Macroeconomic projections – June 2024

• Our new macroeconomic projections were finalised on 22 May 2024. Our baseline scenario remains that of a gradual exit from inflation without a recession, which should allow for a more marked recovery in 2025 and 2026.
   
• On the whole, the uncertainties surrounding this baseline scenario remain high and are balanced for economic growth and for inflation. As usual, we have adopted a no-policy-change assumption
   
• After still reaching 5.7% in annual average terms in 2023, inflation is set to fall sharply to an annual average of 2.5% in 2024, followed by 1.7% in 2025 and 2026, due to lower inflation for food, energy and manufactured goods. Services inflation is expected to fall more slowly.
   
• Economic activity is expected to continue to grow at a moderate pace in 2024, by 0.8%. However, household consumption should benefit from the recovery in purchasing power driven by the fall in inflation. In 2025 and 2026, growth should therefore strengthen to 1.2% and 1.6%, respectively, also buoyed by the recovery in private investment as interest rates ease.
   
• This forecast is based on the assumption of a significant reduction in the government deficit, to around 4% of GDP in 2026. In any case, the upcoming period of gradual recovery and monetary easing is not unfavourable to the necessary fiscal consolidation needed to bring public debt under control.
   
• We continue to forecast a lagged adjustment of employment to the economic slowdown, with only a partial recovery of past productivity losses noted since the pre-Covid period. Consequently, the unemployment rate, which is lower than initially forecast in 2024, is expected to rise temporarily in 2025, before coming down again in the wake of the upturn in activity to stand at 7.6% at end-2026.
   

These projections were finalised on 22 May 2024 and incorporate the first estimate of the first quarter 2024 national accounts published on 30 April 2024. They also incorporate final HICP (Harmonised Index of Consumer Prices) inflation figures for April, published on 15 May 2024. They are based on Eurosystem technical assumptions, for which the cut-off date is 15 May 2024. They do not take account of the detailed figures for the first quarter of 2024 and the annual national accounts published on 31 May and revised for the switch to the new 2020 base (see box for the main implications of these new figures for our projections), and especially not the latest political developments in France.

Economic activity improved at the start of 2024, with growth of 0.2% in the first quarter, in line with the Banque de France's previous Monthly Business Surveys (MBS) and it is expected to be nearly stable in the second quarter, according to the most recent survey at the beginning of June.

In annual average terms, growth is expected to be 0.8% in 2024. Information published after the cut-off date of 22 May does not lead to any change in the growth forecast for 2024. The most recent quarterly accounts suggest a favourable revision of growth carry-over for the first quarter of 2024, however this is expected to be offset by less favourable growth in the second quarter according to the latest MBS. Growth should be driven mainly by household consumption (see Chart 2), which should outpace GDP growth. Falling inflation should benefit household purchasing power and hence consumption, while the savings rate should remain at a very high level. However, we expect domestic demand to be slowed by business and household investment, which should continue to be held back by financing conditions, as well as by significant destocking. Foreign trade is expected to contribute positively to growth, despite the fact that foreign demand for French goods and services has not yet returned to its trend rate. It should benefit from strong export momentum, sustained by a partial and gradual recovery of market share, especially in the aeronautics sector.
 

In May 2024, HICP inflation stood at 2.7% year-on-year, up from 2.4% in April 2024. Core inflation (i.e. excluding energy and food) was 2.4% year-on-year in May 2024, up from 2.3% in April 2024. This slight rise in core inflation is due to the price of manufactured goods. Headline inflation has been reinforced by an increase in the year-on-year rise in energy prices, which is the mechanical consequence of the sharp fall in oil prices a year ago.

For 2024 as a whole, the monthly profile of inflation is expected to be affected by fluctuations linked to base effects from movements in energy prices observed in 2023. Aside from these fluctuations, inflation is generally expected to trend downwards, falling from 3.0% year-on-year in the first quarter of 2024, to 2.1% in the fourth quarter of 2024 (see Chart 3). This downward trend should mainly be driven by a marked drop in food and energy inflation (see Chart 4). However, core inflation is likely to be more persistent, even rising slightly over the course of the year to 2.6% in the final quarter of 2024, mainly due to communication services, where prices fell sharply in 2023, but also to rents, because of their indexation to the previous year's high inflation and the end of their capping in April 2024. Core inflation should continue to be dominated by services, due to the delayed impact of wage rises and an improvement in margins in certain sub-sectors. Moreover, we continue to factor in the inflationary impact of geopolitical tensions in the Red Sea on manufactured goods (due to higher transport costs). On an annual average basis, core inflation should therefore be 2.5%, a slight upward revision on the March projection. However, this is expected to be offset by a downward revision in food inflation, so that our headline inflation forecast remains unchanged at 2.5% for 2024 in annual average terms.
 

Wages, which have not been growing as fast as prices in recent years, began to slow down from the second half of 2023. In particular, payments of the prime de partage de la valeur (PPV – value-sharing bonus) have been lower than expected, so the average per capita wage increase at the end of 2023 was less than the increase in the monthly base wage, which excludes bonuses and overtime (see Chart 5).

After slowing sharply in 2023, salaried employment in the market sectors picked up slightly in the first quarter of 2024. We expect employment to rise again in the second quarter of 2024, owing to the employment climate as measured by the INSEE business survey. The latter has seen a slight upturn since February 2024, despite an overall downward trend throughout 2023. Compared to our March projection, these latest figures have led us to revise our short-term employment forecast upwards (see Chart 7), and thus to delay the labour market turnaround that we had previously expected to occur from the start of 2024.

