War in Ukraine: stagflation, this threat hangs over the French economy

Since the Russian invasion of Ukraine, France has been under threat. And it’s not just a more head-on conflict with Putin. A dangerous economic cocktail of stunting and price spikes is infiltrating the economy. “It has a name: stagflation. This is exactly what we do not want to experience in 2022,” Economy Minister Bruno Le Maire recently worried. Fear that is not unreal. In mid-March, the Bank of France released its economic forecasts for the year. In the first scenario, the most optimistic one, growth will reach an honorable 3.4%, while inflation will rise to 3.7%. But in a second, much more worryingly, gross domestic product (GDP) will stall at 2.8% and prices will jump 4.4%…

The economy minister is not alone in warning against this threat. After the invasion of Ukraine by Russian troops, more and more economists are sounding the alarm. “This scenario is, unfortunately, the most plausible,” worries Erik Dor, director of economic research at IESEG.

This old concept, however, seemed reserved for economic history textbooks. Introduced in the 1960s in the United Kingdom, stagflation, a combination of “stagnation” and “inflation”, spread to industrialized countries after the 1973 oil crisis caused the price of a barrel to explode. This shock then plunged the economy into a vicious spiral, mixing an incessant waltz of labels and an ever-increasing line of unemployed that seemed never to be broken.

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The “economic anomaly” of the 1970s that undermined the economic theories of the post-war years. The latter postulated until then that inflation and unemployment cannot coexist. “In the glorious thirties, when prices fell, governments used the stick of austerity,” recalls Laurent Varlouzet, professor of history at the Sorbonne and author of the book. Europe against Europe. Between freedom, solidarity and strength (CNRS publications). They could afford a small rise in unemployment because it was very low.”

A recipe that is more difficult to apply socially when the number of job seekers is already on the rise due to the crisis… which by itself cannot be cured by a policy of stimulating activity, at the risk of pouring money into the fire of inflation! After a decade of skyrocketing prices and rising unemployment, this vicious cycle was nevertheless broken by massive increases in interest rates by the central bank, austerity policies, and inflation-adjusted wage de-indexation. This was the beginning of a new era, when globalization, digitalization and the weakening of trade unions gradually pushed the specter of inflation into the background.

Price spike spreads

The Covid pandemic has begun to change that. Within a few months, France suddenly rediscovered the label waltz. But until now, political leaders and economists have been saying in chorus that everything is under control: this price increase went hand in hand with a turbulent recovery, and it was only “temporary”.

However, the outbreak of conflict between Russia and Ukraine fanned the fire, causing an explosion in commodity prices. Gas, oil, wheat, nickel… An outbreak that infects the entire production chain, from fertilizer to pasta, including meat and building materials. In the cosmetics sector, for example, “rising energy prices will have a significant impact on glassblowers who use gas ovens to produce perfume bottles,” describes Emmanuel Guichard, general delegate of the Federation of Cosmetics Companies.

In sectors where the margin is the weakest, they cannot be bitten off indefinitely. “We will be forced to raise prices because the mileage for home assistants has been increased to offset the increase in fuel prices,” said Bryce Alzon, CEO of Coviva, a network of agencies specializing in personal services. . The return of the epidemic to China could deal a death blow, once again disrupting global trade and further driving up the cost of transportation.

“If the sea route is blocked, the transit of goods will not be possible even through several existing rail corridors, because they all pass through Russia,” explains Alexander Vienni, partner in charge of the distributor division at bp2r. As a result, inflation, which already reached 3.6% in February, should pick up in the coming weeks. In its latest economic report, INSEE predicts growth to 4.5% in the second quarter.

Rising prices that cost households dearly. According to a study by Asterès, a rise in fuel prices could make a hole in their budget by 550 euros this year. Not to mention other increases that can be expected at the time of checkout… As a result, their purchasing power should decline by at least 0.9% this year, according to INSEE. For the most modest, the shock will be severe, especially since their wiggle room is already in full swing: 44% of French people who earn less than 2,000 euros a month have already given up heating, and 36% are forced to skip meals. , according to a recent study by Ifop/Finfrog. “On the 10th of the month, half of them have less than 100 euros in their account, which causes a lot of stress every day,” describes Riad Alimi, founder of Finfrog.

Locks that can propagate

A fall in purchasing power which is thus holding back consumption, uncertainty which will force producers to postpone their investment projects, rising costs and supply problems which are already forcing some industrial facilities to shut down, external demand which could also be affected… mention companies directly affected by the conflict between Russia and Ukraine. “These two countries account for about 40% of our exports: everything is stopped in Ukraine, and Russian orders are currently blocked,” Antoine Madrid, CEO of the Panther group, which sells, in particular, the Cottage brand, is desperate.

Together, all these elements will affect economic growth. According to INSEE estimates, this year it could fall by one point of GDP. “A simple slowdown in growth, but which could turn into a dive if the Russian gas cut scenario materializes, which is not at all unbelievable,” analyzes Patrick Artus, chief economist at Natixis.

Therefore, the worst has not yet been determined. “Especially since there is a restorative force that prevents entry into an inflationary spiral: wages, which are currently far from spikes,” said Victor Lekillerier, an economist at BSI Economics. “But everything will depend on the duration of the conflict,” adds Sylvain Bersinger, an economist at Asteres. “Workers will demand further wage increases, companies will increase their selling prices, and then inflation will be difficult to break.”

The sustainability plan announced by the government on Wednesday 16 March, which includes, among other things, a fifteen cent rebate on fuel, assistance to energy-intensive companies and exporters, industry assistance to fishermen or livestock breeders, etc. – should allow the breakdown to be somewhat limited, mitigating the loss of purchasing power households and helping the hardest hit companies get through the air pocket. “But these measures also risk maintaining price momentum by propping up demand when it is, in effect, a supply shock. And, in the end, the risk is that public finances can no longer follow,” warns Emmanuel Jessois, director of economic research at Rexecode.

First of all, there is nothing to suggest that this will be enough to reduce the social anger that is starting to rumble. Oil depot blockages can spread and multiply. And force the government to water a little more, which means… to support inflation. Not forgetting all the other embers that could push prices up: the stimulus given to the energy transition and the desire to move, the resumption of the pandemic, or possible sanctions against China if it decides to back Moscow too openly…

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The European Central Bank in Frankfurt is watching the situation with concern. “Unless it is ready to break demand and therefore fuel the forces of recession, it will not be able to withstand this inflationary shock,” explains Erik Dor. rising prices.” The crest, which can be complicated in the event of a warning about the debt of one of the eurozone states, and in particular Italy, is an eternal weak link … If stagflation has not yet been established, the turbulence zone is no less worrisome.


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