Middle East war scorches French economy: Both industrial and consumer confidence plummet, inflation fears reemerge

After the outbreak of the conflict in Iran, both the industrial and consumer confidence indices in France fell, and household inflation expectations rose significantly. The monthly survey by the French National Institute of Statistics and Economic Studies (Insee) showed that the manufacturing confidence index fell 3 points to 99 in March, falling below the long-term average of 100 for the first time since November last year; the consumer confidence index dropped 2 points to 89, hitting a new low in four months. At the same time, a sub-index in the household survey by the institution showed that people's expectations for future prices soared to the highest level since September 2022. The ongoing Middle East geopolitical conflict combined with a sharp rise in oil prices has severely affected the economic prospects of European countries, causing inflation pressures to resurface, and economic activity and market confidence have been dragged down. The French central bank lowered its economic growth forecast on Wednesday while raising its inflation outlook. Given the unpredictable current situation, the bank also provided a more pessimistic scenario forecast - output will suffer more severe impacts, and the rate of price increases will accelerate. According to Insee survey data, executives in the French industrial sector have tempered their optimism about production prospects and order conditions, while households have a more pessimistic outlook on future financial conditions. The survey, lasting about three weeks, began on the eve of the United States' and Israel's attacks on Iran. In addition to increasing uncertainty, the rising inflation expectations will also become a focus of the European Central Bank, which is closely monitoring whether the increase in oil prices will transmit to other areas of the economy. Data shows that Insee's balanced opinion index on future prices jumped from -29 in February to -1. Francois Villeroy de Galhau, the Governor of the Bank of France, said on Wednesday that it is still too early to discuss whether the European Central Bank will raise interest rates at the next monetary policy meeting to curb inflation. However, he cautioned that policy decisions will depend on the size of the risk of second-round effects triggered by energy costs. "Oil prices are clearly out of our control," Villeroy said in an interview. "But our responsibility is to stabilize inflation expectations and avoid a spiral of wage and price increases."