- The war in Ukraine is a major geopolitical event that has already begun to affect macroeconomic events. In addition, there is a significant increase in uncertainty about future events. This exceptional situation leads us to present two opposite macroeconomic scenarios for 2022-2024. The first, called “traditional”, is based on the assumptions fixed on February 28 under the rules of the Eurosystem. The second, labeled “down”, explores the additional effect of an even larger rise in oil, natural gas and wheat prices (as seen in early March), with prices remaining high throughout the forecast horizon, coupled with a pronounced uncertainty shock. In these two scenarios, the shocks suffered by the French economy are significant, even if they gradually disappear by 2024.
- Despite the magnitude of this external shock, the recovery momentum that has prevailed so far and macroeconomic adjustment mechanisms remain important headwinds. Public policies in France and Europe are also likely to change (these scenarios include information available until early March, including a tariff shield in France in 2022, but do not make any assumptions about resiliency plan measures).
- Thanks to the recovery that has already taken place during 2021, the headroom for 2022 is estimated at 2.9% at the end of the first quarter. Thus, despite the expected slowdown in the coming quarters, the average annual GDP growth will be 3.4% in 2022 under the traditional scenario and 2.8% under the degraded scenario. Inflation in 2022 should be high, including due to the energy component: at the level of 3.7% on average per year and close to 4.0% at least until September in the traditional scenario, in 2022 it will be 4. 4% in the degraded scenario. .
- In 2023, growth will continue to be accompanied by shocks under the degradation scenario (1.3%), but will be higher than the potential under the traditional scenario (2.0%). Inflation will return to an annualized average of 2.0% in 2023 in the traditional scenario, but remain high in the degraded scenario (3.3%).
- By 2024, growth will return to a trajectory closer to the assumed main trend before the war in Ukraine, especially in the usual scenario. And after a very strong current shock, this scenario predicts, as we already predicted in December, that non-energy and food inflation will end up by 2024 at a higher level than in the last ten years, close to 2%.
- In the degraded scenario, the cumulative loss of GDP in 2024 compared to the level projected in our publication last December is just under 2 percentage points.
- Risks remain high and these scenarios clearly do not cover all possible areas. In particular, the sudden cessation of energy imports from Russia is likely to have even more serious economic and financial implications for the market, which are difficult to quantify at this stage.
The consequences of the war in Ukraine put pressure on the French economy through various cumulative channels
The war in Ukraine is a major geopolitical event that will affect the current and future macroeconomic developments in France, as well as in the euro area as a whole. Its consequences will affect both inflation, almost immediately through rising prices for energy and other raw materials, and economic growth. Moreover, the uncertainty about future events, including in the very short term, is also very high.
In this context, the macroeconomic scenarios for France are based on today’s analysis of the various channels through which the crisis is spreading to the economy, even if there is a possibility that their respective intensity will change in the coming weeks and months. . Thus, three channels especially draw our attention when constructing two scenarios. The “traditional” scenario is based on the assumptions made on February 28 (see Table A in the appendix) in accordance with the coordinated forecast of the Eurosystem. The qualifier “normal” describes the idea that it gives a photo of a specific date (February 28, 2022) in a situation that changes very quickly. The so-called “degraded” alternative scenario uses more unfavorable assumptions about energy prices and uncertainty shocks that could affect the French economy. However, this does not exhaust the field of possible events, including more unfavorable ones. Thus, these two projections do not form a “range”, but a description of two possible trajectories.
The first channel, which at this stage will be the main one for the French economy, concerns the prices of raw materials. Since they are imported, their increase is a tax on the national economy, which has the effect of reducing GDP and raising consumer prices. In the traditional scenario, the assumptions are based on spot prices and future traded in the markets, closed on 28 February 2022 in line with Eurosystem projections for the euro area. For energy commodities (see Table 1), these assumptions suggest that the price of a barrel of Brent oil will remain close to $100 from February to April 2022 and then gradually fall ($86 at the end of 2022 and $75 at the end of 2022). 2022). end of 2024). Similarly, the price of a megawatt-hour (MWh) of gas (European terminal) will be around €107 from February to April, after which it will fall (€105 at the end of 2022 and €40 at the end of 2024). On average for 2022, the price of a barrel of oil will be $93, which is $15 more than our forecast for December 2021.
However, commodity prices are currently very volatile and have continued to rise since February 28th. In the worse scenario, we assume a price per barrel of $125 and a price per MWh of natural gas of €200 until 2024 (see Table 1). Thus, this scenario differs not only in the magnitude of the shock since the beginning of the forecast, but also in its persistence, while prices for future oil and gas is now expected to decline sharply by 2024.
The war in Ukraine affects not only energy prices, but also a number of commodities. In particular, we include in the degraded scenario the impact on food prices of an increase in wheat prices of about 65% compared to its level at the end of February.
As far as energy is concerned, we obviously cannot exclude that the shock will extend not only to prices, but also to quantity, with the possibility of supply rationing in Europe. This well-defined risk is very difficult to quantify and is not integrated into our two scenarios beyond what markets are already anticipating with price increases, for which it poses a significant downside risk.
The second channel we are looking at is financial tensions and, more generally, uncertainty, which are hurting investment and consumption. In the traditional scenario, we maintain the hypothesis that this channel will contribute to the decline in French GDP by about half a point cumulatively over the second and third quarters of 2022, in line with the volatility observed in the markets at the beginning of March. In the downside scenario, we assume that this volatility will further increase, reducing it by another half point in 2022-2023. As regards the influence of financial markets, important determining factors will be its local or global scope, as well as the more or less prolonged nature of financial tensions. in the end intensity of this channel.
Finally, the third channel is foreign trade. France’s direct trade with Russia and Ukraine, with the exception of imported raw materials, is small. But commodity price shocks or uncertainty will affect all economies, especially in Europe. As a result, in the conventional scenario, demand for France as a whole will decline by -0.5 points in 2022 compared to what we expected in mid-February. In the worst-case scenario, as our neighbors are affected by the same shock, global demand destined for France will fall by about -1.4 additional points in 2022.
In addition to the external demand channel, it is likely that the economy will also be affected by disruptions in production chains. Thus, some companies are beginning to experience interruptions in supply, forcing them to interrupt their activities for a more or less long period. The Covid crisis and then the end of that crisis highlighted the importance of this channel, as well as the ability of companies to gradually adapt. However, it is still very difficult to quantify and therefore remains an additional hazard compared to our two scenarios.