Inflation rose in November, reaching its highest level since 2008, and this increase is expected to continue in the coming months, which may impact household consumption. In addition, new risks linked to the latest wave of the pandemic, and the new Omicron variant, have led us to revise our forecasts downwards In this article
- Inflation is rising, and will continue to rise
- A more difficult backdrop for household consumption
- Increased health threat leads to downward revision of forecasts
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Subscribe to THINK Inflation is rising, and will continue to rise
As expected, inflation rose in November from 2.5% to 2.8% due to an acceleration in energy and manufactured goods prices, but also in services prices. The harmonised index, which is important for the European Central Bank's monetary policy, stood at 3.4% in November, compared with 3.2% in October. France is therefore continuing to experience price increases, in line with other European countries. However, this rate of growth is nowhere near the c. 5.5% rates seen in Germany, Belgium, Spain and the Netherlands last month. We believe that French inflation will continue to rise in the coming months due to energy prices, production line constraints that continue to push up producer prices (which rose by 14% year-on-year in October, an all-time high) and the impact that these price increases will have on wages, which are expected to rise and therefore push up business costs. We expect inflation to reach 2% on average in 2022.
A more difficult backdrop for household consumption
This inflationary backdrop is not favourable for household consumption, which was the main driver of French economic growth in the third quarter, increasing by 5% over the quarter. Figures published today by INSEE show that household consumption of goods declined by 0.4% in October on the back of a sharp decline in the consumption of manufactured goods. Admittedly, part of this decline concerns transport equipment, notably new cars, and is explained more by a very limited supply of cars due to faltering supply chains. However, the fall in consumption can also be observed in other categories of goods, notably clothing and housing equipment.
The fall in the volume of goods consumed does not mean that overall household consumption fell in October. A rebalancing of consumption between goods and services is underway after months of health restrictions that favoured the consumption of goods and prevented the consumption of services. However, with higher inflation and a new wave of the pandemic, as well as the Omicron variant, this data indicates that consumption may not be the main growth driver in the coming months.
Increased health threat leads to downward revision of forecasts
We believe that the latest wave of the virus and the new Omicron variant will have a negative impact on the short-term economic outlook for several reasons:
- Consumer confidence: Even without new restrictions, this latest wave and Omicron are likely to impact consumer confidence and make consumers more cautious. Against a backdrop of increased fears of infection, consumption of leisure services such as restaurants, travel and social activities can be expected to decline, which will negatively impact growth.
- Production chains: The health situation and the new variant are already leading many countries to reintroduce restrictive measures and lockdowns. These restrictions elsewhere are likely to have an effect on the French economy as they could further impact global production chains, reinforcing shortages and supply difficulties.
- Tourism: The new variant is already leading to a substantial increase in travel restrictions around the world, which could persist and negatively impact French tourism activity. While domestic tourism has never been able to compensate for the decrease in foreign tourists since the beginning of the pandemic, the impact could be significant, especially in ski resorts, which rely on both French and international tourists to help them recover from the closure of ski resorts last winter.
- Exports: Omicron is likely to impact the airline sector, with an expected drop in international travel. This may ultimately further delay the recovery of the sector, and thus French production in the transport equipment manufacturing sector (which in September was still 29% below its pre-crisis level, while overall industrial production was below 5.2% of its pre-crisis level).
- New restrictions? At present, little is known about the characteristics of the new variant. However, even before we know more about it, Omicron could accelerate (and make more acceptable) the implementation of new restrictive measures.
Ultimately, as things stand, i.e. in a situation without new restrictions, we are already revising our growth forecast for 4Q 2021 and 1Q 2022 slightly downwards. With expected quarterly growth rates of 0.5 and 0.4% respectively, we are not yet in a pessimistic scenario, though stronger containment measures could further reduce expected growth. We assume that the health situation will improve in spring 2022, leading to a significant rebound in economic activity. Ultimately, the average forecast for 2022 remains for growth close to 4%. The risks are nevertheless skewed to the downside.
Inflation France Eurozone Covid-19 Consumption Share
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