France's economy has contracted over the first quarter under the impact of soaring inflation, increasing the risk for President Emmanuel Macron in key legislative elections that get underway in less than two weeks' time.
According to a data report released by the French statistics office INSEE this Tuesday, the French economy shrank by 0.2 percent from the previous quarter, in stark contrast to last year's strong 6.8 percent recovery as the Covid pandemic eased.
Russia's invasion of Ukraine has derailed growth across Europe, sparking inflationary pressures that are prompting consumers to hold back on purchases of all kinds, which is a crucial motor for the France's economic well-being.
Household spending power dropped 1.9 percent in the first three months of 2022, and price increases have only accelerated since then, with inflation hitting 5.2 percent in May.
This is the first time prices have crossed the five percent threshold since 1985.
The grim data comes as President Macron - who won re-election in April promising to defend spending power - is hoping to secure a majority for his re-branded Renaissance party in parliamentary elections beginning on 12 June.
His new government under Prime Minister Elisabeth Borne has vowed "food cheques" for needy households, pension increases and higher social subsidies - measures that will not be implemented until after the vote.
His detractors on the left and right maintain that the former investment banker fails to fully appreciate the daily budget worries of the electorate, and are promising more concrete measures to lift incomes against the inflation threat.
🇫🇷 - Les prix continuent à augmenter en France. Selon l'estimation publiée par l'Insee ce mardi, l'inflation a continué à accélérer en mai, pour atteindre 5,2% sur un an. La barre des 5% d'inflation n'avait pas été atteinte depuis septembre 1985. pic.twitter.com/RPoB0sXvpT
— INFO Roubaix (@InfoRoubaix_) May 31, 2022
Looming energy crisis
INSEE expects the economy to edge up by just 0.25 percent in the second quarter of 2022, but fuel and food prices have rocketed as Europeans prepare a ban on Russian oil imports, and the halt of Ukraine's grain exports stoke worries of food shortages that have shaken global markets.
Food prices climbed 4.2 percent in May while energy prices jumped 28 percent year-on-year, which is a brutal shock for the millions of French living in smaller cities and rural areas who depend heavily on their cars.
High petrol costs were main factor behind the fiery Yellow Vest revolt against Macron's government in 2018 and 2019, which saw him cut taxes and lift wages for the lowest workers in a string of fiscal concessions.
- Inflation on the rise in France, driven by rising cost of food and energy
- French economy flatlines, growth falls to zero in first quarter
Bleak outlook in Eurozone
However, inflation in France is not as bad as in neighbouring eurozone countries, with Germany reporting a record high of 7.9 percent while Spanish inflation jumped to 8.7 percent in May.
This is the highest rise in German inflation for nearly 50 years, also coming on the back of soaring energy and food prices.
The data coming out of the European Union's largest economy strengthens the case for a big, half a percentage point European Central Bank interest rate hike in July.
The last time inflation was at this level was the winter of 1973/1974, when the first oil crisis led to an entrenched inflationary cycle.
Although the ECB has responded to soaring prices relatively late, the bank made clear last week that interest rates must go up to stop high inflation from getting entrenched.
Now the question is the size of its upcoming moves.
While ECB president Christine Lagarde and chief economist Philip Lane made the case for gradual, 25 basis point (bp) hikes over July and September, some economists say a bigger, 50 basis point increase could be a possibility.
According to ING Economist Carsten Brzeski: "The ECB has clearly passed the stage of discussing whether and even when policy rates should be increased.
"The only discussion seems to be on whether the ECB should start with a 25bp rate hike in July or 50bp."
