After a disastrous start of the year marked by the worst recession since the WWII, the French economy’s 2020 growth outlook has now slightly improved. The upturn in economic activity since May has been stronger than expected and it continued during the summer vacations. The beginning of this normalization has been observed through macroeconomic aggregates such as household consumption of goods, but also through sectoral data, particularly those relating to the hotel and restaurant industry1. In this context, high-frequency indicators in our possession suggest that France should record the strongest growth in its history in the third quarter. Moreover, the rebound is likely to be stronger than in many of our European neighbors. Although this phenomenon is partly the result of an arithmetic mechanism2, it also reflects a greater resilience in the tourism sector during this summer. However, it should also be noted that the pace of normalization slowed in August. Moreover, we believe that we are now entering a pivotal period where the risks of stagnation or even a downturn in economic activity are numerous, and, therefore, there is a need for caution for the end of the year.
I- A catastrophic start of the year
The Covid-19 crisis has paralyzed economic activity in France, so that after a 0.2% fall in quarterly GDP in Q4 2019, the negative spiral intensified with a contraction of 5.9% in Q1 2020 and 13.8% in Q2, the worst sequence ever recorded.
FRENCH GDP QoQ CHANGES
Some sectors have been harder hit, specifically in industry, those producing mobility equipment – such as aeronautics and automobiles. Within services, all sectors of the tourism ecosystem have been hardly hit – particularly transport, restaurants and accommodation, whose activity has historically evolved in strong correlation with overall economic activity.
ANNUAL CHANGES IN GDP AND REVENUE PER ROOM IN FRENCH HOTELS
II- A stronger than expected economic rebound following the easing of lockdown restrictions
Faced with this unprecedented shock, the public authorities intervened massively and chose to protect household purchasing power as a priority. In this respect, a study3 published by the OFCE showed that, over the eight weeks of lockdown, “households and individual entrepreneurs (as well as the voluntary sector) suffered a loss of income of 14 billion euros4”. Nevertheless, this loss of household income was more than compensated by a drop in spending leading to a significant savings surplus (+75 billion euros as of July 5). In a context where the health situation has improved (lower number of hospitalizations and deaths, increase in tests, access to masks, etc.), a normalization of activity was achieved from May onwards. The Bank of France5’s economic survey, published on September 14, also underlined that, for the month of August, the loss of GDP over a typical week of activity was 5% compared to the pre-crisis level (compared to -27% in April).
ACTIVITY INDEX COMPARED TO PRE-CRISIS LEVELS (BANK OF FRANCE)
As in many developed countries, the normalization in activity levels, faster than initially expected, is mainly due to the rebound in household consumption of goods. In France, the latest figures from INSEE6 showed that in July 2020, “household consumption spending on goods increased slightly (+0.5% in volume compared to June) after a strong increase in May and June (+35.5% and +10.3% respectively)”. In this context, in July, household spending on goods almost returned to the level of November 2019.
FRANCE: HOUSEHOLD CONSUMPTION (IN BILLIONS OF EUROS, BY MONTH)
This phenomenon has been encouraged by the aforementioned accumulation of a savings surplus, by a catch-up effect that adds up to state aid intended to stimulate demand (particularly in the automobile sector7), and a desire to profit fully from the summer season, which was also reflected in tourism-related spending. France was able to benefit above all from the resilience of its domestic market, including with regards to its tourism industry. This facilitated its rebound relative to its neighbors, particularly those in Southern Europe (whose exports and tourism depend heavily on Northern European countries), but also those in Northern Europe (which are generally more internationally oriented). In July and August, France therefore took the lead in Europe in terms of the recovery of tourist numbers.
EUROPE: EFFECTIVE OCCUPANCY RATE8 OF HOTELS BETWEEN JUNE AND AUGUST 2020
III- The economic rebound began to falter in August
Economic activity continued to grow in August, but the pace of growth has slowed compared to previous months, as shown by the monthly composite index developed by Markit9, which reached 51.610 in August, a three-month low. Regarding the services sector, the report noted that “underlying data indicated that a rebound in the Hotel & Restaurants sub-sector was partially offset by declines in other areas, including Post & Telecommunications and Renting & Business Activities.”
