The narrative has become more and more doxic or even dogma: after the sudden but exogenous collapse of our economies caused by the Covid shock, the necessary recovery fueled by cash morphine should guarantee us years of good growth. Today it is clear that the signs of this artificial intellectual construction being hacked are multiplying. First, because the iron law of economic cycles has never disappeared. They were the sorcerer’s disciples of central banks and governments who were too quick to hide their imperfections, who tried to hide it. However, France, for example, had zero growth in the last quarter of 2019, and even negative growth in early 2020: a cyclical recession should have hit it in the spring of 2020; the divine surprise of Covid made it possible to disguise it with exogenous contraction and then promise years of easy growth. Secondly, it was morphine itself (monetary and then fiscal policy) that hid in itself a worse evil than the first, covered up by morphine: uncontrolled inflation, which anesthetizes the real impact of post-COVID growth and promises to gradually force us back to the previous state. a general slowdown (due to the rise in prices itself, but also its consequences, the necessary increase in rates to normalize social discontent, etc.).
s The United States started with bad news, with quarterly growth down 0.4% (compared to +1.7% qoq at the end of 2021, even if inventories explain almost all of the weak performance), despite good news on the consumer front. . The latter appears to be resisting inflationary pressures for the moment thanks to higher wages. This leads some economists to say that the United States will face endogenous inflation, while Europe will find itself in a more difficult situation due to inflation that is largely internal, coming from outside. This argument seems to us to be erroneous, because in both cases, inflation is mainly of monetary origin. The only benefit to the United States is that the Fed realized its mistake and started raising its interest rates. The Fed appears determined to change its monetary support, even if it means risking a technical recession, to kill the inflationary hydra (which we think is the right thing to do, better two quarters of slowdown than two or three years of stagflation). Moreover, the U.S. economy, particularly dynamic on the ground, with initial growth potential of 4% in 2022 and 3% in 2023, can afford to slow down and absorb the shock of fighting inflation. If a recession in 2023 seems inevitable due to rate hikes, it can still be avoided if monetary normalization is well orchestrated and the consumer holds out.
This is not the case in France and even in Europe in a broad sense. Our economy experienced zero growth and negative growth excluding inventories in the first quarter, with inflation at 4.8%. We lag other European economies in inflation (but this may be due to differences in the structure of the real estate market or our lagging economic cycle), but also in growth (the euro area rose by 0.2% in the first trimester). While the first quarter is traditionally the least contributor to growth, economists had expected +0.3% growth, in line with the government’s 3.5-4% growth assumption for its budget. Although this budget was adopted on the basis of a 5% deficit to GDP, we dare not imagine where a growth correction will take us in 2022. There was a lot of discussion about the acquis of growth, that is, the minimum growth, even if our economy no longer had any potential for this year. INSEE set it at 2.4% in March due to the strong impact of 2021, but this statistic is subject to revision. Ultimately, it will be difficult for France to earn more than this figure if inflation continues in Europe (and rates are not expected to rise until autumn) and if energy embargoes materialize in a war.
However, in Europe itself, inflation takes a new, unmanageable turn, which I would call the “bad student” effect: without normalizing its situation, Europe plays against its own currency (capital goes to safer higher incomes, therefore, necessarily on the American 10-year 3% more than the French 10-year by 1.3%), and the devaluation of the euro retroactively contributes to inflation through energy products (gas, oil) and food products, whose international markets are denominated in US dollars. In six months, our euro, which rose from $1.20 to $1.05, significantly increased the price of these products for the French consumer, above normal inflation. Thus, we can expect France to join the group of countries with inflation around 7-8% this summer, even though growth is slowing down. The ECB is checkmated before the game, and Ms Lagarde will have to back down for the second half of the year.
It is business investments that still support our French economy, but the consumer, after an orgy of purchases (in particular, real estate) in 2021, is stalling this 2022: consumption fell by 1.3% in the first quarter, but spending on groceries nutrition by 2.5%. For some, the big question remains the evolution of wages (will they finally have time to catch up with inflation, as in the US?) or even government measures to support purchasing power (a package of measures is being prepared for this summer). We are convinced that this will only keep the price-wage loop (thereby propping up inflation), further put public finances at risk if future interest rate hikes are too sudden, and fail to solve the social problems of the French people (especially the Corps). The key to the problem lies in Frankfurt and on the side of Ms. Lagarde: the policy of arsonists and easy money, without regard to real GDP, must end. We are not preparing for the future, making the energy transition and shaping the post-coronavirus world as promised, but simply fueling the crazy speculation that has destroyed our real economy.
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