Perspectives

From fast, the return to normal is becoming more asymptotic

Eco Perspectives // 4th quarter 2020 (completed on 30 September 2020)  
economic-research.bnpparibas.com  
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FRANCE  
FROM FAST, THE RETURN TO NORMAL IS BECOMING MORE ASYMPTOTIC  
After a rapid restart in May and June, the economy was back to 95% of its normal level in August. However, the im-  
provement is now slowing as the automatic catch-up effects fall away and as substantial disparities between sectors  
and persistent public health constraints and uncertainties remain in play. Even so, Q3 is expected to see a substantial  
rebound (of around 15% q/q). It will be in Q4 that growth is likely to fall back like a soufflé. This period will determine  
the next chapter in the recovery. Hence the significance of the stimulus package in its double role of softening the  
blow from the crisis and boosting the recovery now under way. We estimate that this package will add 0.6 of a point  
to growth in 2021, taking it to 6.9%, after a contraction of 9.8% in 2020.  
AFTER THE GREAT CONTRACTION, A GREAT BUT TEMPORARY  
GROWTH AND INFLATION (%)  
REBOUND  
GDP Growth  
Inflation  
According to INSEE’s second estimate, French GDP plunged by 13.8%  
q/q in Q2 2020, coming on top of the 5.9% q/q drop in Q1. The Q2  
GDP contraction was slightly smaller than initial estimates from INSEE  
Forecast  
Forecast  
6
.8  
6
1
(
-20% q/q) and the Banque de France (-15% q/q); these estimates  
1.8  
2.1  
1
.5  
1.3  
0
.6  
0.9  
were subsequently revised to -17% and -14% respectively. Matching,  
but amplifying, the pattern of the first quarter, all components  
of GDP saw substantial falls. In ascending order (by the size of the  
-4  
1
fall), public consumption was “least” affected (-10.3% q/q) , followed  
by private consumption (-11.8%), corporate investment (-13.4%),  
imports (-16.4%), household investment (-17.1%), public investment  
-9  
-9.8  
(
-17.4%) and, hardest hit of all, exports (-25% q/q). The highly positive  
-14  
2018  
2019  
2020  
2021  
2018  
2019  
2020  
2021  
contribution from changes in inventories (+0.9 of a percentage point)  
went a little way to limiting the overall collapse.  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
We would also note, in the detailed figures for Q2, the very limited  
fall in gross disposable household income (-2.3% q/q, from -0.3% q/q  
in Q1), the ensuing increase in the household savings rate of nearly 8  
points (to 27.4%, building on a gain of 5 points in Q1) and the marked  
deterioration of corporate mark-ups (-3 points, to 26%, in Q2, having  
already lost 4 points in Q1). The question now is at what speed these  
indicators will return to their pre-crisis levels (15% for the savings rate  
and 33% for margins) and the scale of the support (unblocking of forced  
savings) or drag (rebuilding margins) that GDP growth will experience  
as a result.  
The slightly smaller than expected contraction of the economy in Q2  
resulted from the strength of the economic rebound since lockdown  
ended on 11 May. This has been visible in the recovery of survey data  
on the business climate (the INSEE composite index gained 38 points  
between May and August, whilst the Markit PMI was up 46 points  
between May and July), consumer spending on goods, and industrial  
production (which gained 50% and 41% respectively between April and  
July).  
However, the recovery is still incomplete. Both INSEE and the Banque  
de France estimate that in August the economy was around 95% of its  
normal level. In August, INSEE’s composite business climate index was  
still 9 points below its reference level of 100. Consumption of goods  
has bounced back to above its pre-crisis levels, but consumption of  
services remains depressed, leaving total consumption at 2% below  
pre-crisis levels according to INSEE. Industrial production is still 7%  
below its February 2020 level. Moreover, the improvement is now  
slowing as the automatic catch-up effects fall away whilst persistent  
public health constraints and uncertainties remain in play. According  
to INSEE, the economy was running at 82% of its normal level in May,  
a 12-points gain on the low point in April (which marked the activity  
SECTOR DISPARITIES  
30  
Other service activities (arts, entertainment...)  
2
2
1
1
5
0
5
0
5
0
Accomodation, catering  
Transport and storage  
Transport  
equipment  
Information-  
communication Other industrial branches  
Food  
industry  
Equipment  
manufacturing  
Business  
services  
Construction  
Non-market  
services  
Financial services  
Coking-  
refining  
Agriculture  
Commerce  
15  
5  
0
5
10  
20  
25  
30  
35  
Real estate Energy, water,  
waste  
Share of employment, %  
CHART 2  
SOURCE: INSEE (8 SEPTEMBER ESTIMATES), BNP PARIBAS  
trough). In June the increase was 9 points, in July 3 points and in August  
1
point. August’s 6-point fall in the composite PMI, to 51.6, marked a  
return to a less optimistic reality too.  
The economic recovery is also being held back by significant disparities  
between sectors, which are affecting in return employment prospects.  
The hardest hit sectors (those where activity in Q3 2020 is 5% or more  
below Q4 2019 levels) account for around 40% of total employment  
(
see Chart 2).  
1
See INSEE for the methodological reasons behind this fall.  
The bank  
for a changing  
world  
Eco Perspectives // 4th quarter 2020 (completed on 30 September 2020)  
economic-research.bnpparibas.com  
1
3
There will nevertheless be a sizeable automatic rebound in Q3 activity  
(
the INSEE expects a growth rate of 17% q/q, the Banque de France 16%  
KEY MEASURES AND VALUES OF THE FRANCE RELANCE PLAN  
and ourselves 13%). But what is clawed back in the third quarter will  
come at the cost of the fourth: growth will collapse back like a soufflé,  
to 2.5% q/q according to our estimates (1% q/q according to INSEE). For  
EUR Bn (2021-2022)  
Energy renovation  
Agriculture  
6.7  
2.7  
1.3  
1.2  
2
020 as a whole, GDP is expected to contract by 9.8%. All other things  
incl. biodiversity, fight against artificializtion  
incl. agricultural tansition  
being equal, the slower growth at the end of 2020 will carry into 2021.  
