Will the economy of France shrink again?

The pandemic era has thrown up so many economic questions, but now we seem to be entering a new phase. Over the past day or two it has been La Belle France which has been exhibiting this. I have pointed out more than a few times that the tendency for forecasters official and otherwise to assume a strong economic bounce back in 2021 and 2022 was based on little more than Hopium, as we are still less than certain about 2020. An example of the issues facing this year came from the BBC a couple of days ago.

Paris will shut all bars completely from Tuesday after the French government raised the city’s coronavirus alert to maximum following a period of high infection rates.
Bars, gyms and swimming pools will all be closed for two weeks in a bid to curb the spread of the virus, the city’s police chief said.

But restaurants will remain open if strict hygiene rules are in place.

On Sunday France reported 12,565 cases of Covid-19.

France24 added to the theme only yesterday.

Covid-19: France records new all-time high of nearly 19,000 cases in 24 hours.

As it goes onto point out there are economic consequences as it highlights a French tradition.

They form part of a centuries-old tradition and are an iconic feature of the French capital, but Paris’s historic riverside booksellers, known as ‘bouquinistes’ are under threat. Like many other businesses that rely on tourism, Covid-19 has taken a devastating toll on their income.
A total of 227 bouquinistes, who sell second-hand books as well as sometimes souvenirs, line the embankment of the River Seine.

This returns us to a point we looked at when the pandemic began which is the impact of such an event on economies which rely on a lot of tourism.

The Economic Situation

France’s official statistical body Insee has tried to allow for the changing situation.

Alongside “barrier gestures”, more restrictive containment measures which more directly affect economic activity (closures of bars, restaurants, sports halls, etc.) are, at this stage, more targeted territorially and sectorally than in the spring. Air passenger transport remains severely affected, as it has since the start of the health crisis.

We have seen an example of the latter issue in the news today with Easyjet suggesting it will lose more than £800 million this year with passenger numbers halved.

Their analysis leads to a change in their view and the emphasis is mine.

In September, the continued improvement in the business climate in France is mainly due, in most sectors, to improved judgment on past production, while the business outlook for the next three months is down. , according to business leaders interviewed in business surveys.

Below is where they think we are.

After the sharp rebound associated with deconfinement (+ 16% expected in the third quarter, after – 13.8% in the second and – 5.9% in the first), economic activity could thus slow down at the end of the year under the effect of the resurgence of the epidemic.

What might slow down? Again the emphasis is mine.

In a scenario where, in the fourth quarter, the most affected services (hotels and restaurants, transport services, recreational and leisure activities) would return, after an improvement during the summer, to their level of activity of last June and where investment should remain, by a wait-and-see policy, at a level close to that of the third quarter, growth would be zero at the end of the year.

That is more than a little uncomfortable for the official predictions for 2021 as we should be rebounding rather than flat-lining. In terms of numbers we have this.

In this scenario, French GDP would remain, at the end of the year, 5% below its pre-crisis level, as on average during the summer……..In total for the year 2020, the forecast of GDP contraction remains in the order of -9%.

The swing factor here is consumption. We will see stellar levels of growth for the third quarter based on the numbers we know. But like in A Question of Sport the real issue is what happens next?

The continuation of these restrictions,
and the dissipation of catch-up effects by
elsewhere, would lead in the fourth quarter to
consumption slightly lower than
in the previous quarter. On the whole of
the year, consumption would decrease by 7%
compared to 2019.

It has been an extraordinary year with normal incomes hammered but government intervention leading to this.

With the rebound in consumption – even attenuated at the end of the year – the household savings rate, which had almost doubled in the second quarter (due to forced savings), should come back to around 17% in the second half, a level slightly higher than before the crisis.

At some point this will end and then consumption will face the consequences of this.

The unemployment rate should jump in the third quarter and reach 9.7% at the end of the year.

Bank of France

It has joined the fray this morning with this.

According to the business leaders interviewed, activity is, as expected a month ago, stable in September in
industry as in services and construction. It remains overall below its previous level
crisis, but still with a strong heterogeneity between sectors. Outlook for the month of October
also show a relative stability of activity in industry, services and construction.

It points out that there is a wide disparity in sectors but at least in some areas it suggests falls last month.

The production capacity utilization rate slipped slightly to 73% on average in September after 75% in August (and 79% before the crisis). It is on the rise in the chemical industry but falls significantly in the aeronautics and other transport sector.

Comment

If we take a look at the position it is not the overall situation that is the issue it is the structure. The 9% fall in GDP is well within the margin of error at a time like this from the Europa summer forecast.

but the forecast for 2020 has been revised down to about –
10 ½% from close to -8 ¼% in the spring.

The issue is the direction of travel which began hopefully with a strong recovery push. But now we see that rather than recovering towards the end of the year we may see stagnation or if the latest numbers are any guide a further decline. This poses quite a challenge to the next part of the summer forecast.

The projected economic recovery is set to remain on track in 2021, with GDP expanding by some 7 ½%.

We should of course have realised via the use of the phrase “on track” which meant anything but in the Greek crisis. In terms of specifics as we have noted today this part is being questioned.

After sinking in the first half of the year, private consumption is projected to gather momentum from the second half onwards.

If we now switch to what this means? We have two major consequences. The first is that the depression starting in 2020 looks set to be longer than expected just like wars which invariably are predicted to be over by Christmas. Sadly that means more people will be unemployed for longer.Should the French economy contract again it will be four out of the latest five. Also it means that there will be no end in sight to central bank intervention and we may see even more negative interest-rates and QE bond buying.