“The probability of a recession in 2022 is far from negligible in Europe”, Philippe Waechter

THE GALERY- INSEE is coming to confirm its first estimate of inflation in March at 4.5%. Does this increase surprise you?

PHILIPPE WAECHTER No, this increase is common to many European countries. In the euro zone, Italy, Spain and Germany also registered a significant acceleration in inflation in March. This acceleration is largely due to the very sharp rise in energy prices. In detail, we see that the price of energy rose strongly again in March. However, France is slightly behind compared to other countries due to the government energy shield it protects.

According to INSEE, this shield makes it possible to limit inflation to around 1.5%. This is a factor that plays favorably in the short term. Play less with gasoline than with gas or electricity. Since Russia entered the war in Ukraine, energy prices have risen sharply. The March figures mark an increase between 60% and 100% compared to the 2021 average. It is a pretty brutal increase.

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What can we expect in the coming weeks?

We cannot assume that energy prices will fall spontaneously. For At the level of the euro zone, if the price of a barrel remains at 102 euros as in March throughout 2022, the contribution of energy to inflation will be very strong in the coming months.

In the euro zone, the contribution of energy at the end of the year should be around 2%. There are still many uncertainties at the diplomatic level and Europe’s strategy on Russian gas.

Could the energy price shock cause a recession in Europe and France?

If we put the current energy shock in historical perspective, the price of a barrel of oil is at a very high level. The price of a barrel in constant euros is much higher than during the two oil crises of the 1970s. When there is an energy crisis linked to a sharp acceleration in energy prices, there is usually a recession behind it. This energy shock forces all economic actors to arbitrate their expenses. Households have to choose between fuels and other goods. Those who depend on the car will be penalized in their consumption. Companies are forced to pay more for their energy. It forces them to make decisions. This situation changes the allocation of resources. It is a destabilizing factor in the economic situation.

Also, when there is such an increase in energy prices, the energy bills increase significantly. There is a transfer of income to oil-producing countries. These incomes will not return spontaneously. Europeans are forced to adjust their budget to this oil bill. The demand directed at companies is necessarily lower.

The probability of a recession in 2022 is far from negligible in Europe and in France. This does not mean that the activity will collapse quickly. The probability of activity close to zero in Europe and France is far from zero. The energy shock can have a systematic character.

The considerably darkened economic horizon with Russia’s invasion of Ukraine complicates the ECB’s task. What room for maneuver does its president Christine Lagarde have?

The European Central Bank does not have much room for manoeuvre. The main objective of the ECB remains inflation. It is currently at 7.5% in March in the euro zone. When observing the contributions of the different items, energy and food contribute 5.5%. The contribution of energy and food is much higher than that of goods and services. The ECB cannot control the production of oil or gas. This situation is binding for the ECB. In the United States, the contribution of goods and services to inflation is very high compared to that of energy. The Federal Reserve can act more easily.

In Europe, acting on behavior means taking the risk of acting on activity without weighing on inflation. Christine Lagarde wants to weigh on inflation. The ECB will probably raise its rates in September and December. For now, her speech tends to show that current inflation should not be in the minds of all economic actors and that not all integrate the idea that inflation is persistent. She must harden her tone to avoid persistent inflation. At the same time, she called on governments to have accommodative policies to sustain demand. The biggest drama for central banks is the persistence of inflation.

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