraine. Supply-chain disruptions in China, exacerbated by Beijing’s zero-Covid strategy, are also pushing prices higher.

"In France and all European countries, spending on transport and energy has become an enormous burden on household budgets,” economist Stéphanie Villers told FRANCE 24. “The initial effect of this is reduced consumption in the first trimester. Households are being cautious, as they understand that price hikes are going to affect their spending power – but household spending is the main motor for economic growth.”

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Data from Insee shows household spending in France fell by 1.3% in March, correlating with a first trimester that saw gross domestic product came to a standstill. In the eurozone, GDP rose by only 0.2% in the first quarter while in the US it fell slightly. After a euphoric post-pandemic rebound in 2021, global economic growth has tapered off.

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‘The first signs’ of stagflation

“If the trend for increasing prices lasts, [stagflation] is a risk. We could now be seeing the first signs,” Villers said.

To be officially classed as stagflation, the combination of inflation and stagnation must last “at least” for multiple trimesters,  Pierre Jaillet, a researcher at the Jaques Delors Institute think tank, told AFP. France calculates its annual financial cycle in trimesters rather than the four quarters used in Britain and the United States.

As such, it is too soon to say whether France is on track for stagflation similar to that experienced in the 1970s following two global oil crises.

"One question being asked now is how much the future government will factor in this loss of spending power,” Jaillet said.

Moreover, these new economic risks come on the heels of the generous financial aid packages offered to many in France during the economic uncertainties of the pandemic.     

Some economic indicators suggest there is reason for cautious optimism. Despite slowing down overall, business investments in France still grew in the first trimester. Unemployment rates also fell to 5.3% among active job seekers.

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However, France’s falling unemployment rate has now “probably reached the limit", Villers says. "Businesses are faced with rising production costs and expenses for essential materials. They are seeing an accumulation of negative financial signs. So we cannot expect further reductions in the unemployment rate in the coming trimesters.”  

'Historically high' prices until 2024

Prices are likely to keep rising for the foreseeable future, according to a report published by the World Bank on Tuesday. “The war in Ukraine has dealt a major shock to commodity markets, altering global patterns of trade, production and consumption in ways that will keep prices at historically high levels through the end of 2024,” it said.

"It is hard to know how long this pressure on prices that is impacting all goods and services will continue,” Villers said. “It really depends on how long the conflict in Ukraine goes on.”

So how can France and other countries avoid falling into a vicious circle of stagflation? There is no simple answer for central banks, which have two main levers for reducing inflation: reducing the assets they purchase, which limits the amount of liquidity in the market to avoid spurring inflation (known as quantitative tightening), or by raising their interest rates.  

"The risk of this strategy is that it will become more difficult to obtain loans. This could reduce consumption and therefore growth, which is already not in the best state,” explained FRANCE 24 economics reporter Joanna Sitruk.

The president of the European Central Bank (ECB), Christine Lagarde, raised the possibility on Wednesday of increasing interest rates this summer if inflation continues at its current rate. “The ECB’s objective is to create price stability,” said Lagarde, France’s former finance minister.

The ECB in March ended its emergency programme aimed at supporting the economy during the Covid-19 crisis and declared it would reassess its purchase of net assets from July. The result, it hopes, will be to keep prices under control while waiting for better days.

This article has been adapted from the original in French.