Economic review of 2023 and outlook for 2024: a modest, fragile recovery in France?

Slow decline in inflation against a backdrop of weaker momentum in the global economy in 2023

In 2023, the global economy suffered the negative impact of previous inflationary trends on the purchasing power of private agents. Economic activity continued to lose steam in 2023, owing to the gradual transmission of monetary tightening to the real economy on both sides of the Atlantic, the slowdown in global demand, and the weakening of international trade.

This slowdown in activity automatically triggered a gradual decline in inflation, which was more noticeable in the second half of the year, but failed to halt the rise in long-term interest rates. Nevertheless, the economy proved to be fairly resilient against a backdrop of renewed financial instability, originating in the United States, and a series of geopolitical uncertainties, ranging from the war in Ukraine to the renewed tensions in the Middle East since October 7.

2,9% The inflation rate in Europe over one year in December 2023.

As a result, although inflation remained high, it began to decline in both the United States (3.4% per annum in December, compared to 6.5% in December 2022) and in Europe (2.9% in December, compared to 9.2% in December 2022), chiefly due to the decline in the energy component.

Continuation of the monetary tightening process

The Fed (US central bank) and the European Central Bank (ECB) did not sacrifice their objective of price stability in order to preserve their goal of financial stability. Following in the Fed’s footsteps, the ECB sought to catch up with the US central bank to avoid the risk of a price-wage spiral as well as a fall in the value of the single currency against the dollar. The European Central Bank raised its three key interest rates several times in succession, finally bringing the interest rates on main refinancing operations, the marginal lending facility, and the deposit facility to 4.5%, 4.75%, and 4% respectively on September 14.

Ten-year rates on both sides of the Atlantic remained virtually stable at the high levels noted at the end of 2022 until June 2023, after rising rapidly as a result of monetary tightening and inflationary pressures. Despite peaking at 3.55% on October 28, the 10-year OAT fell sharply to 2.56% on December 29, reaching an annual average of 3% in 2023, compared with 1.7% in 2022.

+ 0.8% The increase in French growth in 2023, compared with 2.5% in 2022.

Despite weakening domestic demand, French economic growth, which was in the middle of the pack in Europe, rose by 0.8% in 2023, after 2.5% in 2022, owing to support from productive investment and a decline in imports. Consumer price inflation remained high at an annual average of 4.9%, compared with 5.2% in 2022.

A slowdown in global growth in 2024?

In 2024, global growth is expected to slow slightly to 2.7% according to the OECD, compared with 2.9% previously, with a continuing decline in inflation as a result. The economic situation should continue to suffer from sluggish trade and a decline in business and consumer confidence, against a backdrop of a downward trend in the intensity of trade and an increase in geopolitical tensions.

In addition to threats of a geopolitical nature, global economic activity and, above all, European industry are expected to remain exposed to the rise in protectionist tendencies, notably in the United States, through subsidies for the localization of a number of production activities on its territory. This slowdown, however, is expected to be much more pronounced in the eurozone than in China and, even more so, in the US, which should enjoy a soft landing.

Downward inertia in long-term rates

Key interest rates in advanced countries outside Japan peaked in 2023, after rising to historic levels. The unanswered question will be the pace of subsequent monetary easing: financial markets are anticipating a 150 basis point (bp) cut over the year for the Fed and the ECB, while the latter consider this process to be far too rapid, even if we are witnessing a reduction in inflationary pressures.

In addition, both central banks are expected to pursue the gradual reduction of their balance sheets, with the ECB also announcing that it will speed up the pace of this process from July 2024. These measures should prevent long-term yields from falling in line with the easing of key interest rates, the economic slowdown and the decline in inflation expectations, in a context where we are likely to see an increase in risk premiums on the sustainability of public debt in the United States and certain European countries, such as Italy and France.

French GDP growth of only 0.7% in 2024?

In 2024, French GDP, whose resilience is offset by very high levels of public debt, is expected to grow by only 0.7%, as in 2023 (+0.8%), owing to an unfavorable carryover effect from the second half of last year and a sluggish European economic environment.

The modest improvement in household spending, the main driver of economic activity, is then expected to be insufficient to counteract increased caution on the part of businesses in terms of employment, inventory management, and investment, despite the decline in inflation. Average inflation is expected to fall to 2.4% owing to the downward stabilization of energy prices and the continued moderation of food price increases.