Testimonies from a French Citizen on the Economic Situation
How to Recognize an Economic Crisis?
For the past few months, I have been regularly conversing with shopkeepers in my neighborhood. I live in the 20th arrondissement of Paris, near Gambetta. When I talk to them, many of them confide in me that they are in precarious financial situations. Many don’t know how long they can hold on. These discussions have made me realize the seriousness of the current economic situation.
What opened my eyes happened a few days ago. While picking up a friend from Saint Louis Hospital, I saw numerous businesses closed. I’m not talking about a particular type of business here. I’m referring to bakeries, grocery stores, restaurants, real estate agencies, travel agencies, hair salons, and so on. This is just the tip of the iceberg. Indeed, everything suggests that we are at the beginning of a major economic crisis. However, in the face of this alarming reality, traditional media in France remains strangely silent. That’s what prompted me to write about this topic.
In this article, I will take the time to revisit the concept of an economic crisis and detail the warning signs of an economic crisis, comparing them to the current economic context. Beyond numbers and hypotheses, it’s primarily about men and women, like you and me, that we are discussing.
Recognizing an Economic Crisis
An economic crisis is defined as a period of decline in the economic health of a country or region. Often unforeseen, it catches economic actors by surprise. Think about the subprime crisis: banks had not anticipated the level of risk and were caught off guard.
Hence the central question, how do you recognize that an economic crisis is about to occur? What are the signs?
Companies are laying off employees
An increase in the unemployment rate is often one of the most evident signs of an economic crisis. When companies face difficulties, they often cut costs by laying off their employees. These difficulties can be related to the infamous order book and/or liquidity problems. In the case of publicly traded companies, difficulties are more likely related to investor confidence.
An increase in unemployment can amplify the negative effects of an economic crisis. In general, layoffs lead to a decrease in consumption, which, in turn, leads to further job cuts.
Business bankruptcies multiply
The bankruptcy of businesses, especially small and medium-sized enterprises, is a particularly striking indicator of an economic crisis. These companies are often considered the heart of a country’s economy. They tend to be much more vulnerable than large corporations to economic shocks. Local businesses like hair salons, restaurants, and boutiques play a crucial role in the local economy.
Similarly, startups, which have been talked about a lot in the past decade, are not immune to economic turbulence. Many of them operate through external funding (grants, private investors, and venture capital).
A drastic reduction in funding puts the survival of many startups at risk. Spoiler alert: many startups are closing or have closed, as I will discuss in the section on the current economic context.
Access to credit becomes more complicated
According to traditional economic laws, access to credit is a central pillar of modern economic functioning. It stimulates consumption and investment. During an economic crisis, banks become more cautious about lending.
In France, when we talk about access to credit for individuals, we often think of buying an apartment or a house. Restricted access to credit leads to a decrease in real estate purchases, which, in turn, leads to a decline in property prices. This is especially true if there is a speculative bubble in real estate prices (as has been the case in the Paris region for several years).
Inflation becomes rampant
Let’s now talk about inflation. Inflation is generally defined as the general and continuous increase in prices. When it is at moderate levels (meaning, not very high), it is often said to encourage spending and investment. However, when inflation is high, it weakens economic actors, especially households. Everything becomes more expensive. The reasons for inflation can be diverse (we will come back to this).
Inflation is considered widespread when the price increase affects a wide range of goods and services. It is not concentrated in a specific sector or category. When inflation is widespread, it affects key areas like energy, raw materials, and food.
The number of homeless people is on the rise.
In addition to purely economic signs, an economic crisis can be recognized by more social aspects. I am referring here to an increase in the poverty rate, inequality, and social tensions. An increase in poverty is most often manifested by an increase in homelessness and individuals searching through trash bins.
These are more difficult indicators to measure. However, they are directly visible to a large part of the population (provided they are not glued to their smartphones). Increasing inequality often has significant effects on the mental health of individuals.
Of course, there are other signs of an impending economic crisis. These can include a decline in GDP, difficulties in financial markets, etc. If you are interested in this topic, I invite you to explore the following resources:
- World Economic Situation And Prospects — September 2022
- What is an economic crisis? Definition and example
- Global Risks 2023: Today’s Crisis
- List of economic crises — Wikipedia
The Current Economic Context
Now that we have explored the early warning signals of an economic crisis, let’s delve into the current economic context. Here, I believe it’s important to mention my own biases due to my social and economic situation: I reside in Paris and work in the tech industry.
Tech companies are laying off employees and/or closing down
Let’s begin by discussing the technology industry. Since late 2022/early 2023, many tech companies have been laying off employees. Companies like Google, Amazon, Microsoft, and Meta are among them. I invite you to read this TechCrunch article for more information. Some experts believe that these layoffs are a correction after the significant hiring that occurred during and after COVID. This may be the case. Another possibility is the bursting of a bubble in the technology companies.
To recap, a bubble, or speculative bubble, is a rapid and excessive increase in the prices of an asset. Investors buy this asset with the hope of selling it later at an even higher price. Bubbles have been frequent in modern history. Examples include the cryptocurrency bubble and the housing bubble in the United States (subprimes).
Many of these companies received substantial funding (money) to finance their development and growth. This money was not always spent wisely. Anyone who has worked in the startup world will know what I mean. One of the problems is that many of these companies did not have a viable business model. They remained in operation longer than they should have.
