FRANCE

After a lost decade (from 2008 to 2016), France rebounded with stronger growth in 2017 (+2.4%). However, despite this positive surprise, many bottlenecks remained unsolved and growth slowed down again in 2018 (+1.7%) and in 2019 (+1.3%).

France has cumulated four overarching imbalances during the last decade. Each domestic sector has its own imbalances, which are weighing on the whole economy: a supersized government (fiscal spending reached 55.6% of GDP in 2019), a highly indebted corporate sector (73.5% of GDP) and high-saving households (about 15% of their disposable income). The fourth imbalance is at the country level, with a sizeable trade balance deficit (EUR59bn in 2019).

The building up of strong imbalances and growth acceleration in 2017 fuelled the risk-taking of French companies. As companies resorted to debt issuance to finance their needs, corporate debt increased by +2.3pp in 2018 to 74% of GDP, before declining slightly to 73.5% in 2019. Yet, the Covid-19 shock is now fuelling the indebtedness of French companies once again. In April 2020, loans to non-financial corporations grew at a record rate of 9.3% year-on-year (compared to 6.4% on average in 2019). These loans were mainly intended for covering the treasury needs of cash-constrained companies.

The lockdown measures to contain the spread of the Covid-19 virus hit the French economy through an unprecedented loss of activity in virtually all sectors. After a massive decline (-18.2% q/q) in the second trimester, we expect the French GDP to rebound (+16%) as of the third quarter of 2020. However, overall, France is likely to experience the worst recession since World War Two, with GDP contracting by -18.2% in 2020. Economic growth is expected to rebound by +7.4% in 2021, thanks to continued fiscal support from the government and the recovery of domestic demand. We expect France to catch up with its pre-crisis GDP growth trajectory (+1.5% on average) only as of 2022. Inflation is expected to remain muted in 2020 (+0.4%) and to increase slightly in 2021 (1.4%) amid rising import prices and stronger internal demand.

The French government has implemented a wide number of emergency measures (7% of GDP) to limit the extent of the recession and support the recovery. These measures helped to absorb the immediate shock on households and companies, but will have a large fiscal cost. We expect the fiscal deficit to soar from -3% in 2019 to -11.8% in 2020, while public debt, which was already high in 2019 (98.8 % of GDP), is likely to reach 119% by end 2021.