Covid-19, war in Ukraine, geopolitical tensions, unprecedented drought episodes… “The moment we are experiencing may seem structured by a series of serious crises (…) and some may see our destiny as perpetually managing crises or emergencies, said Emmanuel Macron on Wednesday at the opening of the Council of Ministers.
During his speech in a serious tone, the Head of State said he believed “that what we are going through is of the order of a great turn or a great shock” in the world. Basically, we are experiencing the end of abundance, the end of free cash -we will have to draw the economic consequences-, the end of products and technologies that seemed perpetually available to us, the breakdown of value chains. The scarcity of this or that material or technology, such as water, reappears. We will have arrangements to make”, added the President of the Republic.
In the process, the high commissioner for planning, François Bayrou, said he was in the same line as Emmanuel Macron, even fearing “the most serious crisis that France has known since the war.” Catastrophism or lucidity? The future will tell. However, what is certain is that the events of the last few months are already affecting the French economy and the world economy in general. Certain signs are there to attest to this. The risk of recession is getting stronger every day.
■ World inflation
As a result of the disruptions in world trade during the post-Covid recovery and then the war in Ukraine, the general increase in prices now affects all regions of the world: 8.9% in the euro zone in July for a year , 10.1% in the United Kingdom, 8.5% in the United States, 7.8% in South Africa. Levels not seen for several decades. In Asia, inflation remains subdued but is accelerating month after month. Specifically, it stood at 2.7% in China in July and 2.3% in Japan.
Faced with sky-high prices, central banks stepped forward, albeit too late for some. To cool down the economic machinery, at the risk of seriously hampering growth, the Fed announced at the end of July its fourth rise in reference rates since March on the other side of the Atlantic. In the UK, the Bank of England has used this lever several times since December, while the ECB raised its rates for the first time in ten years a few weeks ago.
If central bank action is aimed at curbing inflation, raising key rates will not stop prices rising overnight. In France, the inflation rate is expected to approach 7% by the end of the year, compared to 6.1% today (6.8% HICP). The situation is even more worrying on the other side of the Channel, where the Bank of England expects more than 13%.
In the end, inflation should reach an average of 6.6% in developed countries this year and 9.5% in emerging countries, according to IMF forecasts. That is an upward revision of 0.9 and 0.8 points compared to the latest forecasts. The monetary institution also expects it to “remain high for longer”.
■Very high energy prices and risk of shortages in Europe
Oil, gas, electricity… Energy prices have peaked in recent months. Started in the second half of 2021 against the background of a strong recovery in the world economy, the increase intensified with the war in Ukraine. The price of European natural gas in particular has soared and has quadrupled (+315%) since the beginning of the year. On Wednesday it briefly exceeded 300 euros per megawatt hour, a level not seen since the all-time high set in March, at the start of the Russian invasion of Ukraine.
In question, Gazprom’s announcement of a complete suspension of gas supplies to Europe via Nord Stream 1 for a period of three days from August 31 to September 2. Prices were also supported by climatic conditions in Europe, between droughts and heat waves, “which caused an increase in energy demand for air cooling”, explain analysts at Societe Generale. They also cite among the bullish factors the effort by European nations to replenish their natural gas reserves before winter, an even more ambitious undertaking “with gas flows still weak through the main gas pipeline that supplies Western Europe.”
This recent price spike has also caused electricity prices to skyrocket for next year in France and Germany, missing all-time highs hit earlier in the week. From now on, the Old Continent, trying to do without Russian gas, is preparing for a difficult winter. Restrictions on energy consumption have already been put in place in several European countries to limit the risk of shortages. In France, while Emmanuel Macron spoke of the “end of abundance”, “a great plan for sobriety” will soon be presented.
■ Growth forecasts revised downwards
At the end of July, the IMF updated its growth forecasts, with a clear observation: “the world’s three largest economies (United States, China, Eurozone) are playing for time, and the consequences for the global outlook are significant.” The Washington institution thus expects global growth of 3.2% this year and 2.9% in 2023, that is, a deterioration of 0.4 and 0.7 points compared to the April forecasts.
In detail, activity in the United States should grow only 2.3% this year and 1% next. At 3.3%, Chinese growth in 2022 should be at its lowest level in more than forty years (excluding the pandemic). Finally, that of the euro zone is estimated at 2.6% this year and 1.2% in 2023.
Forecasts revised downwards that the Washington institution justifies by referring in particular to the “negative repercussions of the war in Ukraine” with “inflation stronger than expected” in the United States and Europe, as well as a slowdown “more pronounced than expected expected” in China “in the context of the Covid-19 outbreaks and lockdowns”. So much so that global production contracted in the second quarter of this year.
Added to this is the tightening of monetary policies that should accentuate the slowdown in the world economy. Even lead some countries into recession. Furthermore, even if the issue is debated across the Atlantic, the United States is already technically in a recession as the US economy has contracted for two consecutive quarters. In the UK, the Bank of England forecasts a contraction in output every quarter between the last three months of 2022 and the last three of 2023. So, “growth will remain weak”.
The euro zone continues to avoid recession. But Bruno Le Maire himself has not ruled out the possibility of a serious deterioration in activity in the coming months: “Everything will depend on Vladimir Putin’s decisions on gas. If he ever decides to cut gas to the EU and the euro zone , we estimate the impact on growth, only for France, at half a point of GDP, and probably more for other economies more dependent on Russian gas than we are,” the economy minister told France 5 on Wednesday. “It is about the issue of Russian gas that part of the growth in Europe will be at stake in the coming months,” he added.
In France, growth picked up stronger than expected in the second quarter, to +0.5%. But this relative improvement is explained in part by the return of foreign tourists, while household consumption continued to fall. The signs for the French economy in the coming months are not encouraging either.
Witness the latest PMI indices released by S&P Global. Ces indices constituent des indicators avancés de l’activité du secteur privé, c’est-à-dire qu’ils prennent le pouls de l’économie avant la fin d’une période donnée, en sondant les avis des directeurs d’achat des big companies.
The latest PMI indices for France, released on Wednesday, turned out to be gloomy. In August, the PMI composite index, which includes activity in services and manufacturing, fell to its lowest level in 18 months at 49.8. An indicator below 50 in a given month means that activity has contracted. “The end of 2022 promises to be difficult for European economies and France is no exception,” warned Joe Hayes, an economist at S&P Global Intelligence.
The figures for the eurozone as a whole are no better. The August composite PMI for the euro zone fell to an 18-month low also for the euro zone, at 49.2. Barclays Bank economists, however, point out that France was the country that suffered the greatest deterioration in August. Given these indicators, the British establishment confirmed that it was expecting a recession in the euro zone in the second half of the year.
■ Risk of food crisis
On Wednesday, the World Food Program (WFP) warned of the dramatic increase in the number of people facing acute food insecurity since the Covid-19 crisis. It would be 345 million today, against 135 million three years ago.
A jump linked to the consequences of the pandemic, climate change (droughts, floods) and the war in Ukraine that is driving up world food prices and slowing down exports to countries in Africa and the Middle East.
Source: BFM TV