But this does not factor in the effect of the recovery plan, which we  
estimate at 0.6 points of additional growth (conservatively assuming  
a multiplier of 0.5 and that 30% of the EUR 100 billion France Relance  
programme will be injected in 2021). This would put average growth  
over 2021 at 6.9% (in line with the consensus). This estimate is sur-  
rounded by balanced risks: the stimulus package creates upside risk,  
whilst the health situation and uncertainties relating to Brexit and the  
US elections represent downside risks. To borrow INSEE’s analysis, the  
engine of growth is both turbo-charged and throttled down. By way of  
comparison, the OECD is more pessimistic (with a 2021 growth forecast  
of 5.8%), whilst the Banque de France and the government are more  
optimistic (7.4% and 8% respectively) – with the former specifying that  
it has only taken partial account of the stimulus package as it does  
not have all the details. It is also worth noting the Banque de France’s  
belief that French GDP will return to its pre-crisis levels in early 2022,  
earlier than the euro zone as a whole.  
Energies and green technologies  
incl. decarbonization of industry  
incl. hydrogen  
12.4  
1.2  
2
ECOLOGICAL  
TRANSITION:  
EUR 30 Bn  
incl. support plans for the automotive  
2.6  
3.4  
0.5  
and aeronautic sectors  
…  
incl. development of key markets  
in green technologies  
incl. circular economy and short circuits  
Green infrastructure and mobility  
8.6  
incl. railway  
4.7  
incl. support for the purchase  
incl. support for the purchase of less polluting…  
of less polluting vehicles  
2.1  
1.8  
incl. other infrastructures and daily mobility  
Production tax cuts  
20  
Strengthening equity capital  
3
 Fundi ng f o ri ni v ati o nandi n ve s t men t
in the technologies of the future  
Industrial relocation  
5
.9  
COMPETITIVENESS  
AND INNOVATION :  
EUR 34 Bn  
1.0  
1.9  
2.7  
Digital upgrade  
Others (export support, culture, defense orders)  
Long-term job retention scheme  
Subsidies for hiring youth  
Training  
FRANCE RELANCE: SUBSTANTIAL FISCAL STIMULUS BUT IT  
IS STILL TOO EARLY TO JUDGE HOW EFFECTIVE IT WILL BE  
6.6  
3.9  
5.9  
SOCIAL AND  
TERRITORIAL  
COHESION:  
EUR 36 Bn  
The challenges for the France Relance programme are substantial, as  
it will not only have to support growth in the short term (avoiding the  
ongoing recovery to fizzle out, with a target of getting GDP back to  
pre-crisis levels by 2022), but also strengthen prospects for the me-  
dium to long term, or “build the France of 2030 today”. Hence the em-  
phasis on supply-side rather than demand-side measures. The subs-  
tantial support to businesses is also a result of the cost of the crisis,  
which has been higher for companies than for households. Under the  
recovery plan, support for households comes via measures to support  
employment, which in turn goes partly through support for companies  
Research  
3.0  
Ségur health agreement / old-age  
Territorial cohesion  
6.0  
9.5  
Precariousness  
0.8  
0
5
10  
15  
20  
SOURCE: GOVERNMENT, BNP PARIBAS  
contained in the “competitiveness” section of the programme. Other, used to serve several purposes (competitiveness, employment, innova-  
more direct measures to support employment are contained in the tion, relocation). All of which raises the question of the adequacy of the  
social cohesion” section too. Positive effects are also to be expected resources committed, in terms of both value and duration. There is also  
from the support provided to environmental transition. Employment is an underlying issue of the targeting and proper allocation of resources:  
the key linking variable between supply and demand. It is no accident, this will be watched closely by the government.  
therefore, that it is at the heart of the recovery package.  
Nor is the decision to support the supply-side without risk. Since the  
There is no doubt that the sums being made available are substan- summer, economic surveys have shown an emerging risk of a de-  
tial. These are, by design, split more or less equally between the three mand-side shock: according to INSEE, many companies express their  
pillars of the plan (environment, competitiveness, cohesion), which fears of losing market prospects. Supporting them by reducing produc-  
choice is hard to disagree with. The debate now relates to the likely ef- tion costs and increasing their growth potential through innovation is  
fectiveness of the plan over both the short and long term. For the time necessary, but it is far from certain that this will be enough in current  
being this is hard to judge. More precisely, although we might expect conditions: more direct, visible and immediate support for demand  
positive effects, their scale is unclear.  
might need to be considered. To achieve this, attention is turning to  
The first question is at what speed the EUR 100 billion will really be the forced savings accumulated by households, how quick this could  
injected, and how the total will be split between 2021 and 2022 and be unblocked and how to avoid it being converted into precautionary  
between front-loaded and back-loaded measures. We hope that the savings. There is no easy answer. Thus far, the government has opted  
presentation of the 2021 budget at the end of September will shed against a temporary cut in VAT, as in Germany, which it considers inap-  
some light on this. The effectiveness of the programme might be un- propriate. Instead it is banking on the positive impacts of the recovery  
dermined by its ambitions and by the risk of dilution. It is perhaps package on employment: the more households feel reassured in this  
reasonable to ask if the double role of shock-absorber (addressing the area, the more they will consume.  
scars left by the crisis) and support (for the recovery and for future  
growth) is not too ambitious for a single plan. One might also worry  
that a single instrument (for example the cut in production taxes) is  
The bank  
for a changing  
world  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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