The French Economy: Large second wave of the pandemic ends the recovery

After the severe recession in the spring caused by the Covid-19 pandemic and the strict national containment measures, the French economy experienced a strong recovery during the summer. The recovery now ends because of a large second wave of the pandemic. As in the spring, the French lockdown of the economy is strict when compared to other countries. As elsewhere, travel, tourism, hospitality, entertainment, and many other sectors of the economy are hard hit. Because of the pandemic and the measures to contain it, I expect a negative growth rate in the fourth quarter of 2020, although the reduction in GDP will be hopefully less strong than in the spring.

The third quarter of this year was a period of fast recovery. Gross domestic product (GDP) increased at a rate of 18.2 percent.  In the second quarter, GDP had dropped by 13.7 percent after a decline of 5.9 percent in the first quarter. Within one year, GDP contracted by 4.3 percent. Private consumption (+17.3 percent) and investment (23.3 percent) both strongly increased between July and September. In the second quarter, private consumption had fallen by 11.6 percent (after 5.7 percent in the first quarter) and investment had contracted at a very high rate of 14.3 percent (after 10.4 percent from January to March).

The recovery in the third quarter was due to lower Covid-19 cases and the partial relaxation of the lockdown measures in May. The recovery then gained further momentum over the summer although the pandemic and measures to contain it were still a drag on economic activity. Since forecasts or scenarios are associated with very high levels of uncertainty at the moment, I do not publish a detailed economic forecast. I was always relatively optimistic as regards the short-term recovery in the summer, but I have always been relatively pessimistic as to economic developments in the fall and the coming months and years (I also hold this view for several other countries).

I am not optimistic for the fourth quarter. The recovery would have got considerably slower even in the absence of a large second wave of the pandemic. Since the second wave of Covid-19 is large and severe in France and has led to very extensive measures to contain it, I expect a negative growth rate in the fourth quarter of 2020. The recession will hopefully be much smaller than in the spring, but it gets increasingly obvious that the whole recovery process from Covid-19 will take a long time.

For the whole year of 2020, I expect a severe recession of roughly 9 percent. This will be followed by a strong rebound of perhaps 6 percent in 2021. Currently, I do not think that the output level of 2019 will be attained again before the summer of 2022. As I mentioned above, such forecasts are obviously associated with a high degree of uncertainty. Especially, there is the risk of a persistent second wave of the pandemic that lasts for the whole winter. At the global scale, worldwide tensions could increase – especially between the United States and China. And at the European level, it is still not clear how exactly Brexit will occur and whether it will cause damage to the French economy – at least in the short term. In addition, the longer a large wave of the pandemic lasts in Europe, economic strains will probably increase in the eurozone and the European Union. Some risks that I do not expect to materialize in my baseline forecast, but that one should bear in mind is the situation of the banking sector, the high public debt levels, and a situation of stagflation (higher inflation and low economic growth).

While I use several models in my forecasts, my published numbers are also strongly influenced by my personal experience and judgment.

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