Perspectives

An accordion-like exit from the crisis

nd  
Eco Perspectives // 2 Quarter 2021  
economic-research.bnpparibas.com  
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FRANCE  
AN ACCORDION-LIKE EXIT FROM THE CRISIS  
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 YEAR 2020 IN REVIEW  
GROWTH AND INFLATION (%)  
If we had to summarize the year 2020 in a few figures, we would  
use the following seven indicators. First, GDP plunged at an average  
GDP Growth  
Inflation  
annual rate of 8.2%, a record for France. It was also the third largest  
contraction in the Eurozone, behind Spain, the leader at -10.8%,  
and Italy, -8.9% (compared to a Eurozone average of -6.8%). Second,  
payroll employment declined only 1.3%. Third, household disposable  
income rose a slight 1.1%. These two trends, which are correlated,  
are remarkable given the massive recessionary shock that slammed  
the French economy. They attest to the effectiveness of emergency  
measures. Fourth, the household savings rate rose strongly, up  
Forecast  
.1  
Forecast  
8
6
4
2
0
2
4
6
4.4  
1
.5  
1.3  
1.4  
1.0  
0.5  
-
-
6
.4 points to 21.4%, as households built up a combination of forced  
and precautionary savings, the corollary of the prevailing uncertainty  
and the preservation of gross disposable income at a time when  
consumption plummeted (-7%), largely restrained by a series of  
-6  
-8  
-10  
-8.2  
2020  
1
2019  
2021  
2022  
2019  
2020  
2021  
2022  
lockdown phases . Fifth, the profit margins of non-financial companies  
declined sharply, down 4 points to 29.2%, the lowest level since 1985.  
The sixth and seventh indicators are the fiscal deficit and the public  
debt ratio. According to preliminary INSEE estimates, both reached  
record levels at -9.2% and 115.7% of GDP, respectively. Yet these figures  
are not as bad as the government estimated in its fourth revised  
finance bill for 2020 (PLFR4 2020), which called for a deficit of 11.3%  
and a debt ratio of 119.8%. This means the enormous cost of the crisis  
was not as high as feared (+6.1 points for the deficit relative to 2019  
and +18.1 points for the public debt). This can be explained in part  
by the smaller contraction in GDP than the government had forecast  
in its PLFR4 (-11%). All other factors being the same, this favourable  
forecasting error of GDP growth accounts for 83% of the erroneous  
deficit (1.7 points out of a total of 2.1). The wider deficit (in EUR billions)  
can be broken down as follows: 47% is due to the drop-off in revenues  
and 53% to higher spending. This created an open scissors effect that  
will probably be much harder to close than it was to open (see chart 2).  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
FISCAL REVENUE AND SPENDING: AN OPEN SCISSOR EFFECT  
Public revenues and expenditures (level, EUR bn)  
500  
1
Revenues  
Expenditures  
1
400  
1
300  
1200  
In our review of 2020, one of the key characteristics of this crisis was the  
jagged ups and downs of quarterly GDP growth, according to the series  
of lockdown and reopening phases. After a 5.9% q/q decline in Q1, GDP  
plummeted 13.5% q/q in Q2 before rebounding vigorously by 18.5% q/q  
in Q3. The economy then relapsed, declining 1.4% q/q in Q4, leaving it  
1
100  
000  
00  
1
9
5
% below the pre-crisis level of Q4 2019. Household consumption was  
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020  
down nearly 7% from pre-crisis levels, while corporate investment and  
exports were down 5% and 10%, respectively. Another characteristic of  
this crisis is that consumption was hit harder than business investment,  
while the heavy toll paid by exports can be attributed to the weight of  
CHART 2  
SOURCE: INSEE, BNP PARIBAS  
2
the aeronautics and tourism sectors in the French economy .  
1
. Gebauer, J-F. Ouvrard, C. Thubin (2021), Uncertainty over Covid-19 drives up French household savings, Bank of France, Bloc-note Eco billet n°206, 3 March  
2
INSEE, Troubles in the aeronautics sector are preventing French exports from taking off again, Note de Conjoncture, March 2021  
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nd  
Eco Perspectives // 2 Quarter 2021  
economic-research.bnpparibas.com  
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THE RECOVERY IS DELAYED AGAIN  
FRANCE’S REBOUND CAPACITY AS SEEN IN SOFT DATA  
The economic situation is mixed in the first 3 months of 2021. GDP is ex-  
pected to grow slightly in Q1, but thanks solely to a positive carry-over  
effect due to the rebound in activity in December 2020 after the end of  
November’s lockdown restrictions. In January and February 2021, the  
French economy continued to operate at about 95-96% of its pre-crisis  
level according to INSEE and Bank of France estimates. In March and  
April, we expect France’s operating capacity to deteriorate to about 93-  
1
1
1
1
1
9
90  
85  
80  
7
7
6
6
20  
15  
10  
05  
00  
65  
60  
55  
50  
45  
5
40  
9
4% of pre-crisis levels following the tightening of lockdown measures  
35  
on 20 March for at least four weeks in 16 departments, which was then  
expanded to 19 departments. Fears of another decline in Q1 GDP seem  
nonetheless to have been put to rest. As a result, France is likely to  
have avoided a technical double-dip.  
