PARIS: The French economy is set to emerge from the Covid pandemic with inflation significantly closer to 2%, something monetary authorities had unsuccessfully battled to achieve since the global financial crisis more than a decade ago.

According to updated forecasts from the country’s central bank, consumer price growth will settle at around 1.5% in 2023 and 2024, after the effect of surging energy prices tails off next year.

Stripping out energy and food, the rate in the eurozone’s second largest economy would be 1.7% in those two years compared to around 0.7% in the seven years preceding the pandemic.

“The return toward normal in 2023 and 2024 would not be a return to the situation between 2013 and 2019, characterised by inflation that was too weak,” Bank of France governor Francois Villeroy de Galhau said in an interview with Les Echos newspaper.

“On the contrary, we could get back to a better balanced inflation regime, like before the 2008 financial crisis, with inflation around 2% on average in the eurozone.”

The reassessment of price dynamics in the currency bloc has given policy makers at the European Central Bank (ECB) more leeway to plot a course out of exceptional monetary stimulus.

That began last week with the announcement of an end of net asset purchases under the emergency programme - known as PEPP - and a temporary boost to regular bond buying to smooth the exit.

Yet Villeroy said the “optionality” the ECB included in its decisions still gives it the means to quickly change its stance depending on real data.

“It’s close and pragmatic piloting,” Villeroy said. “We have a firm hand, but it is still a free hand.”

In its inflation outlook, the Bank of France said strengthening labour markets and a narrowing of the output gap will drive a clear advance in wages and services prices over its forecast horizon.

Rises in manufactured goods prices will, however, contribute less to inflation than in recent months, it said.

The central bank cautioned that uncertainty surrounding its forecasts “remains high.” In the short term, the inflation hump could go on for longer, while the longer term trend will depend on the interaction between wages and services prices, it said.

The French economy has outperformed major European peers in its recovery from the slump during the Covid pandemic, reaching pre-crisis levels of output in the third quarter of this year.

The Bank of France raised its 2021 growth projection to 6.7% from 6.3% and said that industrial supply shortages and the latest wave of Covid infections would only temporarily disrupt the trend. It predicts growth at 3.6% in 2022 and 2.2% in 2023.

“Over recent months, the French economy has shown its capacity to adapt to the context of the pandemic,” the Bank of France said.

In 2024, however, the central bank expects economic growth to fall back to 1.4%. To boost that rate, Villeroy called for more economic reforms to make work more attractive, improve education and training and overhaul the pension system.

“We will rediscover a structural challenge for the French economy: potential growth that is too weak,” Villeroy said. “It’s clearly insufficient.”

 

 - Bloomberg