France, Covid-19, retail

France: Improved confidence will boost consumer spending by EUR10bn in 2021

02 December 2020

Household confidence will play a key role in France's economic recovery from the Covid-19 crisis . But unlike consumption, confidence never recovered to its pre-crisis level even when the first lockdown was lifted. After a short-lived rebound in June, and with the implementation of a second lockdown in November, confidence has deteriorated severely to near the historically low level seen in December 2018 during the peak of the ‘Yellow Vest’ movement. The “confidence effect” usually explains around one third of the consumption gains in France but this relation seems to now be ‘temporarily’ broken (see Figure 1). During the first lockdown, the timely announcement of generous fiscal support measures reassured households, helping to prevent a major confidence shock despite the historical drop in consumption. However, while the gradual easing of sanitary restrictions from May led to a consumption euphoria during the summer, it was fueled by “other” factors than confidence, such as pent-up demand and the unleashing of forced savings accumulated during the lockdown (close to EUR100bn in Q2). In our view, household confidence in France has been held back by continued uncertainty over the sanitary and economic outlook, as well as growing fears of unemployment (after a potential phasing out of the government support). Indeed, after a short-lived recovery in August , the unemployment outlook sub-component of the headline confidence indicator has deteriorated continuously.

Figure 1 – Consumer confidence (lhs) and consumption (rhs) - EURbn

Figure 1 – Consumer confidence (lhs) and consumption (rhs) - EURbn
Sources: INSEE, Eurostat, Allianz Research
Figure 2 – Monthly household consumption, EURbn
Figure 2 – Monthly household consumption, EURbn
Sources: INSEE, Allianz Research

In our baseline scenario , we expect the continued stringent sanitary measures  to prevent a strong confidence rebound in Q1 2021, even though the vaccination of the population at risk is likely to kick off successfully during this period. The confidence recovery could only gain traction as of Easter 2021, under the hypothesis of a larger scale vaccination campaign being implemented and continued fiscal support from the government. Overall, in 2021, we expect a strong consumption rebound of +7.2% in view of sizeable base effects (after a -8.1% consumption drop in 2020). Applying model elasticities to our macroeconomic scenario, we find that returning to the pre-crisis confidence level (i.e. that seen in February 2020) by end 2021 could generate close to EUR10bn in additional consumption in 2021 itself, and explain above one third of total consumption gains in 2021 (EUR27.4bn, see Figure 3). However, with deteriorating labor market conditions amid rising insolvencies, we expect consumption expenditure to recover to its pre-crisis levels only in 2022. 

Figure 3 –Decomposition of quarter-on-quarter change of consumption in 2021 (EURbn)

Figure 3 –Decomposition of quarter-on-quarter change of consumption in 2021 (EURbn)
Sources: Euler Hermes, Allianz Research

The confidence recovery as well as the reopening of the Covid-19 sectors throughout 2021 is also likely to unleash close to EUR20bn of excess savings.  We expect the second (lighter) lockdown to push the household saving rate up to 21% at end-2020 from 16.5% in Q3. Under the hypothesis of a +2% y/y increase in gross disposable income  and a rebound of private consumption of 7.2% y/y, we calculate that the household saving rate will fall to 16.8% in 2021. This should translate into close to EUR20bn of unleashed private savings (see Figure 4) and in our view, most if it will be private consumption due to pent-up demand. Based on the split of savings  and propensity to spend these savings by revenue category (higher when revenues are lower), we estimate that improved confidence and pent-up demand would unleash a total of EUR19.5bn of household excess savings, with EUR5bn of excess savings from the 10% richest households and EUR9bn from the upper medium class (see Figure 5). Overall this unleashing of savings should bring around +1.0pp of additional GDP growth in 2021.

Figure 4 – Expected pattern of French households’ savings  

Figure 4 – Expected pattern of French households’ savings
Sources: Insee, French Treasury, Eurostat, Allianz Research
Figure 5 – Potential for additional private consumption from excess savings in 2021, EURbn and pp of GDP growth
Figure 5 – Potential for additional private consumption from excess savings in 2021, EURbn and pp of GDP growth
Sources: Eurostat, Allianz Research
Ana Boata
Head of Macroeconomic Research
ana.boata@eulerhermes.com
Selin Özyurt
Senior Economist for France and Africa
selin.ozyurt@eulerhermes.com