The French economy was able to keep growing for a large part of 2022 despite a number of challenges tied to Russia’s invasion of Ukraine, supply chain disruptions, and elevated energy prices. A new report from Goldman Sachs Research predicts the country will experience a period of weakness but narrowly avert a recession.
Whether the actual results are better or worse than that depends on three themes the GS researchers say they will be watching in the months ahead:
Energy and the economy
France is less exposed than other European countries to the continent’s energy crisis because its economic growth is less reliant on industrial production for growth (and, thus, gas) and is not as dependent on Russia for the gas that it needs. Also, the government has capped energy prices, among other measures, to shore up expenditures at a time when employment is expanding and wage growth is robust.
“The natural hedge of a diversified economy, lower exposure to gas and strong fiscal support,” underlie the authors’ view for France to outperform its European peers.
The risks to that outlook are two-sided. On the upside, Goldman Sachs researchers say they might see more resilience stemming from bigger moves away from expensive energy inputs than they assumed in their forecasts. On the other hand, delays in the ramp-up of nuclear production could mean slower growth due to higher-than-expected energy prices.
Consumer inflation in France was among the lowest of the EU countries in 2022, due in part to targeted fiscal support. But as 2023 arrives, several factors are skewing inflation risks to the upside. For one, those energy price caps that proved so effective last year in limiting gas and electricity inflation are set to increase by 15% in January and February, respectively. Those higher caps will only affect regulated contracts, which make up about two-thirds of electricity contracts and one-fourth of gas contracts for household consumption. In addition, January also brings a 1.8% increase in the minimum wage, impacting about 15% of the country’s labor force.
“These factors are likely to put upward pressure on the prices paid by consumers for services and energy and could, in that sense, make French inflation in 2023 more similar to that of European peers than in 2022,” the authors write.
France’s government is “walking a narrow fiscal path” with steps taken (or not) in the coming year that could "catalyze a re-focusing of investors on French fiscal issues,” the researchers write.
For starters, the report notes that the government’s budget embeds growth expectations of 1.0% for 2023, which is currently above consensus. The way the government reacts to consumer inflation could lead to a larger primary deficit if price growth surprises to the upside.
In addition, the government just presented its proposal to reform the pension system – and a failure to reach agreement with opposition parties and unions could trigger larger borrowing needs. The researchers also note that they’ll be watching the reaction of center-right factions to the new leadership and the unity of the left coalition – as well potential negotiations to reform European fiscal rules.
Finally, the French government could face pushback from the European Commission and other member states on the European Council on its above-consensus growth projections at the European level. Those parties could force it to downgrade those projections and plan for more aggressive efforts to address debt accumulation.