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RECOVERY IN FRANCE: SLOWED BEFORE IT STARTED? Published on 12 May 2021 by Hélène BAUDCHON
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The increase in supply side difficulties identified by INSEE’s economic surveys in April 2021 requires a closer look. It is to be hoped that it will not hold back a recovery that is only just beginning to take shape. The rise has been particularly noticeable in the industry sector and has mainly been blamed on procurement problems that significantly exceed average levels from past years. In the construction sector, a shortage of labour has been the main difficulty (as it was before the crisis) but procurement constraints have also increased sharply. In the services sector, supply side difficulties relate primarily to health protections measures. In this sector however, demand side problems are  affecting a greater number of companies.

Procurement issues were also highlighted by the Banque de France in its economic update on 10 May. They were mentioned by slightly over a quarter of companies in the industry and construction sectors, although it is noteworthy to add that they have not so far affected these companies’ own prospects of an improvement in activity levels. This is reassuring and  suggests that if these difficulties do hold back the recovery, the effect will be moderate. This said, a rapid easing of the supply side difficulties will be needed. For those relating to health protection measures, this will come from the lifting of lockdown measures. For the problems in procurement and recruitment the way out is less clear.

CENTRAL EUROPE: RETURN TO PRE-COVID GDP LEVELS LIKELY IN 2021 Published on 5 May 2021 by Stéphane Colliac
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Growth in Central Europe looks set to accelerate in the 2nd quarter of 2021, after already a good performance in the 2nd half of 2020, as indicated by the capacity utilisation rate in the manufacturing sector. This highlights good resilience despite a shortage of chips in the automotive sector and a fairly severe 3rd wave of Covid in the 1st quarter of 2021.
Improving business conditions in the industrial sector stem from the on-going recovery in demand, specifically for exports: this has already allowed economic activity in the Czech Republic and Slovakia to move above pre-Covid levels, whilst the Polish and Romanian economies have returned to around pre-crisis levels.
This performance should allow the region’s GDP to recover its pre-Covid levels before the end of 2021 (growth of 4.2% compared to the 3.8% contraction in 2020), notwithstanding a loss of activity in services that will hold for longer. It is also likely to support inflation (along with the chips shortage and oil prices recovery), which is likely to remain close to 3% on average for the 3rd year in a row.

 

Given the way outstanding amounts of equity and debt are valued[1] in national financial accounts[2], debt ratios calculated using these figures can give a distorted picture of the financial structure of non-financial companies. In contrast, capital increases and self-financing give a reliable approximation of changes in company capital.

Our calculations suggest that French companies went into the pandemic in a strengthened financial position. Thus, the unprecedented increase in financial debt in 2020 (EUR 206 billion, with nearly EUR 130 billion in the form of government-guaranteed loans) was preceded, between 2015 and 2018, by a marked rise in capital, as the result of a significant increase in equity issues. However, these aggregate trends hide different pictures when individual companies, differing company sizes and different sectors are considered.

[1] The value of unlisted shares and other equity is estimated on the basis of the listed shares multiple. Regarding debt components, only debt securities are at market value.

[2] The national financial accounts elaborated by the Banque de France describe the financial assets acquisitions and the financing behaviours of the different institutional sectors, according to their respective financing capacity or their financing requirement.

