Q4 2022 saw continued inflation, counterbalanced by an improved economic outlook thanks to a higher-than-expected GDP growth at the end of the year and lower inflation expectations going forward. Nevertheless, although lower, the risk of recession remains a concern

• Inflation in the Euro Area decreased to 9.2% at the end of Q4 2022 (-70bps since Q3), while inflation forecasts decreased to 5.6% for 2023 (-50bps vs Q3 forecast) and 2.5% for 2024 (-10bps). In comparison, inflation in France reached 5.9% at the end of Q4 2022, a slight increase from last quarter (+30bps) and is forecasted to be 5.2% in 2023 (+80bps) and 2.5% in 2024 (+30bps)^[1]. While the French Government’s willingness to subsidise electricity and gas bills has limited inflation so far, a partial easement of these subsidies in 2023 is expected to increase inflationary pressures in France.

• Despite a slowdown in Q4 2022, the Euro Area finished 2022 with an annual GDP growth of 3.5% (+30bps vs Q3 forecast). Looking forward, GDP is forecasted to grow by 0.9% in 2023 (+60bps) and 1.5% in 2024 (±0bps). In France, GDP grew by 2.6% in 2022, in line with Q3 forecasts, and is expected to grow by 0.6% in 2023 (+20bps) and 1.4% in 2024 (-10bps)[1]. The Banque de France is forecasting a base case with no recession and, in their own words, a “limited and temporary” recession in a downside scenario.

In its ongoing fight against inflation, the European Central Bank (ECB) has raised deposit rates twice during the quarter, bringing Euro deposit rates to 2.0% at year-end (+125bps since Q3). Since the beginning of the year, the ECB further increased rates by 50bps to 2.5% and is expected to raise them to 3.25% by year-end. Interest rates are expected to remain above 2.5% until 2025[2].

[1] Source: European Commission

[2] Source: Bloomberg