June 1, 2023

The Banque de France more optimistic for the French economy in 2023

Renewed optimism at the Banque de France. In its latest forecasts, published on Monday, the institution expects a 0.6% increase in gross domestic product (GDP), against 0.3% previously envisaged.

On the inflation front, the central bank is lowering its forecast for 2023. “There is a little more growth and a little less inflation,” summed up the central bank’s chief economist, Olivier Garnier. The institution justifies the doubling of its growth forecast by lower than expected inflation (in particular energy) and “higher growth in global demand”.

These good surprises are, however, offset by the “financial environment”, with exchange rates and borrowing rates being less positive than in December. And, even increased, the growth forecast for 2023 remains lower than those of the OECD (0.7%, raised by 0.1 point on Friday) and the government (1%).

No fall in food prices before 2025

Another lesson: while food inflation has taken over from energy inflation as the main driver of price increases, it should peak “towards the end of the first half”, according to Matthieu Lemoine, one of the authors macroeconomic projections for 2023-2025 published on Monday. Prices would then increase more slowly, thanks to “the expected relaxation in the price of agricultural inputs […] and the international prices of agricultural raw materials”, explains the institution. But “we do not expect a drop in food prices on the horizon of our projection”, that is to say 2025, warns Matthieu Lemoine.

All goods and services included, the harmonized consumer price index (HICP) – the inflation barometer which refers to the European level and which the Banque de France uses in its projections – would stand at 5.4% annual average in 2023, against 6% expected so far. The HICP would then fall to 2.4% in 2024 and then 1.9% in 2025, below the 2% mark targeted by the European Central Bank (ECB).

Fears around banks

These forecasts of activity and inflation are nevertheless dependent on “numerous risks”. “The indirect effects of the recent banking and financial volatility should be closely monitored, as the events of the last few days brought about by the closure of the Silicon Valley Bank in the United States or the uncertainty around Credit Suisse have reminded us”, she details.

The difficulties of American and Swiss banks have indeed caused chaotic sessions on European markets including the Paris Stock Exchange. Investors fear a major financial crisis. But the Governor of the Banque de France, François Villeroy de Galhau, reiterated, as of Friday morning on BFM Business, his confidence in the solidity of European banks, just like the French Banking Federation, Saturday, for the banks of the Hexagon.

And the institution does not believe either in a lasting effect on the economy of the tensions concerning the pension reform. “There may be temporary effects from one quarter to the next”, acknowledged Olivier Garnier, but “when we think over the multi-year horizon […] it is not likely to significantly affect the projection”.

No inflationary spiral?

These uncertainties aside, the Banque de France is therefore counting on a clear upturn in growth in 2024 (+1.2%, as anticipated in previous forecasts) and in 2025 (+1.7%, against +1.8% ). This relaunch should be supported in particular by an upturn in household consumption (+1.5% in 2024 and +1.6% in 2025), whose remuneration should experience more dynamic growth than in recent years.

The average salary per head, which includes overtime and bonuses, should grow by 6% in 2023, 4.6% in 2024 and 3.7% in 2025, without purchasing power jumping in the same proportions. “This increase in wages should not lead to an inflationary spiral”, anticipates the Banque de France. In terms of employment, the unemployment rate should experience a “transitory” increase in 2023 and 2024 before starting a “decline” again from 2025.


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