Head of Macroeconomic Research
Summary: France is well-known for his strong reliance on nuclear energy (about 69 % of electricity generation). But France’s forward energy prices are currently higher than those of any other major European economies (Germany, for instance). This is puzzling. In today’s ‘Macro Chartmania’, we explain the current state of France’s electricity crisis, why the worst is yet to come and why it may last for more than a single winter. We also discuss the monetary policy implications of elevated energy prices in France and in the rest of the eurozone, in light of European Central Bank (ECB) Board Member Isabel Schnabel’s speech at Jackson Hole last week.
Click here to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.
France’s electricity prices are close to record highs. The baseload power price is above €900 per MWh – see below chart. Many other European countries face similar prices (Germany, Belgium, Italy, for instance). But tensions are higher in France. The French-1 year electricity forward is at the highest level among major developed European economies. Last Friday, it jumped to a historical record of €1,000 per MWh (versus €900 per MWh for Germany). This represents an increase of +1000 % compared with the long-term average of 2010-2020. This is also a clear signal that traders don’t expect prices to get back to normal anytime soon.
Contrary to other European countries, France’s energy crisis has little to do with the Ukraine war and the European sanctions against Russian gas. This is mostly due to corrosion issues in nuclear reactors (this caused the shutdown of about half of France's fifty-six nuclear reactors.) and low water levels related to unusual heat during the summer (three nuclear reactors were shut down temporarily because of climate conditions this month). The country is highly dependent on nuclear energy. This represents about 69 % of electricity generation (this is a larger share than any other country). About 17 % of nuclear electricity is produced thanks to recycled materials. Summer heat will likely stop soon. But corrosion issues are partially structural and here to stay. In a statement a few months ago, the French nuclear energy regulator ASN mentioned that a restart of nuclear reactors closed due to corrosion could take up to several years. The risk of electricity shortage is therefore real this winter (no matter how the weather conditions are, actually). During the summer, electricity demand is around 45 GWh. During the winter, higher consumption will push electricity demand around 80-90 GWh on average. This will put under tension all France's electricity infrastructure, thus increasing the risk of a shortage. We think that France is certainly in a worse position than Germany when it comes to energy supply (at least, in the short-term).
So far, the French government has mitigated the energy crisis by capping electricity and gas prices for households (gas prices were frozen at Autumn 2021’s levels and electricity price increase was capped at +4 % this year). This does not apply to corporations, however. This cannot last forever. The cap on energy prices will expire at the end of the year for gas and in February 2023 for electricity. The government is not planning to extend it further. It is too costly (about €20bn so far this year on a total of €44bn of various measures to support companies and households facing high inflation. This represents the total annual budget for education in France). From 2023, more targeted measures to help the low-income households to cope with higher energy prices is the most likely scenario. Will it be enough ? This is far from certain. A repeat of the 2018 Yellow Vest Movement (meaning massive demonstrations against the cost of living) is not out of the table, in our view.
France is not the only European country in a very uncomfortable position, at the moment. The situation is worse than in its counterparts. But all the continent is facing the prospect of a difficult winter due to persistent high inflation. Contrary to the United States, we think the peak in eurozone inflation is ahead of us.
The explosion of power prices is one of the three factors (along with a weak euro exchange rate and the easing of government measures to cap prices from 2023 onwards) which make us consider that inflation will remain elevated for a prolonged period in the eurozone. In terms of monetary policy, this means the ECB is likely to be more aggressive in the short term before potentially reviewing its policy stance if the recession materializes. The ECB Board Member Schnabel was very clear about it at last week’s Jackson Hole Symposium. In her speech, she argued that three arguments of why central banks should act with determination : 1) inflation uncertainty (there is no way to predict accurately the evolution of energy prices in such a volatile environment, for instance) ; 2) credibility ; and 3) the cost of acting too late (in some respect, the ECB certainly waited for too long between the February policy pivot and the July interest rate hike). In the short-term, this means there will be more weight on realized data (especially the preliminary release on Wednesday of the August eurozone CPI expected at a new record high of 9 % year-over-year). This increases the probability of a significant move of 75 basis points at the next Governing Council of 8 September.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
