French central bank cuts growth outlook, sees higher inflation

© Reuters. FILE PHOTO: A book seller prepares her stall along the edge of The Seine in Paris, France, May 30, 2022. REUTERS/Kevin Coombs

PARIS (Reuters) – France’s economy will slow more than expected this year due to the current energy price shock, while inflation will climb higher than previously expected, the central bank said on Tuesday.

The euro zone’s second-biggest economy was set to grow 2.3% this year, before slowing to 1.2% in 2023 and picking up to 1.7% in 2024 as the impact of the crisis subsided, the Bank of France said in its quarterly outlook.

The Ukraine crisis and the surge in energy prices have made for a darker and more uncertain outlook in since the central bank’s last forecasts in March, when it saw growth of 3.4% this year, 2.0% in 2023 and 1.4% in 2024.

The central bank estimated that the fallout from the war in Ukraine would cost France’s economy the equivalent of 2 percentage points of gross domestic product over 2022-2024.

If European countries put an embargo on Russian gas, France’s economy was seen growing only 1.5% this year followed by a contraction of 1.3% in 2023, before returning to growth in 2024 with a rate of 1.3%.

Judging that scenario to be “less likely”, Bank of France Governor Francois Villeroy de Galhau told Le Figaro newspaper that, so far, economic activity was proving resilient as household consumption and business investment were holding up.

Although France had a lower inflation rate than elsewhere in the euro zone, he said it was nonetheless too high and would likely only start to fall at the start of next year.

“The increase in inflation is not only in energy but is also spreading to other sectors. Monetary policy needs to take action,” Villeroy said.

The central bank forecast that French inflation would average 5.6% this year before falling to 3.4% in 2023 and easing to just below the European Central Bank’s 2% target in 2024.

In March, it had forecast inflation of 3.7% this year, 1.9% in 2023 and 1.7% in 2024.