Many French startups (and scale-ups) have also laid off employees massively this year. These startups don’t always communicate openly about their failures. Nevertheless, you can find some names in this Le Monde article.
Some of these companies, particularly in the United States, are publicly traded (understand: on Nasdaq). I’m thinking specifically of WeWork, which announced potential payment default during the summer of 2023. Know that a sharp drop in stock prices is a sign of a possible economic crisis. By the way, I invite you to read the excellent book “The Cult of We”. It describes the atmosphere in technology companies very well.
One of the problems that few media outlets are currently talking about concerns people. The French government has massively trained individuals in digital skills in recent years. For example, they created the “Grande École du Numérique” label and offered numerous training programs for individuals looking to change careers.
What will we do with all these newly trained individuals?
Businesses are closing down
At the beginning of this article, I mentioned that the closure of businesses in Paris was a trigger that made me realize the seriousness of the situation. Currently, we have relatively few figures on the number of business bankruptcies in 2023. According to La Tribune, their bankruptcy rate increased by 35% during the second quarter of 2023. I think the numbers for the third and fourth quarters will be alarming.
In discussions I have had with shopkeepers or friends running businesses, it appears that many of them have been weakened by COVID (understand: their cash flow has taken a significant hit). Between 2022 and now (September 2023), many have seen their expenses increase. This includes rent but also electricity, raw material prices, property tax, and more.
At the same time, many households, primarily families, have left Paris. A friend who runs an organic canteen and grocery store in the 19th arrondissement informed me that this led to a nearly 50% drop in his revenue. Businesses have, therefore, experienced increased expenses (with fragile cash flow) and decreased income. If you live in Paris or a major city, I encourage you to take a closer look at the businesses. You will see many closed storefronts and lowered shutters.
One of the impacts of these business closures concerns the business owners themselves. Many of them have often taken out loans from banks to finance the purchase of their businesses. In case of bankruptcy, they would sell their business and could thus repay the money they owed to the bank. This allowed them to avoid personal debt situations.
The problem currently is that businesses are closing in large numbers without subsequent purchases. This results in a decrease in the value of businesses. This means that many business owners will find themselves in debt, or even facing personal bankruptcy, with the banks.
The real estate market (in Paris) is collapsing
We have a saying in France which says “quand le batiment va, tout va”. In English, we could translate it as “when real estate is doing well, everything is doing well.” The fact is that today, the sale and construction of buildings are experiencing a serious slowdown.
Indeed, a few days ago, Le Monde reported a significant drop in real estate prices in Paris. The trend had been noticeable for some time. According to data, it is predominantly medium-sized apartments, ranging from 35 to 80 square meters, that are experiencing this decline. These apartments are often occupied by families or couples, a demographic that seems to be increasingly moving away from the capital.
Various factors come into play. Besides the palpable effects of climate change making some summers unbearable, the shift towards remote work and the growing attraction of a more rural life could also play a role. Furthermore, the rising cost of living in major cities is prompting many households to reconsider their choice of residence.
However, despite these signals, some media outlets and financial institutions still encourage investments in Parisian real estate. My brother-in-law, for example, is currently buying an apartment in Saint-Ouen, persuaded by a real estate agency of the future profitability of this investment. These decisions, based on optimistic forecasts, could be risky in the current economic context. Indeed, a continuous decrease in property value can have repercussions on banks and the financial sector, especially if many households are unable to repay their loans. This is a situation also present in the United States. My advice here is: do not buy! You risk putting yourself in a financially complex situation.
Widespread price increases
For many months now, we have been experiencing record price inflation. This inflation is pushing us to change our consumption habits. We are buying less. However, that doesn’t mean we are consuming better. I recently read that the sale of organic fruits and vegetables was declining in supermarkets.
This widespread increase in prices has many impacts on our society. It weakens the most vulnerable households and businesses. It increases the number of people rummaging through trash bins and, more broadly, social inequalities. In the graph above, you can see that even during the subprime crisis, inflation was not as high.
This record inflation has many causes: disruptions in supply chains due to COVID, the war in Ukraine, and weather phenomena due to climate collapse. I could write a whole article on inflation because it’s both an interesting and complex topic. The idea here is to get to the essentials.
Climate Collapse
Climate collapse refers to the profound and often irreversible upheavals our planet is experiencing. Among the main causes are massive greenhouse gas emissions, pollution, urbanization (remember the part about the building crisis!), and deforestation. These disruptions are accelerating alarmingly.
What concerns me the most is the potential interconnection between this climate collapse and the upcoming economic crisis. Historically, although economic crises may have been influenced by environmental factors, they have never been as susceptible to a disrupted climate as they are today. It is unsettling to think that we could be on the cusp of the last major economic crisis, exacerbated by unprecedented climate upheavals.
It’s Urgent to Slow Down
How challenging it is not to be frightened and concerned by all these signs heralding a major economic crisis. However, I don’t see it as a fate but as an opportunity for us to rise, to grow.
It’s urgent to slow down. Not out of resignation, but by choice. This is personally what I decided to do since 2023. I consume less, I find meaning in what I do, I meditate, I spend time with my loved ones. Slowing down offers us a chance to reconnect with ourselves and with others. Slowing down also means reducing our smartphone usage to take more time to observe what surrounds us.
Meditation and mindfulness play a crucial role in this journey. They teach us to be present and more attentive.
Ultimately, by changing our perspective on our world, by cultivating kindness towards ourselves and others, we can together build a more harmonious and sustainable future.