On the Same Theme

April’s lockdown had a mildly negative impact on overall economic activity 5/17/2021
Our barometer shows a marked improvement in France’s economic situation in recent months compared to the three previous months. Yet the improvement is helped by a very favourable base effect. In April 2021, the base effect should be favourable again, despite another lockdown.
The French labour market: outlook for 2021 5/10/2021
Employment and the jobless rate are both expected to rise in 2021, but the size of these movements is very uncertain. The rise in employment is likely to be limited, while the upturn in the jobless rate risks being big. The France Relance recovery plan will surely help boost employment. Uncertainty over the size of its rebound is linked in part to the vigour of the economic recovery. Above all, employment recovery will be hampered by several headwinds: the lagged impact of the GDP plunge in 2020, the increase in corporate bankruptcies, persistent sector differences, the return to work of furloughed or short-time workers, and corporate efforts to restore productivity gains and margins. As to the unemployment rate, the dynamics of employment and the labour force are both uncertain. There is also the question of the profile of the increase in the jobless rate in 2021. Will it be a continuous increase or a bell-shaped curve? The most likely scenario is the first one, with a sharper increase in the first half that eases in the second half. The French labour market is unlikely to return to good health in 2021 (as defined by the government in its unemployment insurance reform), but the year 2022 seems like a more realistic horizon.
French companies went into the pandemic in a strengthened financial position 4/28/2021
Given the way outstanding amounts of equity and debt are valued[1] in national financial accounts[2], debt ratios calculated using these figures can give a distorted picture of the financial structure of non-financial companies. In contrast, capital increases and self-financing give a reliable approximation of changes in company capital. Our calculations suggest that French companies went into the pandemic in a strengthened financial position. Thus, the unprecedented increase in financial debt in 2020 (EUR 206 billion, with nearly EUR 130 billion in the form of government-guaranteed loans) was preceded, between 2015 and 2018, by a marked rise in capital, as the result of a significant increase in equity issues. However, these aggregate trends hide different pictures when individual companies, differing company sizes and different sectors are considered. [1] The value of unlisted shares and other equity is estimated on the basis of the listed shares multiple. Regarding debt components, only debt securities are at market value. [2] The national financial accounts elaborated by the Banque de France describe the financial assets acquisitions and the financing behaviours of the different institutional sectors, according to their respective financing capacity or their financing requirement.
4/20/2021
The economy continues to yo-yo 4/12/2021
Our chart shows an improvement in the French economy over the last few months, compared to the previous three ones: the blue-shaded area is larger than the dotted area. However, the picture that emerges from the monthly changes in the component indicators is made less clear by their yo-yo movements. 
An accordion-like exit from the crisis 4/9/2021
Contrary to what we were led to expect in late 2020, the discovery of vaccines did not end the stop-and-go nature of the recovery. In early 2021, due to the emergence of variants and the slow pace of the vaccination campaign, the exit from the crisis continues to follow a jagged trajectory. The light at the end of the tunnel seemed to be getting closer (Q4 2020 GDP did not decline as sharply as feared; a technical recession was apparently avoided in Q1 2021, with feeble but positive growth) but now it is fading again (the rebound has been pushed back until Q3, with Q2 growth verging on zero, and it could even slip into negative territory). The strong upturn in March confidence surveys is good but fleeting news, because it does not integrate the recent series of tightening of lockdown measures. We should expect a relapse in April before a turnaround in May, which we hope will be sustainable this time, thanks to the acceleration of vaccinations and support from the policy mix. The expected rebound in H2 would lift growth to an average annual rate of 6.1% in 2021, followed by 4.4% in 2022.
The French labour market: 2020 in review 4/6/2021
In 2020, the Covid-19 pandemic had a much smaller impact on the French labour market than on GDP. On an average annual basis, GDP growth plunged 8.2% while private payroll employment declined by only 1.7%. The unemployment rate even fell slightly compared to 2019 (-0.4 points on an average annual basis). Employment was buffered by emergency support measures, notably the massive use of job retention schemes, which is the main reason why the overall negative impact was so mild. Yet the impact was disproportionate by sector: in Q4 2020, compared to the year-earlier period, 75% of payroll job losses were concentrated in the four sectors hit hardest by the crisis (hotel & restaurant services, household services, transport services and transport equipment manufacturing), even though their employment share is 5 times smaller (16%). The counterintuitive fluctuations in the unemployment rate can be attributed to the misleading effects of methodology. During lockdowns, numerous jobseekers exit the labour force because they cannot actively seek work and/or show that they are available to work. As a result, they no longer qualify as jobseekers according to ILO criteria. Instead, they are counted as part of the halo around unemployment, which has increased sharply. Underemployment, which includes short-time work, has also risen rapidly. The impact of the crisis on hiring declarations and the number of category A jobseekers is more in line with what one would expect.
France: state of play after one year of crisis 3/19/2021
A year ago, give or take a few days, France entered its first lockdown as it began to combat the Covid-19 pandemic. After the massive recessionary shock of 2020, where does the French economy stand today? Its health status is mixed, with strong and weak points.
Economic recovery in France and Germany: where do we stand? 3/11/2021
In the eurozone, there are still some way to go to offset the loss due to the Covid-19 crisis. The activity in the services sector is suffering the most from the health restrictions and remains still well below its pre-crisis level. There are significant risks of a sharp deterioration in the labour market in the months ahead which has to be closely monitored.
Debt: size is not all that matters 3/10/2021
Proponents of debt cancellation programmes sometimes argue that public debt will never be paid off, but that is not the question. In France, public debt denominated in euros (or in euro-equivalent francs before 1999) has increased constantly throughout the post-war period, without anyone dreaming of cancelling it. The high growth and inflation rates of the Thirty Glorious Years worked their magic. Between 1945 and 1975, debt outstanding increased about 10-fold, with the franc’s depreciation bolstering the external component, while the debt ratio plunged from over 100% of GDP to less than 20%. In 2021, following a series of crises (the financial and euro crises, and then the Covid-19 crisis), debt has soared to peak levels again (117.8% of GDP according to European Commission estimates). Even so, public debt is no less sustainable, considering the share of fiscal revenues devoted to interest payments, that has never been so low (2.3%). The real question is what will happen if there is an interest rate shock. In the very short term, higher interest rates are not a problem since they are being driven by brighter growth prospects. On the whole, rate increases have been rather mild. That said, fire prevention is largely a matter of credibility. Future borrowing conditions will depend above all on investors’ confidence in the French government, which issues sovereign debt, and in the European Central Bank, which indirectly purchases them.

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