Is France The Next Economic Crisis?
Low Inflation Is Flirting With Deflation. "Japanification" Next?
The latest inflation figures from France are surprising—and not necessarily in a good way.
Deflation is always problematic for any country’s economy, but when that deflation stands at odds with one’s neighbors in a highly integrated economic region, the probability of a significant imbalance is raised, as is the likelihood of a major dislocation event to resolve that imbalance.
The latest preliminary inflation figures from France posted an unexpected decline, to 0.7% year on year.
Low inflation is generally cause for celebration, but France’s inflation rate is less than half of the Euro Area rate overall, which has most recently printed at 2.2% year on year. France is at less than half the inflation rate of the European Union, as well as EU ally/competitor (“frenemy”?) Germany.
Even Spain and Italy are showing greater price stability than France at the moment.
The United Kingdom is showing signs that inflation is actually heating up.
While Germany has long been Europe’s industrial epicenter and exporting powerhouse, of the major European economies France is the one which stands as the greatest economic outlier.
With inflation trending lower and lower in France, the possibility that France is on the verge of slipping into a deflationary cycle is growing. With deflation there is always the specter of “Japanification”—an extended period of deflation and economic stagnation which drains all semblance of economic vitality from a nation’s economy.
Europe as a whole has been facing the prospect of long-term de-industrialization as a result of sanctions on Russia and general economic warfare with Russia after the latter’s invasion of Ukraine.
At the end of 2024, it was clear that the effects of economic warfare on Europe have been quite damaging.
Now France may be flirting with deflation—the next logical phase in an extended pattern of de-industrialization as a result of the war in Ukraine.
Interestingly, Europe’s sudden interest in re-armament has not prevented declines in manufactured items or all types, and this is proving especially true in France.
Is France leading Europe (and perhaps the world) into the next great economic crisis?
Fascinating figures - I had no idea the inflation rate had dropped so low in France. It raises many questions: it is likely to spread to all of the EU, and if so, how quickly? Are the politicians in France telling their constituents that this “low inflation” is a good thing, and so the people will be caught unaware? What would be the likely effect on this Japanification if the Ukraine’s war were to suddenly end? What would France have to do today to get off the path to deflation?
By the way, I saw a news video just a few days ago claiming that things in Japan are now getting worse, not better. Their debt/GDP ratio has become astronomical, and people in Japan are complaining that they can’t afford rice.
Ominous all around.
Thank you for this, Peter!
The entire West is so out of touch with reality that it's basically committing suicide. Putin and others have also said many times: "We don't have to do anything, nothing, we just have to watch the West destroy itself".