The French economy absorbs the shock of the war in Ukraine

After a financial crisis of historic proportions and a global pandemic whose effects are far from over, a conflict erupts at the gates of Europe. It is difficult to talk about the economy when civilians are being bombed and three million Ukrainians are seeking asylum in other countries, but this conflict also has an economic dimension, because it is on this ground that the Westerners decided to respond to Russian aggression through their sanctions.

In all of this, the “good news”, so to speak, is that, given the situation in mid-March, the French economy may not be hit hard.

It does not take much economic research to feel the economic consequences of the war in Ukraine. The surge in gas and fuel prices that began last year and is already in our accounts finds a new outlet in the panic of traders driving up prices even as Russian gas and oil continue to flow to international markets, at least for now. Prices for wheat, a third of the world’s exports to Russia and Ukraine, and other raw materials are also rising.

Multiple shock

In short, we are facing for the first time an inflationary shock that affects the purchasing power of households and the production costs of companies. Thus, inflation for the year in France amounted to 3.6% at the end of February and, according to INSEE, may rise to 4.5% in the second quarter.

French growth will also suffer from the conflict. Rising prices reduce the purchasing power and consumption of households, companies may decide to invest less, tourists will be less tempted to return to France, and the difficulties of other countries will affect our ability to sell our products to them.

However, it is important, INSEE experts point out, that job prospects seem relatively unchanged »so no layoffs and, with the possible exception of a few sectors (transport, fisheries, construction, etc.) no partial activity.

True, the situation remains very uncertain, the duration of the conflict is unknown, if Russia turns off the taps of its gas and its oil, or that the Europeans decide or will not do without it, then the consequences will be very different. But at this stage, INSEE provides, excluding government intervention, a loss of just under one point of GDP, about 25 billion euros.

So we can end up estimating growth in 2022 in the range of 2.5% to 3% rather than roughly 3.5% to 4%. At the moment, nothing to do with the consequences of the pandemic (-8.1% in 2020) or the financial crisis (-2.9% in 2009), we are still close to the consequences of the first oil shock (-1% in 1975). .) .

Political response

The ultimate impact of the conflict will depend on how government agencies respond. As for budget policy, the government reacted at the end of last year. Various measures to control energy and fuel prices are pouring in to support households in the order of 30 billion euros, which is about one point of GDP, a bill that could rise along with the price of electricity.

Various measures to support the economy imply an increase in spending and an increase in public debt, which, it seems, no longer scares anyone, and this is good.

It is clear that the government seems ready to bear the costs associated with the crisis. Even so, to avoid wasting public money, he must direct his aid to less fortunate households whose share of energy and fuel expenditures is higher, resulting in a greater loss of purchasing power. All this is paid for by increased spending and increased public debt, which does not seem to scare anyone anymore, which is a good thing.

In any case, no worries as long as interest rates remain low and allow loans to be financed at low prices. From this point of view, the statements of the European Central Bank (ECB) on March 10 came as a surprise: it provides for a faster-than-expected cessation of purchases of government debt securities from June next year. The message is clear: even if growth is slowing in Europe, inflation is rising, it is time for us to stop supplying the economy with money. Between growth and inflation we have to choose, it will be the mastery of rising prices and the worse for the activity.

In any case, this is how this decision was perceived by investors, as a result of which the rate on 10-year loans began to grow … for France from 0.6% to 0.8%. No need to panic!

The ECB has clarified that in the event of a sharp deterioration in the situation, it may reconsider its decision and that between the end of its purchases of public debt and the increase in its key interest rate, there will be a time that partly determines the cost of obtaining liquidity by banks and, therefore, the cost at which they lend to enterprises and households.

Finally, the central bank will continue to refinance the more than 3,000 billion of debt it already has: it will re-lend enough to governments to repay incoming loans. In short, before the value of French public debt begins to rise seriously, there will still be a lot of water under the bridges, which leaves room for fiscal action in response to the consequences of the conflict. At the moment, France seems to be getting out of it without much loss.

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