eco TV Week

A V-shaped recovery for France? Not so fast

7/3/2020

Looking at France’s economic situation and prospects, there are grounds for both optimism and pessimism

Hélène BAUDCHON

TRANSCRIPT // A V-shaped recovery for France? Not so fast : July 2020

Looking at France’s economic situation and prospects, there are grounds for both optimism and pessimism. The most positive signal comes from Markit’s composite PMI. In June, the business climate rose slightly above the 50 threshold into expansion territory. It has virtually returned to pre-crisis levels after recovering almost all of the ground lost in March and April. The rebound is just as spectacular as the preceding collapse, raising hopes for a V-shaped recovery.

Yet the less optimistic signals from the INSEE business confidence surveys dampen these hopes. Remember that in May, the INSEE composite index improved only slightly. As a result, despite a strong rebound, the June figure was simply not as low. At 78, it was still far below the benchmark average of 100 (which is consistent with the trend growth rate of the French economy) and it had barely made up half of the ground lost in March and April. Another mixed signal to keep in mind is the gap between the more optimistic view that companies have on their activity prospects and the lack of improvement in the balance of opinions relating to past trends.

Here is another illustration of the long road that still lies ahead: according to the latest INSEE estimates, economic activity in June was 12% below “normal” levels. Although the improvement is significant compared to the April and May figures, will the situation continue to improve at the same pace in the months ahead? Will the remaining gap of 12% close just as quickly? We cannot be sure; it is still a high step. True, household consumption of goods jumped 37% in May and hiring reports picked up by 76%, which is impressive and encouraging, but these gains were largely automatic. They will fall off as the catch-up effect wears off. And consumption is still 9% below its level at the end of 2019, and hiring reports are 50% below.

There is still great uncertainty about what comes next and the shape of the recovery. It is more likely to be gradual than vigorous: more U-shaped than V-shaped. Indeed, not all sectors and segments of the economy are on the same page when it comes to the speed of the recovery and the return to normal. The scars left by the crisis are likely to be significant. The Covid-19 epidemic is not over. These considerations and the greater-than-expected severity of the recessionary shock underpin the more pessimistic view of the IMF and the sharp downward revision of its 2020 growth forecasts. Thanks for watching. Tune in next week for a new edition of EcoTV Week.

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