French economy hit by deepest fall since 1945

29 April 2020
By Brian McCulloch

France is facing a recession nearly as deep as the Great Depression, with the economy contracting by 8% and possibly even 10% due to the shutdown caused by Covid-19.

Prime Minister Edouard Philippe said the economy had taken a severe blow in “the deepest recession since 1945”.

He said the government’s “goal is to save what can be saved now in order to rebound tomorrow and “we must protect our productive base”.

Figures showed how badly economic life has been hit, with car and airline activity down 90%, public works down 85%, textile and interim work down 75%, security and aluminium down 70%, and commercial cleaners and aeronautics down by 60%.

Worse, the figures, by French firm QuantCube, do not include hotel, restaurant, tourism or events sectors, which have been at a standstill.

Unsurprisingly, only two sectors were doing as well as they would have been expected to do normally – food and health.

Packaging, supported by the boom in internet deliveries, was the next best performer, with activity down only 15%.

Despite a boom in internet use for teaching and social contact, telecoms was down 20%, as were chemicals, water and electricity, with iron and steel, cosmetics and rail transport down 40%.

QuantCube used figures as varied as the fall in air pollution (down 50% in Paris, 25% across France), the number of vehicles on the roads (car use in Paris reduced to 10% of previous figure) and the inflation statistics (down to 0.47% from 1.45%) to give econ­omists and statisticians hard facts to work with.

Mr Philippe’s figures were worse than initial forecasts by national statistics agency Insee.

It estimated after the first week of lockdown that if it continued for eight weeks, the annual GDP for 2020 would be down by around six points, equating to around €150billion lost to the economy over the confinement period, not counting any further losses later in the year.

The Bank of International Settlements (BIS), set up in 1930 to co-ordinate global banking rules after the 1929 crash, warned that the effects of lockdown would continue to be felt by businesses for many months.

Senior economist Emanuel Kohlscheen and head of economic analysis Benoît Mojon said in a joint paper: “The reduction of GDP due to confinement measures is likely to drag on over several quarters. The total GDP shortfall could be as much as twice that implied by the direct initial effects of confinement.”

In addition, they said uneven spillover of the virus between countries might lead to repeated outbreaks and confinements and warned that there would be no economic immunity from the virus if it was contained in only one or two regions.

Mr Philippe said the effects would be long-lasting and France had to look at “a national and European recovery plan”, while protecting what it had.

To give the economy some chance of rebounding, the government has started huge spending to keep companies of all sizes going and to keep workers employed.

These include the state paying 80% of salaries of workers put on chômage partiel, the new name for what used to be called chômage technique (short-term unemployment, with workers maintaining their positions for when work picks up again), not charging businesses for their payroll taxes, normally worth €1billion, or company tax, normally worth €12billion, and boosting funds set up to help independent workers such as auto-entrepreneurs.

Social security payments for both large and small businesses were also suspended, but not cancelled, in March, worth €21.5billion, and the arrangements will be repeated for April.

It is intended that these payments will be recuperated once the lockdown is over.

The government said it would guarantee 80% of bank loans given to companies to ensure they have enough cash flow to keep going, even when they have no, or very few, customers. So far, €45billion of extra spending has been approved to support companies and the government has indicated it will raise this amount if needed.

While there have been calls from politicians on the left for new taxes to be imposed on the rich to pay for the spending, there are indications the government will, instead, boost spending after the lockdown by cutting individual taxes.

In Europe too, action has been taken to boost the economy, with the European Central Bank injecting €750billion into the Eurozone by buying comp-any bonds, the European Stability Mechanism offering €450billion credit to countries in need, with few conditions, and the European Investment Bank releasing an extra €200billion to back projects in EU countries.

Proposals to issue so-called Coronabonds, in the form of combined sovereign bonds by the 19 Eurozone countries to help the most fragile states, caused outrage in the Nether­lands and Germany.

Fragile political alliances are at the root of the Dutch and German dislike of the “debt mutualisation” plan.

Their ministers said the bonds would reward countries such as Greece and Italy, where public spending and borrowing were very high, and punish countries with more balanced budgets.

Portugal called the Dutch attitude “disgusting” in the middle of a pandemic but the Eurozone countries agreed the €450billion package was a working alternative that would show they were “all in it together”.

In addition, a “recovery fund” is being created to finance a hoped-for rebound after the lockdown is ended but there is, as yet, no sign of how this will be financed.

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