GDP, inflation, how did France end 2023? Knowing that its main trading partner, Germany, suffered greatly last year, particularly via its manufacturing sector, which was hard hit by the energy crisis.
Looking at growth rates, we see that Germany is effectively the only developed country to be in recession, producing less in 2023 than in 2022. France, on the other hand, should see a positive growth rate of just under 1%. Extending our analysis to compare with the pre-Covid crisis period, i.e. 2019, it is interesting to note that overall, France is posting growth of +1.7%. Germany, on the other hand, is virtually at the same level as in 2019, with its economy stagnating over four years, a result all the more notable given that Germany is generally regarded as the engine of the European economy. It is also important to point out that Europe is losing ground to the USA, which in 2023 will post growth of more than +7.5% above its pre-Covid-19 crisis level. Within Europe, France is about average, while Germany is well below average in terms of activity.
As far as inflation is concerned, a common trend can be observed in all major developed countries: a decline in inflation, a phenomenon known as disinflation. It is important not to confuse this with a fall in prices; rather, it is a deceleration of price increases. Inflation, which was around 10% at the start of 2023 in the major developed countries, is now between 2.5% and 3.5% in all these countries for the year 2023, with slightly lower figures for France. If we take a step back, particularly since the end of 2021, we can see that cumulative inflation over the last three years has been lowest in France. Today, we're seeing around 4.5% less inflation than in Germany, and almost 8% less than in the UK, which clearly favors the French economy and could augur better performance in terms of competitiveness in the years ahead.
We've definitely moved away from the "whatever it takes" approach, and recent government announcements seem to confirm that the time to pay the piper is inevitable. Is France's indebtedness excessive? Is it a handicap in the short, medium or long term?
As far as public debt is concerned, if we look at the current French situation, we see a downward trend. In 2020, public debt would represent around 115% of GDP, whereas today it would hover around 110 to 111%.
However, what makes the debt less sustainable today than before are the interest rates that have risen. In 2020, although debt was high, interest rates were close to zero. Today, interest rates are rising, with the result that interest expenses have risen over the past two years to a relatively high level. This increase represents around two percentage points of GDP in terms of interest expense, well above the average for the last ten years. However, it is important to point out that during the 90s, this figure was 3.5 percentage points of GDP, which shows that we are still well below that period.
However, this situation now makes it necessary to reduce our debt, especially as it is becoming more and more expensive to take on debt. With our commitments to our partners, we have to undertake what is known as austerity or fiscal consolidation. We are moving away from the "whatever it takes" policy; in this context, the Minister for the Economy is planning to make savings of around 12 billion euros a year over the next ten years. The first few years will be relatively straightforward, but from 2025, 2026 onwards, real reforms will have to be considered, including significant cuts in public spending. Indeed, the current government refuses to raise taxes, which means that these reductions can only be achieved through cuts in public spending. This could have more painful consequences, as it will be necessary to determine which public spending to cut, and which families or businesses will be affected. We must therefore be prepared for a slowdown in economicactivity as a result of this austerity, which is widespread throughout Europe. By way of comparison, the Germans are forecasting savings of 6 billion euros, which shows a more marked austerity even for a country that is not doing very well economically.
The United States seems to be embarking on a process of industrial rearmament, in particular to counter China's ambitions. Europe is not to be outdone, but accounts for only 6.7% of global industrial investment. Several questions arise: firstly, is this reindustrialization possible, and how far can it go? Can France go it alone, or does it need to be part of a common European project to bring this process to fruition?
Beyond reindustrialization, the United States is dragging us into a trade war. Overall, if we caricature the phenomenon and take it to the extreme, they want to get us out of WTO-style free trade. In other words, where there used to be common rules for all trade, these rules will still exist, but there will no longer be a policeman to check whether or not they are being violated. What's more, the United States is embarking on protectionism with the IRA (Inflation Reduction Act), which runs counter to WTO rules. What the United States wants to lead us towards is tripartism, i.e. the American bloc, the Chinese bloc and the BRICS (Brazil, Russia, India, China and South Africa), to which six new countries have been added in the last six months. This bloc represents 46% of the world's population, making it a major player.
The big question is what we're going to do with the European bloc. Faced with the Chinese and American blocs, France alone certainly doesn't carry much weight, and could carry more if we formed a European bloc. However, the Germans are hostile to such a move, as they have a vested interest in returning to the previous WTO rules, where they benefited from a trade surplus of 4 to 8 percentage points every year. The Americans have put an end to this, as have the Chinese and the British. It is therefore necessary for Europe to prepare for its own bloc with its own rules, what is now called "friend sharing" or "near sharing". This means that we will trade with friends or countries that are politically or geographically close, with rules common to this bloc, and then trade between blocs with different rules, including customs barriers.
The US elections will be very important in this respect. Should Donald Trump return to power, he has clearly announced that the rules will be even stricter. He wants to reindustrialize the US much faster, probably at Europe's expense. So, Europe needs to set its own rules, with its own budget and a strategy that involves, in a way, protectionism, but European, of course, not just French.
Some forecasters believe that 2024 will be the third consecutive year of global economic slowdown. Do you agree with this prediction, and if so, what impact could it have on the global economy, and more specifically on European countries and France?
Indeed, we are in line with this slowdown, with global growth forecast at 2.3% in 2024. As a reminder, growth was 3.2% in 2022 and 2.6% in 2023. So there's a continuing slowdown, but with changing factors. Up until now, the slowdown has been linked more to problems of supply and recruitment. There were few problems with demand, as order books were full, but there were difficulties with production for the reasons previously mentioned. In 2024, the situation will be reversed: the main drag will be on demand, order books are emptying, and supply problems have returned to normal, although tensions in the Red Sea may create new supply problems.
Today, we're back to normal, so it's demand that's going to bear the brunt. This demand is somewhat battered by two mechanisms: on the one hand, the austerity we just mentioned, where all budgetary policies cease to support household purchasing power, by raising taxes or cutting public spending; on the other hand, monetary policy, but that's a thing of the past. Interest rates have risen, but are now falling. However, the impact of monetary policy is not immediate, and it takes around 18 to 24 months for rate rises to really feed through to the economy and cause a slowdown. Well, here we are.
In 2024, we'll be suffering the consequences of the rate hikes of 2022/2023, and this will be a very important factor, particularly in the construction sector, where we're seeing a gradual collapse in all countries. As a result of all this, unemployment will rise in all developed countries, whereas it was falling in 2022/2023. This is the main consequence. The second consequence is, of course, that the public deficit will shrink less rapidly than expected, since less activity means less revenue for public finances.
Interview conducted on January 24, 2024.
OFCE: French Observatory of Economic Conjunctures
