In France, a worrying economic situation

Observing economic indicators point to a global slowdown in economic activity. We can observe in France an intact desire to consume, a consequence of the robustness of the labor market.

In view of high interest rates, inflation and falling real incomes, such a cocktail should panic the French financial markets and worry consumers according to simple economic logic. For example, Germany is going into recession and China into deflation. Against all odds, stock prices are up, most companies’ profits are booming. Except for the French who are excluded because of the weakening of their purchasing power, spending is directed towards holidays, entertainment and outings. These trends are outside the known pattern of an economic cycle with recovery, prosperity, runaway and weakening.

The question is: is France in full prosperity or is it already in full decline?

The indicator of weak demand for goods and high consumption of services provides us with an answer. Some sectors of the economy are definitely heading for a slowdown. Industry indicators are down sharply, especially in Europe, including France. Production and order books are reaching levels that only show up in a recession. The measures taken during the health crisis have led to a significant increase in demand for goods. Currently, demand is declining. At the same time, the sharp rise in interest rates is affecting real estate markets. But at the same time, the job market is booming and the desire to consume does not seem to be curbed. This is what makes the current macroeconomic situation both unique and puzzlingly disturbing.

Will the gloomy outlook lead businesses to slow down and therefore cut jobs?

Until when will consumers continue to consume and then reduce spending because purchasing power decreases, savings too, due to inflation and interest rates increase. The robustness of the labor market and the stability of consumption can be explained by the aid paid by the State in a period when consumption had been limited. The measures put in place were intended to avoid a collapse of the country’s economic fabric and mass unemployment. In addition, those who have benefited from salary increases and who do not have to fear for their jobs are fueling the travel and cultural events sector with their spending. US figures on credit card debt show that these expenses are also on credit. This trend is correlated to the labor market situation which offers a lot of vacancies.

Full employment according to the figures while no one is responding to job offers.

We will find an explanation in the consequences of the health crisis. Many people have taken early retirement or have reduced their working hours. Also, observation of demographic changes shows that baby boomers are retiring, leaving a void in the labor market. We are witnessing a phenomenon that economists call labor hoarding, i.e. labor hoarding. Despite a slowing economic climate, companies are reluctant to lay off staff because if there is a recovery, finding the right people can be difficult. Initially, unemployment remains low, and consumption stable. This attitude cannot be sustainable in the sense that if there is labor retention, companies employ more staff than is economically reasonable. One solution would be to forego salary increases. Lowering wages would not be possible because it would impact productivity linked to employee morale.

Compressed profits and margins.

Too high labor costs also and above all weigh on profitability. This means that companies’ profit margins will now be under pressure, after they have been able to widen them sometimes massively during the recovery. Even U.S. analysts, who are often a little too optimistic, on average expect earnings to fall by 9 percent from a year ago. This is bad news for the stock markets. But not only. It is consumers and the economy as a whole who will be impacted by a reduction in investment for lack of profits. Layoffs will be inevitable in order to save money. In addition, the effect of the explosion in interest rates will be fully felt.

Interest rates are rising in France.

In France, the pattern is the same, even if the figures are a little less important and the average level of fixed interest rates over five years has increased « only » by 1 to 4%. But if the US enters a recession, France would feel the effects mainly through foreign trade. The future will tell if our domestic consumption will remain strong or stable enough to protect the entire French economy from a recession.

And, honestly, we know not…

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Jean-Luc GINDER Economiste

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