Perspectives

Massive recessionary shock

EcoPerspectives // 2nd quarter 2020  
12  
economic-research.bnpparibas.com  
France  
Massive recessionary shock  
Clearly, 2020 will not be another year of slow but resilient growth as we were forecasting just last quarter. We must now expect a massive  
recessionary shock triggered by the Covid-19 pandemic. To date, the INSEE estimates the instantaneous loss of economic activity linked  
directly to confinement measures at 35%, which is equivalent to slashing off 3 points of annual GDP per month of confinement. In March,  
the business climate was in free fall, which gives us a first glimpse of its scope. A full arsenal of measures have been deployed to mitigate  
the shock as best possible. According to our estimates, French GDP could contract by 3.1% in 2020, more than the 2.8% decline reported  
in 2009, before rebounding by 5.4% in 2021. These forecasts are highly uncertain, with risks on the downside.  
A relatively positive pre-crisis situation  
1
- Growth and inflation  
(
Y/Y, %)  
Q4 2019 figures surprised on the downside as GDP unexpectedly  
contracted by 0.1% q/q (vs expectations of +0.3%). Yet this fall  
followed five consecutive quarters in which France showed  
remarkable resilience to the global slowdown. The poor Q4  
performance was also marred by strikes and protests against  
pension reform, as well as other sector troubles (automobile sector,  
aeronautical sub-contractors) and mild weather conditions (which  
meant less energy consumption). Lastly, business confidence  
surveys for January and February continued to show signs of  
resilience and the horizon seemed to be clearing on the  
international front. A strong technical rebound seemed to be taking  
shape in the first quarter, and it looked like full-year 2020 GDP  
growth would hold close to the 2019 rate of 1.3%.  
GDP Growth  
Inflation  
Forecast  
Forecast  
6
5
4
3
5.4  
2
.1  
2
1
0
1
2
1.7  
1.3  
1.3  
1.3  
0.3  
-
-
-3  
-
4
-3.1  
2018  
2019  
2020  
2021  
2018  
2019  
2020  
2021  
Source: BNP Paribas Global Markets  
Covid-19 crisis: a “black swan” shock  
2- Business confidence  
Yet we hardly had time to formulate this scenario before it was  
shaken by the outbreak of the Covid-19 epidemic in China in  
January. It became totally obsolete as the virus spread globally in  
February and March, with the introduction of confinement measures  
and business restrictions to try to halt the contagion. The Covid-19  
outbreak is a perfect example of an extreme “black swan” shock: an  
unpredictable, low probability-huge cost event. Indeed, the Covid-19  
pandemic is an unprecedented, multi-dimensional shock that is  
hitting both supply and demand, an abrupt, widespread, global  
shock affecting all sectors of economic activity in both the real and  
financial spheres, with innumerable multiplier effects.  
INSEE business confidence composite index (LHS)  
Composite PMI (RHS)  
70  
1
1
1
30  
20  
10  
6
5
0
5
0
5
0
5
0
6
5
5
4
4
3
3
100  
9
0
0
8
70  
60  
Today its cost is difficult if not impossible to quantify given the  
unprecedented nature of the shock, and because we still do not  
know its end date. Nonetheless, the release of the business  
confidence survey results for March provides us with a first glimpse  
of its scope. The PMI and INSEE indexes have both plunged. The  
INSEE composite business climate index dropped by 10 points in  
one month  an unprecedented decline  to 95, beating by a full  
point the record fall reported in October 2008. Although the index  
has fallen back below the long-term average of 100, it is still far  
above the all-time low of 68 reported in March 2009, unlike the  
Markit composite PMI, which dropped to 30.2. Just this once, it was  
the manufacturing sector that proved to be the most resilient: the  
INSEE manufacturing index declined only 3 points while the  
services and retail indexes were down 14 and 13 points,  
respectively. The stability in the construction sector was not  
significant. Considering the circumstances, indeed, the INSEE  
warned that for all these surveys, the March statistics might not be  
as precise as usual. Most of the responses were collected before 16  
25  
1
998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020  
Source: INSEE, Markit, BNP Paribas  
3- Sector impact of the Covid-19 containment measures  
The size of the circles corresponds to the share in the GDP  
100  
Accomodation-catering  
9
8
7
0
0
0
Household  
services  
Transport equipment  
Construction  
Transport  
60  
50  
Trade  
Business  
services  
Coking-refining  
4
3
2
1
0
0
0
0
0
Other industrial  
branches  
Capital goods  
Food industry  
Energy,  
Information-  
communication  
Real estate  
services  
Non-market  
services  
water, waste  
Agriculture  
Financial services  
0
2
4
6
8
10 12 14 16 18 20 22 24 26  
Share in GDP, %  
Source: INSEE, OFCE (policy brief n°65, March 2020), BNP Paribas  
EcoPerspectives // 2nd quarter 2020  
13  
economic-research.bnpparibas.com  
March, the date when confinement was first announced. In each  
sector, it was the balance of opinions concerning future prospects  
that fell the most. The labour market climate was also swept up in  
the turmoil and dropped 9 points.  
electricity and gas bills (for small businesses experiencing  
hardships); and bank payments for a 6-month period;  
- State guarantees: on liquidity loans granted between 16 March  
and 31 December (EUR 300 bn); public reinsurance for credit  
insurance outstanding (EUR 10 bn); and an increase in various  
public insurance facilities for export companies.  