5
0
5
0
30  
25  
20  
15  
10  
Business confidence (INSEE, LHS)  
Household confidence (INSEE, LHS)  
PMI composite (Markit, RHS)  
The strong upturn in March confidence surveys is good news, but it  
was a false start, illustrating the expression “one swallow does not  
spring make” (see chart 3). The improvement in business sentiment  
in the services sector and in household opinions on future living  
standards in France illustrate the country’s rebound capacity, while  
the strength of business sentiment in industry illustrates the power of  
external support factors. It also brings to mind the dichotomy between  
industry, which is not hit as hard by restrictive health measures, and  
the services sector, which is more directly impacted. Yet March’s  
improvement, notably in the services sector, was more of a technical  
rebound after February’s decline, two movements that are uneasy to  
square with the relative stability of the Google mobility indices. Above  
all, for the different surveys, it was probably a very short-lived rebound  
because it does not include the impact of the most recently announced  
lockdown restrictions. These so-called leading indicators are lagging  
behind the times, a lag due to the rapid reversals in the health crisis.  
Consequently, we should expect the surveys to deteriorate again in  
April, before hopefully entering a more lasting upturn starting in May.  
Seen in this light, Q2 prospects are not very encouraging. Assuming that  
activity rebounds as of May, based on the assumption that lockdown  
measures will be eased, GDP could rise slightly. Yet we cannot rule out  
the possibility of negative growth if the most recent health restrictions  
have a bigger than expected impact on activity in March and April, if  
new restrictions are announced, and/or if the expected rebound fails to  
materialise once lockdown restrictions are lifted. In a nutshell, there  
is still enormous uncertainty and any improvement in the economic  
situation hinges directly on the evolution of the health crisis.  
5
5
50  
2007  
2009  
2011  
2013  
2015  
2017  
2019  
2021  
CHART 3  
SOURCE: INSEE, MARKIT, BNP PARIBAS  
FRANCE’S REBOUND CAPACITY AS SEEN IN HARD DATA  
Dec. 2019 = 100  
05  
1
1
00  
9
5
90  
8
5
8
0
7
5
70  
65  
6
0
5
5
Household consumption expenditure on goods  
Industrial output  
50  
Services output  
4
5
Exports  
4
0
Building permits  
3
5
Existing home sales  
30  
Dec. 19 Feb. 20 Apr. 20 Jun. 20 Aug. 20 Oct. 20 Dec. 20 Feb. 21  
CHART 4  
SOURCE: INSEE, BNP PARIBAS  
Contrary to what we were led to believe in late 2020, the discovery of  
vaccines and the announced start-up of vaccination campaigns did not  
end the stop-and-go nature of the economic recovery. In early 2021,  
due to the emergence of variants and the slow pace of vaccinations, the  
exit from the crisis continues to follow a jagged trajectory. We still see  
the light at the end of the tunnel, but it keeps getting closer or farther  
away depending on the evolution of the health situation. As we write  
these lines, the light seems to be fading, whereas four months ago, in  
our previous analysis published in early December, we seemed to be  
nearing the tunnel’s end. The economy’s rebound capacity, and the  
potential for a vigorous recovery, are not called into question. Rather  
it is the timing of the rebound that has been pushed back by two  
quarters, from Q1 to Q3 2021. Given this background, although there  
has been some discussion on the various steps of the exit strategy, the  
time is not ripe to withdraw support measures, much to the contrary.  
In 2022, GDP growth should remain strong at an estimated 4.4%.  
According to our scenario, French GDP will surpass pre-crisis levels in  
Q1 2022. This would mark a first step. There can be no doubt that it will  
occur at one moment or another: the big question is one of timing, just  
how long will it take? Returning to pre-crisis levels in the span of about  
a year can be considered a relatively short period of time considering  
the severity of the shock. In contrast, there is a big difference between  
returning to pre-crisis levels and returning to the pre-crisis trajectory,  
i.e. the level of GDP that would have been reached in the absence of the  
crisis. The size of this gap is a measure of the scars left by the crisis.  
While the United States seems to be well on its way to returning to  
this pre-crisis trajectory as of 2021, which would be remarkable, the  
same cannot be said for France. Based on our outlook through 2022  
and those of the IMF from 2023 to 2025, there could still be a gap of  
slightly less than 1% in 2025.  
In 2021 as a whole, we expect GDP growth to average 6.1%. This is  
a rather optimistic forecast, a half point higher than the March  
consensus. Our optimism is based on the expected acceleration of the  
vaccination campaign and the effective support of the policy mix.  
Completed on 31 March 2021  
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