Even when households were taking summer breaks, particularly in areas where resort tourism is important, the momentum slowed sharply during August.
SUMMER 2020: WEEKLY CHANGE IN HOTEL OCCUPANCY IN FRANCE
It even reversed at the end of the month, in response to renewed concern about the sanitary situation (particularly with the Bouches-du-Rhône and Paris regions becoming a “red zone”) and the sluggish demand observed by companies in many services’ sectors.
At the same time, in the manufacturing sector, the Markit index fell back below the 50 threshold, indicating a contraction. In this respect, we can assume that activity in the automotive sector has stagnated due to the decline in new car registrations. According to the Committee of French Automobile Manufacturers (CCFA), in August11 the French market for new passenger cars fell by 19.8% in gross terms compared to August 2019. This decline is partly due to unfavorable base effects (solid basis for comparison in August 2019) but also reflects a backlash after the excellent figures in July, boosted by the end of the “cash for clunkers” scheme.
Even though the overall rebound in activity lost momentum in August, the positive base effect accumulated since the end of the second quarter still implies that French growth will spring back very strongly in the third quarter. More specifically, its rate of growth will be the highest ever recorded, and probably well above the average for the euro zone. In this context, the government should revise upwards its growth forecast for 2020, currently set at -11%. A figure close to the Bloomberg consensus (i.e. around -10%) seems appropriate to consider the potential turbulences that could occur in Q4.
FRENCH 2020 GDP
IV- The risks of business stagnation or downturn are numerous for the end of the year
As illustrated by the decline in tourist activity since mid-August, we are entering a pivotal period where businesses will have to take the lead. This observation is equally valid for the hotel industry, where 65% of the annual turnover is generated during the week (Monday to Thursday), mainly by business customers, and for which September usually marks a peak in activity. This reality is reinforced by the recent evolution of the sanitary context, as France and some of its key territories are once again subject to restrictions (such as a fourteen-day mandatory isolation upon return) imposed by various European countries, such as the United Kingdom, Belgium or Germany. It should also be pointed out that national measures, which could go as far as a localized lockdown, would likely penalize activity very significantly. The risk would be greater if two of the regions that are currently most affected by the virus, namely PACA and Ile de France, were to be subject to restrictions. Indeed, these regions account for more than 35% of national GDP and for more than half of the turnover of the hotel and restaurant industry. At the same time, even if the government decided to implement an ambitious €100 billion recovery plan, its new effects are not expected to be felt until 2021, which raises fears of a period of uncertainty for the end of the year.
At the same time, numerous bankruptcies are already expected for the month of October. As Les Echos12 pointed out, “since August 24, companies that cannot pay their invoices have 45 days to declare themselves in suspension of payments at the Commercial Court”, which should result in a rise in business failures starting in October. This phenomenon could then weigh on household morale and put a brake on consumption.
Finally, on a geopolitical level, the environment will be particularly unfavorable. Indeed, the latest negotiations between Europe and the United Kingdom suggest that the “Hard Brexit” scenario remains credible. On the other side of the Atlantic, the uncertainties surrounding the November 3 elections will increase, especially since various scenarios synonymous with instability of the international trade system cannot be ruled out. These factors, combined with a lack of visibility on the post- Covid recovery, could lead companies to delay their investments and hiring decisions, thus amplifying the phenomenon of stagnation or even relapse. The economy, as well, will have to fight against the risk of a second wave.
1 As a reminder, historically, it has been possible to observe a strong correlation between the sector’s turnover and GDP.
2 A return to normal starting from a lower point implies a strong progression.
4 Less than 10% of the total shock at the national level, estimated at €165 billion.
7 New vehicle sales increased at an annual rate in June and July.
8 Effective occupancy rate = share of hotels that are open x occupancy rate of open hotels.
10 An index above 50 implies an expansion compared to the previous month.