STAGNATION OF ACTIVITY AND PERSISTENT INFLATION

The economy will slow down sharply in 2023 due to sluggish domestic demand in the context of persistent inflation. While the cap on gas and electricity price increases (energy shield) enabled the country to post the lowest inflation of the European Union over the whole of 2022, the lifting of the fuel rebate and the 15% increase in electricity and gas tariffs on 1 January 2023 will drive inflationary pressures, which will only ease in the second half of the year. As wage increases (+3.7% y/y in the third quarter of 2022) and support measures (fuel vouchers, indexation of the income tax scale to inflation, automatic revaluation of the minimum wage) will not fully offset the rise in prices, households will see their purchasing power decline. In an uncertain environment conducive to precautionary savings, household consumption will thus come to a halt. At the same time, households will reduce their investment in real estate due to the sharp rise in interest rates. The tightening of financing conditions will also have a considerable impact on companies, which will have to cope with lower demand, even though their production costs will continue to rise (acceleration of wages, gradual expiry of fixed-rate energy contracts, and repayment of state-guaranteed loans). Under these conditions, corporate margins and cash flow will be under pressure despite an apparent slowdown in investment and hiring. Business insolvencies, which began to rebound in 2022 after two years of historically low figures, will continue to rise and probably exceed their pre-pandemic level in 2023. While the import increase will be limited by sluggish domestic demand, exports will be hampered by the stagnation of activity in the central partner countries. The contribution of foreign trade is therefore expected to be zero.

PUBLIC DEFICIT STILL HIGH DUE TO SUPPORT MEASURES

The public deficit will remain high in 2023 after a sharp increase due to the pandemic and measures taken to deal with the consequences of the war in Ukraine. The increase in tax revenue rendered possible taxing profits generated by producers when they sell electricity above a specific price according to the technology (EUR 11 billion, or 0.4% of GDP) should remain lower than the increase in expenditure. The continuation of anti-inflation measures will drive the latter, the cost of which will increase a little more (EUR 60 billion), and by wage increases for civil servants, in line with high inflation. At the same time, the interest burden will continue to grow due to interest rates and inflation. Public debt will therefore remain very high, and its sustainability will be one of the main challenges in the medium term.

The current account deficit will remain high in 2023 due to a high energy bill. This will continue to significantly contribute to the deficit in the balance of goods (5% of GDP in the first nine months of 2022). The surplus of the services balance (2.3% of GDP), historically high in 2022 thanks to the recovery of tourism and maritime transport, whose freight rates reached records before falling back at the end of the year, should reduce in 2023. The current account deficit is mainly financed by debt issues or, to a lesser extent, by listed shares purchased by non-residents. At the end of 2021, non-residents held 48% of the securities issued by government administrations and more than half those issued by non-financial companies (57%) and French banks (69%).

WITHOUT AN ABSOLUTE MAJORITY FOR PRESIDENT MACRON, THE RISK OF POLITICAL INSTABILITY IS HIGH

In power since 2017, President Macron of the center-liberal La République En Marche (LaREM) party was re-elected in April 2022. Although he won again against Marine Le Pen of the far-right Rassemblement National (RN), the second-round score this time was much closer (58.5%-41.5%, compared to 66%-34% in 2017). In the legislative elections two months later, his party won only 170 out of 577 seats in the National Assembly. Allying with two other center-right parties that can only muster 250 seats, the government will be forced to negotiate agreements on each reform or pass bills without a vote in the National Assembly and expose itself to the possibility of a motion of censure. The two main opposition forces are the RN (88 MPs) and the left-wing alliance NUPES (149 seats, including 74 for the far-left party LFI). Both parties tabled numerous motions of censure against the government at the end of 2022 and, as such, Les Républicains (right-wing, 62 seats) will have a central role in approving reforms and also in ensuring the continuity of the government in case of new motions of censure (so far constantly rejected). President Macron may dissolve the National Assembly and call for fresh legislative elections if the government cannot pass specific reforms. In this situation of no absolute majority for the President of the Republic, the risk of political and social instability increases, and no scenario can be ruled out.