Ukrainian War: Stagflation, this threat rests on the French economy

Since Russia’s invasion of Ukraine, the threat has posed to France. And it’s not just that of a more head-on confrontation with Putin. Dangerous economic cocktails, a mixture of stunting and runaway prices, are pervading the economy. “It has a name: stagflation. This is exactly what we don’t want to experience again in 2022,” recently worried Minister of Economy Bruno Le Mer. Unrealistic horror. In mid-March, the Bank of France released its economic forecast for the year. In the first scenario, the most optimistic growth reaches a good 3.4% and inflation rises to 3.7%. But second and far more worrisome, gross domestic product (GDP) stagnates at 2.8% and prices rise 4.4% …

The Minister of Economy is not the only one to warn against this threat. Since the invasion of Ukraine by Russian troops, more and more economists have warned. “Unfortunately, this scenario is the most valid,” worries Eric Doll, director of economic research at IESEG.

But this old concept seemed to be reserved for economic history textbooks. Introduced in the UK in the 1960s, stagflation is a portmanteau that combines “stagnation” and “inflation” and spread to developed countries after the 1973 oil crisis caused barrel prices to skyrocket. The shock then plunged the economy into a vicious spiral that mixed uninterrupted label waltz with a continuous increase in the unemployed line.

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The “economic anomaly” of the 1970s that shattered postwar economic theory. The latter had previously assumed that inflation and unemployment could not coexist. “In the thirties of glory, when prices fell, the government took advantage of austerity,” recalls Laurent Wallusette, a professor of history and book author at the University of Sorbonne. Europe vs Europe.Between freedom, solidarity and power (CNRS edition). The unemployment rate was so low that we could afford to see the unemployment rate rise slightly. ”

Recipes that are more difficult to apply socially when the number of job seekers is already increasing due to the crisis … itself cannot be cured by stimulating activity policies and money on the fire of inflation There is a risk of throwing away! !! Ten years after rising prices and rising unemployment, this vicious cycle was nevertheless broken by a sharp rise in central bank interest rates, austerity and the deindexing of wages against inflation. It was the beginning of a new era in which globalization, digitization, and weakening of unions are gradually boosting inflationary anxiety.

Price spike spread

Covid’s pandemic has begun to turn things around. For several months, France suddenly rediscovered the label waltz. But so far, political leaders and economists have said that choruses control everything. This price increase was closely linked to a vigorous recovery, which was only “temporary.”

However, the eruption of the conflict between Russia and Ukraine has fueled the fire, causing an explosion in raw material prices. Gas, oil, wheat, nickel … outbreaks that pollute the entire production chain, from fertilizers to pasta, including meat and building materials. For example, in the cosmetics sector, “rising energy prices will have a major impact on glass makers who use gas ovens to make perfume bottles,” explains Emmanuel Guichard, president of the federal beauty company. ..

In the sector with the weakest margins, these cannot be gnawed indefinitely. “Home helper mileage allowances have been raised to compensate for rising fuel prices, forcing them to raise prices,” emphasizes Brice Alzon, CEO of Coviva, a network of institutions specializing in personal services. increase. .. If the epidemic returns to China, it could be fatal, disrupting world trade again and further increasing transportation costs.

“If the route is blocked, you won’t even be able to pass through some of the existing rail corridors, because they all pass through Russia,” said Alexandre Vienney, partner in charge of the distributor division of bp2r. Explains. As a result, inflation, which already reached 3.6% in February, should strengthen in the coming weeks. The latest economic report predicts that INSEE will surge to 4.5% in the second quarter.

Rising prices that are expensive for households. Rising fuel prices could open a € 550 hole in this year’s budget, according to a study by Asterès. Not to mention the other increases expected at checkout, according to INSEE … As a result, their purchasing power should decline by at least 0.9% this year. In the most modest cases, the shock is exacerbated, especially as the room for maneuvering is already well underway. Forty-four percent of French with a monthly income of less than 2,000 euros have already given up heating and 36% have been forced to skip meals. , According to a recent Ifop / Finfrog study. Riadh Alimi, founder of Finfrog, said:

Obstruction that can spread

Controlling consumption due to lower purchasing power, uncertainty leading to postponement of manufacturers’ investment projects, increased costs, supply problems that have already shut down certain industrial lands, external demand can also be affected … Mention companies directly affected by the conflict between Russia and Ukraine. “These two countries make up about 40% of our exports. All have been suspended in Ukraine and Russian orders are currently blocked,” said the Panther Group, which sells cottage brands in particular. CEO Antoine Madrid is in despair.

Overall, all these factors weigh on economic growth. INSEE estimates that this year it will be able to reduce GDP by one point. “It’s a simple slowdown in growth, but if Russia’s gas reduction scenario comes true, it could turn into a plunge,” said Patrick Artus, chief economist at Natixis.

Therefore, the worst has not yet been identified. Victor Requillerie, an economist at BSI Economics, said: “But everything will depend on the duration of the conflict,” adds Sylvain Bersinger, an economist at the Asterès company. If that continues and it takes too long for prices to rise, agents will have more employees. They may start acting to demand higher wages, corporate selling prices will rise and it will be difficult to break inflation. ”

Resilience plans announced by the government on Wednesday, March 16 include, among other things, a 15 cent discount on fuel, assistance to energy-intensive and exporters, and sectoral assistance to fishermen and breeders. -We need to be able to limit damage a bit by mitigating the loss of household purchasing power and helping the most affected businesses overcome air pockets. “But these measures also carry the risk of maintaining the momentum of rising prices by supporting demand in times of supply shock, and after all, the risk is that finances follow further. You can’t do that, “says Economics at Rexecode.

Above all, it says nothing that these are enough to reduce the social anger that is starting to ring. Blockages in oil depots can spread and multiply. And it forces the government to water a little more and therefore … keep inflation. Remember all the other embers that could keep prices soaring: a boost given to the desire for energy conversion and relocation, a pandemic rebound, or if you decide to support Moscow a little openly. Possibility of sanctions against China …

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In Frankfurt, the European Central Bank is monitoring the situation with concern. “Unless we are ready to crush demand and fuel recessionary forces, we cannot counter this inflationary shock,” explains Eric Doe. But at the same time, trust must not be lost and prices will rise. A coat of arms that can be complicated in the event of a warning about debt in one of the eurozone states, especially Italy, a weak link forever … If stagflation is not yet installed, the area of ​​turbulence I’m not so worried.


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