French recession looms as cost of living crisis mounts

France is in recession as the cost of living crisis in the eurozone mounts, analysts warned last night.

The country’s national statistics agency INSEE said output fell by 0.2 per cent in the first quarter of the year – a downgrade from the stagnation that was previously reported.

Another slump is expected in the current quarter which runs from April to June – causing economists at investment bank ING to predict that France is already in a recession, defined as two consecutive quarters of shrinking output.

The grim update from across the Channel came as inflation in the eurozone hit another record high of 8.1 per cent in May, up from 7.4 per cent in April, according to the EU’s statistics body Eurostat.

In Germany, Europe’s largest economy, inflation hit 8.7 per cent last month. Soaring energy prices were the main driver, but food, alcohol and tobacco also pushed the cost of living higher.

Pressure on the European Central Bank (ECB) to begin hiking interest rates will now intensify, as the crisis threatens to spiral out of control.

Chris Beauchamp, chief market analyst at trading platform IG Group, said: ‘Betting on a surprise move next week by the ECB seems to have increased in the wake of today’s numbers, and given the problems facing the eurozone economy it might actually be the sensible move.’

Salomon Fiedler, an economist at Berenberg, added: ‘The fallout from Russia’s attack on Ukraine and continuing supply shortages, further exacerbated by lockdowns in China, have pushed up inflation far beyond the ECB’s 2 per cent target.’

While inflation has probably peaked, he said, pressure on prices would be sustained by expensive ‘green transition’ projects and falling participation in work as the population ages.

Berenberg expects the ECB to raise rates in July and September, as the central bank’s president Christine Lagarde has guided to.

But Fiedler also thinks there will be another rise in December, three more in 2023 and two in 2024. 

He said: ‘These moves will not do anything to the current inflation spike, but they can help to keep inflation expectations anchored. If expectations are de-anchored from the inflation target, a central bank’s job becomes much more difficult.’

Inflation in the UK hit 9 per cent in April, and the Bank of England has already lifted rates four times since last December in an attempt to tame red-hot prices.

The rise in the cost of living across the eurozone varied wildly country-by-country in May. In Malta, the cost of living rose by just 5.6 per cent year-on-year, but in Estonia – which has been hit particularly hard by Russia’s brutal invasion of Ukraine – inflation levelled 20.1 per cent.