Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Chart of the Week : France’s recession is right around the corner
Christopher Dembik
Head of Macro Analysis
Summary: According to a Bloomberg poll released today, economists see an 80 % chance of a recession in the euro area in the next twelve months. In the same poll, more than half consider a second 75 basis-point rate hike is likely at the European Central Bank’s meeting in October. But some eurozone countries will navigate better in a recessionary environment than others. We expect France to be one of the most resilient euro area countries in 2023.
Click to download this week's full edition of MacroChartmania composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.
No recession, really ?
In mid-September, France's Minister of Economy, Bruno Le Maire, denied the risk of a recession in France in 2023. The French government targets a GDP growth at 2.5 % this year (prior estimate at 2.7 %). This makes sense based on the most up-to-date data. The 2023 GDP growth has been revised downward at 1 % versus prior estimate at 1.3 %. This is overly optimistic, in our view. When we look at the INSEE business climate indicator and its main components, the economic slowdown is obvious (with the exception of the construction sector) – see below chart. The slowdown will accelerate in the coming months and could cause a recession. Last week, Barclays was the first international bank to forecast a recession in 2023 for France (GDP contraction of -0.7 %). This is our baseline too (GDP forecast at -0.2 %). A few days ago, the Bank of France published its three main scenarios for the French economy next year. A recession is one of them (expected drop in GDP of -0.5 %). The forecasts for 2023 range from +1 % to -0.7 %. This shows the high level of uncertainty regarding the trajectory of the economy next year. The forecasts will likely be adjusted more often than usual in order to reflect the evolution of the energy crisis in Europe and the risk of energy rationing.What really matters is the depth of the recession
In the case of France, we are optimistic. The recession is unlikely to be deep and long. The Bank of England forecasts a contraction in UK GDP of minus 2.1 % next year. There is a broad consensus that the recession will be massive in Germany due to the reliance on Russian gas and the exit from nuclear power. In its economic bulletin of September, the Bundesbank is forecasting a deep recession : « Economic output is likely to decline noticeably in the fourth quarter [ following a slight contraction in Q3 ]. This should also be the case in the first quarter of next year ». That won’t happen in France. The expected drop in GDP will be lower than in most other European countries for three main reasons :1) Generous automatic stabilizers (despite the introduction of a less generous unemployment insurance reform in 2019 which reduced insurance payouts for high earners and required people to work for longer before claiming benefits) ;
2) An healthy labor market (the rate of activity among people aged between 15 and 64 years old is at an all-time high at 73.5 % - this is the best indicator to assess the real state of the labor market);
3) With the exception of Germany, no other European government has been so spent so much to mitigate inflation and higher energy prices. The French government has done everything it can to accommodate households and companies (cap on energy prices and rent increases, higher pension, higher salary for civil servants etc.). According to our estimate, the total amount allocated to fight inflation already reaches more than €60bn. This includes €44bn already spent from September 2021 to August 2022 and about €17-18bn for the announced extension of several measures going into 2023. This will certainly increase more in the coming months. The « Whatever it costs », which started in 2020, is not over yet. For the sake of comparison, the stimulus plan to mitigate the economic effects of the Covid amounted to €100bn. France’s total anti-inflation will likely be close to this amount by the end of 2023, in our view. This raises questions about the level of public debt as a percentage of GDP. But this is certainly a necessary step to avoid a deep and long recession like in several of our European counterparts.
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