After the inflation peak exceeded six months ago, INSEE has revised the growth rate upwards for the current year, with a forecast of almost 1% for the full year of 2023. Good news which are not enough to reverse the sobriety behavior of the French in terms of energy and food.
The Director General of INSEE, Jean-Luc Tavernier, details INSEE’s forecast for the second quarter: the National Institute of Statistics is revising its growth forecast upwards, to 0.9% for 2023, and according to him, inflation will continue to decline gradually.
franceinfo: What curve will inflation follow? Will prices continue to rise, but less quickly?
Jaen-Luc Tavernier: Yes, prices should continue to rise a little, but inflation, which is recalculated over 12 months, should continue to fall. The peak was six months ago. It started to drop quite sharply because energy prices stabilized. Our forecast is that it will continue to gradually ebb and at the end of the year, we will be at just over 4% inflation, in December, over one year. With average inflation for 2023 settling at 5%.
If we dissect this inflation, what role does food inflation play? We talked a lot about it, it reached double digits at one point, it’s not the case anymore…
We had the rise in energy prices, and then the rise in food prices which was the strongest at the start of the year, it is gradually receding. That doesn’t mean the prices will go down any further. Our forecast is that they are stabilized, or that they will increase very slightly in the autumn months. Perhaps they will drop later, in 2024, during price renegotiations. But over 12 months, that still means that inflation will continue to slow.
And for energy prices?
Energy prices are another matter. We had a slightly upward surprise, an upsurge in energy prices in August, due to the increase in regulated electricity prices and a rise in oil prices. On oil prices, we know that there is volatility, unpredictability. If we do not have a new shock, energy prices should contribute positively and not hinder the fact that headline inflation is reduced.
And what other components of inflation: services, manufactured goods…?
Services are 50% of the index. It’s the hairdresser, transport services, financial services. And it’s very sensitive to salary costs. In services, what matters most are wages. And we could fear, from the point of view of inflation, a risk of price-wage loops in services, with rising costs, rising service prices, which feed an overall price increase, which itself feeds the minimum wage, which contributes to wages, etc.
August’s news was not reassuring on the energy front, but rather reassuring on the services side. Their prices are slowing down a bit and we no longer have this risk of a loop that we had there. We therefore arrive at inflation in services which is around 3%, which also contributes to this overall slowdown.
What should we expect for household consumption?
What we have seen in the past and commented on quite a bit, are the reductions in consumption in the branches of the sectors where prices have increased the most. The rises in energy prices a year ago led to behaviors of sobriety and also a reaction of lower consumption. What we have observed for quite a long time now, and which is unprecedented, is a drop in the consumption of food products. It does not necessarily mean that we consume less in volume, it can especially mean that we change range, that we change stores. And in doing so, when you take a first price against a brand, the overall consumption volume moves and drops.
Are the French still turning to savings?
Yes, the savings rate was around 15%, fairly stable before the crisis. And there, since then, it has risen sharply and remains high, around 19%. The conditions could have led to a drop in the savings rate, but the purchasing power of households in 2023 will be around 0%, whereas it is usually positive. It means that for some, it goes down. You have to draw on your savings, so you accumulate less.
Moreover, the unemployment rate and the labor market are doing well, so there is no need to take precautions on this side, at least at this stage. However, the savings rate remains high. There are these reactionary behaviors in certain branches, food products, energy, which are not compensated by an increase in consumption elsewhere. It is a behavior of global sobriety which is established. And then, there is still a precautionary effect that we see clearly in our surveys: households answer “we want to save”, not to mention the rise in interest rates in the event of a loan.
And how are businesses doing? What should we expect for the investment?
The investment has held up well so far. It would be surprising if it did not react a little to the rise in interest rates. We are clearly expecting a drop in real estate investment, at least in new construction. This can be seen very clearly in surveys of real estate developers. It is also very commented. The short-term business climate has darkened in recent months. We have now returned to a short-term climate, let’s say average, when it was very above, in particular for employment.
You are revising your growth forecasts for 2023 upwards, to 0.9%. There was the second quarter that went through that, 0.5% growth. What should we expect for the rest of the year?
We are revising the annual average because we had a good surprise in the second quarter, for example in the automobile industry, there were fewer supply difficulties and a return to normal production in certain sectors. A set of somewhat specific factors.
0.5% quarterly is 2% annually – not the new normal, beware! In fact, what we expect is 0.1% for the third quarter, 0.2% for the fourth quarter. That’s 0.9% over the year. That’s not a lot of momentum in our jargon, for the year 2024. And that’s a subject.