As to household confidence, a “data collection” effect limited the  
decline in the INSEE synthetic indicator to 1 point. According to the  
INSEE, the publication essentially reflects household opinions on  
the economic situation in early March. Yet even so, worries were  
already beginning to surface, as illustrated by the large dip in the  
balance of opinions concerning the opportunity to purchase big  
ticket items and future trends in unemployment and the standard of  
living in France. In April, we should expect to see a sharp drop in  
household confidence, as well as in the business climate, although  
we can hope the decline will be less vertiginous.  
The government’s stimulus package initially totals EUR 45 bn, which  
is considered to be a minimum. In addition to these fiscal and  
financial support measures, there are also European measures, the  
ECB’s monetary support measures, and the easing of prudential  
regulations in the banking sector to keep monetary and financial  
conditions from tightening and to ensure the smooth financing of the  
economy. These measures look appropriate to address the dire  
consequences of the crisis; their effectiveness will now be put to the  
test. The dive in oil prices provides a mitigating effect that is hardly a  
drop in the bucket in the near term, but which could prove to be a  
major support factor during the post-crisis period.  
Along with these business confidence surveys, the INSEE also  
published its preliminary estimate of the loss of economic activity  
linked directly to measures to halt the Covid-19 pandemic. The  
instantaneous loss is estimated at 35%, which is equivalent to  
slashing off 3 points of full-year GDP per month of confinement.  
Similar estimates were released by the OFCE, the French economic  
observatory, and the OECD: the monthly loss of activity was  
estimated at about 30% and 25%, respectively, and the negative  
The post-crisis period: what kind of a recovery?  
Predicting the type of recovery that will follow the Covid-19 crisis is  
just as difficult as trying to estimate the scope of the recessionary  
shock. One would hope for a V-shaped recovery, in which activity  
restarts rapidly and business quickly returns to pre-crisis levels, i.e.  
by the end of 2020. This scenario is still within the realm of the  
possible. Though extremely abrupt and widespread, the economic  
shock triggered by the Covid-19 pandemic should be only temporary,  
and its roots are not as deep as in the 2008 financial crisis.  
Moreover, economic policy responses have been rapid and massive,  
and will continue to be implemented as needed. The economy could  
bounce back rapidly once the health risk has receded. But when  
might that happen? That is the big question. Until then, the longer  
the crisis lasts, the more it will erode the capacity for a rapid,  
comprehensive rebound. Looking at the situation on a sector basis,  
we cannot say the harder the fall, the more rapid the recovery.  
Take tourism, air transport and aeronautics, to name but three  
examples at the heart of the French economy: it will probably take a  
long time before these sectors return to pre-crisis levels. Among the  
consumer spending and investment projects that were postponed,  
many will never be restarted or replaced. And even if demand is on  
track, would supply be able to handle it? And vice versa? Lastly,  
regaining confidence is also a key factor. For all these reasons a V-  
shaped recovery does not seem to the most likely scenario. A more  
realistic scenario would be a U-shaped recovery, with a longer  
recuperation period. An L-shaped scenario cannot be excluded  
either, depending on what scars, hysteresis effects and changes in  
behaviour the crisis leaves in its wake.  
1
shock on GDP at 2.6 points and roughly 2 points . These headline  
figures for the loss of activity mask major disparities between  
sectors in terms of the size of the decline (see chart 3) and the slight  
“buffer” effect in some sectors, which have managed to maintain or  
increase activity (food stores, e-commerce, pharmacies,  
telecommunications and healthcare). From a more general  
perspective, the sector structure of the French economy is both  
favourable and unfavourable in the current crisis. The weight of the  
non-market services sector contributes to mitigate the impact of the  
crisis while the large share of the market services sector, which  
usually serves as the buffer, is a strong negative this time.  
To manage the shock, an arsenal of measures has been deployed  
to preserve as best as possible production capacities, employment,  
household revenues and corporate cash flows, to avoid  
bankruptcies in chain. In this way, once the healthcare crisis is over,  
the country would be prepared to return to work and restart the  
economy as rapidly as possible. These measures can be grouped  
into three categories:  
-
Direct support: simplification and strengthening of short-time  
working schemes (EUR 8.5 bn for two months); additional  
healthcare expenditures (EUR 2 bn); a solidarity fund for very  
small businesses, the self-employed, professionals and micro-  
enterprises that have been hard hit by the crisis (EUR 1 bn per  
month); and looser conditions for the payment of the Macron  
tax-free bonus (the government is also exploring the possibility  
of doubling the amount to EUR 2000);  
In conclusion, we estimate that French GDP could contract by 3.1%  
in 2020 (average annual growth rate, seasonally and working days  
adjusted), a bigger contraction than the 2.8% reported in 2009.  
Thereafter, the economy would rebound by 5.4% in 2021. It goes  
without saying that these forecasts are highly uncertain, with risks  
on the downside.  
-
Deferrals (for companies and the self-employed): taxes and social  
welfare contributions due in March (EUR 32 bn); rent, water,  
https://read.oecd-ilibrary.org/view/?ref=126_126496-  
evgsi2gmqj&title=Evaluating_the_initial_impact_of_COVID-  
19_containment_measures_on_economic_activity.  
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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