In 2023, the purchasing power of household disposable income rose by just under 1%. This change in households’ real income is an average that includes all income items (including property income, income stemming from job creation, and social transfers); it may therefore differ from individual households’ own perceptions of their finances. In 2023, household income was thus supported by continuing strong job creations and high social transfers, but even more so by the rise in income from assets, which offset the fall in per capita real wages. In 2024, growth in household purchasing power (1.2%) is expected to strengthen, thanks to an increase in real wages, the impact of which should be mitigated by a smaller contribution from other income items (see Chart 9). In 2025, growth in purchasing power is expected to slow (0.5%). This slowdown can be explained by the adjustment in employment, slower growth in other income items, in particular property income, and smaller increases in social transfers as a result of measures to control public spending. In 2026, growth in purchasing power is expected to pick up (0.9%) thanks to the recovery in employment.

In 2024, business investment is likely to be penalised by relatively sluggish activity, as well as by financing costs and lending conditions. However, bank interest rates for businesses have started to decline slightly, and according to the latest results of the Bank Lending Survey (BLS), lending conditions are no longer tightening. As a result, business investment growth is likely to bottom out until mid-2024, before picking up again in 2025-26 (see Chart 11). In the future, it should be underpinned by investment in the digital and energy transitions, as evidenced by the announcements of investment in electric battery “gigafactories”. The recovery in investment should also be supported by the upturn in activity and by continued high corporate margins.

In 2023, the government balance deteriorated, falling to -5.5% of GDP after -4.8% in 2022. This surprise on the downside is mainly attributable to lower-than-expected taxes and social security contributions at the end of the year, with declines in corporation tax and real estate transfer taxes in particular. After posting very strong growth for two years, tax receipts lost momentum and increased less strongly than economic activity.

In 2024, spontaneous growth in taxes and social security contributions should remain slightly lower than that of GDP, before normalising in 2025-26. Government expenditure is expected to grow only slightly in 2024, as a result of the withdrawal of exceptional measures taken to deal with the energy crisis and the savings contained in the decree cancelling budgeted spending on 22 February.

The strictly conventional assumptions adopted regarding projected budgetary savings (by reference to the average annual growth rate of government expenditure over the previous decade) would imply a primary structural adjustment of 0.6 potential GDP points in 2025 and 2026, which is higher than the minimum adjustment of 0.5 GDP points required in the event of an excessive deficit procedure under the new European budgetary rules. However, the adjustment taken into account is smaller than that planned in the Stability Programme (1.2 GDP points in 2025, then 0.5 GDP points in 2026), which is based on savings that have not yet been detailed.

Under our assumptions, the government balance should be -5.2% in 2024, dropping to -4.8% in 2025 and reaching -4.1% in 2026. Fiscal consolidation is needed to bring the public debt under control.
 

Even more so than in our previous projections, the political context remains highly uncertain, due in particular to the recent developments in France and to geopolitical factors: the war in Ukraine and the situation in the Middle East. A worsening of these tensions could have an impact on oil and gas prices, maritime transport costs, global demand and uncertainty levels. This would pose an upside risk to inflation and a downside risk to economic activity. It should be noted, however, that oil prices have dropped sharply since the end of May, and are now well below the assumptions adopted in this projection. Still at the global level, there is also an upside risk to demand from the United States, which could turn out to be greater than in our baseline scenario, particularly in the event of prolonged fiscal expansion. Conversely, increased fragmentation of global trade could weigh on foreign demand for French goods and services.

At the domestic level, the risks to household consumption and business investment are balanced. On the one hand, we project only a partial return of the saving ratio towards its pre-Covid level by 2026. The saving ratio could decrease more rapidly, or conversely remain persistently high. On the other hand, firms will face a rising interest burden as they renew their loans at higher rates than in the past, which could generate a downside risk to our investment scenario. Conversely, thanks to their high margins, firms could invest more than expected to meet the major needs associated with the ecological and digital transitions.

The fiscal adjustment measures represent another risk to our GDP growth projection for 2025-26. In the absence of precise specifications of the measures contained in the Stability Programme, we have in fact adopted a lower strictly conventional adjustment assumption than that set out in the programme. The scale of the negative impact on growth of aligning the primary structural adjustment with that of the Stability Programme is uncertain: its estimate depends very much on the composition of the measures implemented, which may have different fiscal multipliers (effect on growth of a fiscal measure).

In addition to the geopolitical risks mentioned above, there are two specific downside and upside risks to inflation. On the one hand, the slowdown in nominal wages was more pronounced than expected at the start of 2024 and it could continue to be more marked than in our baseline scenario, which could reinforce the slowdown in services prices. On the other, we cannot rule out the possibility of another downward surprise on business productivity, which could reinforce the dynamics of unit wage costs and give rise to additional inflationary pressure.

Finally, the staging of the 2024 Olympic and Paralympic Games in Paris should lead to a rise in demand for certain goods and services, owing to the movement of athletes and sports delegations and the influx of tourists attending the competition. As the sectors concerned are mainly accommodation and food services and transport in the Île-de-France region, and for a short period only, we expect the upward impact on inflation and economic activity to be only limited in our baseline scenario. However, the scale of these increases remains uncertain and constitutes a risk to our projections.