The French economy: Delayed recovery

The coronavirus pandemic caused a severe recession in France. I expect a solid recovery, but it will be somewhat slower than in some other advanced economies.

In France, gross domestic product fell 8.2 percent on average in 2020 after many downs and ups. In the fourth quarter of last year, output contracted at a rate of 1.4 percent compared with the previous quarter. A new wave of infections and various lockdown measures, some of them drastic, led to a sharp drop in private consumption of more than five percent. Investment, however, moderately expanded. Exports increased at a solid rate (+5.8 percent) in the fourth quarter. Since the growth rate of imports was only 1.8 percent, net exports increased compared with the third quarter.

In the first quarter of 2021, the French economy is expected to slightly contract. The pandemic will also weigh on economic growth in the second quarter, although I expect a low positive number. Various measures to curb the virus will remain in place during spring. In addition, the pace of the French vaccination program advances at a slower pace than, for instance, in the United Kingdom and the United States. I think that the pandemic will leave deep scars and French economic output will need more time to recover. Having said that, a solid recovery is hopefully ahead in the second half of 2021 and 2022. Business sentiment and consumer confidence show signs of improvement compared to the winter months.

The gradual easing of containment measures will stimulate private consumption and investment. This should also improve the situation on the labor market. In addition, the household saving ratio increased during 2020. Over time, at least some of these savings will be used for private consumption purposes when lockdown measures are eased. Households have experienced the pandemic in different ways. Some groups have been suffering a lot, while other groups could increase their savings. Strong economic growth in the United States, stimulated by fiscal policy and fast vaccinations, will help the French economic recovery. However, most European countries face similar health and economic situations to France, which will weigh on the recovery in Europe including France.

Against the backdrop of strong consumer demand and gradually increasing foreign demand, business investment will also increase noticeably. Corporate financing conditions will probably be somewhat less favorable than last year, but will continue to support investment. Monetary policy of the European Central Bank will remain expansionary and support the economic recovery.

All in all, I expect that the French economy will grow by around 4.5 percent this year. Next year, the growth rate is also likely to remain high at five percent. My forecast for 2021 is slightly lower than what other forecasts predict, while I expect a higher growth rate for 2022 than others. In my opinion, the recovery will be more delayed due to the pandemic related stagnation in the first half of 2021. Inflation will remain subdued for the moment, but will somewhat increase in the second half of 2021. Regarding inflation, I am a bit more concerned than others. While I do not see a strong increase in inflation, it might be somewhat higher than some of my colleagues predict.

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