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AB 2000 studies

Alain Boublil Blog


A statistical recession

The economic consequences of the corona virus outbreak have an exceptional extent. In France, the first results of the Banque de France inquiries provide an estimation of the GDP fall during the 1st quarter of 6%. The government is forecasting for the full year a recession with the same magnitude. Support measures in favor of enterprises and the increasing of health and unemployment compensation expenditures could generate a public deficit above 7% and public debt could overpass at the end of the year 120% of GDP under the cumulative effect of the contraction of the denominator and the increase of the numerator. The State has not waited  to meet these new expenditures. It is increasing bond issuances on financial markets and the last one has brought more than 12 billion when the initial program had inscribed an amount between 9 and 10 billion euro. Interest rates are remaining near zero which will allow not to making heavier next year this public expenditures item.

The world has already known two major economic crises in 1929 and in 2007-2008. But that one which is announced is different: it has not, as an origin, unbalances resulting from enterprises, household or financial institutions behaviors. It is the consequence of an outbreak which spread worldwide. Sanitary measures decided by governments have lead to a brutal good and services production and consumption stoppage in many sectors. It is the statistical expression of these stoppages which is at the origin of the recession which so has not any proper economic or financial cause and which will weight on the situation and the prospects of the concerned enterprises. investors have understood it and financial markets have known a slump as brutal as in 1929 or 2008.

The 1929 Great Depression at the beginning affected only the U.S. It had been caused by an intense stocks market speculation where some went even to indebt themselves to buy shares. Enterprises didn’t anymore invest and even also started to speculate, as household who had reduced their consumption. The economic activity had been affected and a recession had occurred during 1929 1st half. The Federal Reserve thought it was a good idea, in order to slow speculation, to increase its interest rates during the summer. Becoming aware of these excesses, Wall Street slumped during October last week and President Herbert Hoover was not able to find the appropriate remedies to make the activity rebounding. It will be necessary to wait for 1933, with the coming into function of Roosevelt and the launch of the New Deal to see economy restarting. During that time, Europe had suffered the after-effects of the American recession and the worsening of the economic situation was not without link with the Hitler coming into power in Germany that same year.

The 2007-2008 crises also started in the U.S. but expanded very quickly outside, in the other parts of the world through the whole international banking system. Loan to poorly solvable household (sub-primes) and the securitization of the debts put in danger financial institutions. The States, after Lehmann Brothers failure in September 2008, had to save them through partly nationalization or, which was not quite different, through guaranteeing their financing. Enterprises reduced their activity, stock markets fell and the recession was the consequence of the financial crisis. The States reacted more quickly than in 1929 and allowed to make the activity rebounding to the price of heavy budget deficits and a massive interest rates fall.

The 2020 crisis has a different nature as it is not the consequence of excessive behaviors from economic agents. It results from the measures taken to stop an outbreak. They have had an immediate statistical impact. Hundreds of thousands enterprises had to partly or totally stop their activity to comply with administrative decisions. Others confronted with the deep fall of the demand for their products or services had to do the same because their clients were forbidden to go to their shops or to their restaurants. In France near one third of the private sector employees found themselves in part-time or full time unemployment. Facing this unprecedented situation, the government, at the national level, and members of the euro-group have decided to adopt massive supporting measures to go through that test. But the real challenge is not there. In order to that purely statistical recession doesn’t become a major and lasting economic crisis, it will be necessary to avoid that the damages on the production apparel are irreversible with a multiplication of bankruptcies and the disappearance of essential enterprises. It is why the exit process of the sanitary crisis, the methods used to put an end to confinement will be decisive to avoid that the recession, which is today a purely statistical one, becomes an economic and financial one.

Medicine is not an exact science. To be convinced of that, it is enough to observe that there are as many opinions on the outbreak as doctors, especially when the issue is about the proposals to exit from it. It will also be necessary to avoid that the sick dies cured, i.e. that the damages caused to the economy put in danger our societies equilibriums through a massive unemployment along with household impoverishment, as dangerous as it would be unequal. It is why the exit from confinement, which will necessarily occur, must be carefully prepared and gradual and selective in order to reduce, at the maximum, the long term consequences of the outbreak. Priority must be given to the demand, i.e. to the possibility offered to household to start again to consume and to move. If garages are open, it can be done the same, it is examples, for car sellers and bookshops, under the condition that all precautions, already in application, under the form of barriers, are taken in current open places are extended to the new ones.       

Bit by bit we will observe a diminution of the numbers of affected persons, justified travel allowances which are today forbidden will have to be authorized again, but also there, with pragmatism and accompanied with a large pedagogic effort by public authorities. So the economic life will be back and enterprises, which will be equipped, regarding their production tools, with the indispensable protection equipments for their employees, will have overcome that crisis, the support measures announced by public authorities having given to them the ability to survive. Since these measures cannot be forever, it is urgent to prepare the confinement exit. To submit it to the availability of tests, treatments or vaccines which do not exist yet is unrealistic in face of the damages the outbreak has already provoked.

The statistical recession will not transform itself into a major crisis if we can find the good balance between sanitary preoccupations and economic constraints. That will depend on the relevance of the choices, regarding the agenda as the selection of activities and trips to be re-authorized. That set of decisions which will be assigned to political leaders will be very difficult to determine and to make it accepted, so the pressures coming from all sides will be strong as the attempts to use the situation by political parties from all tendencies will be numerous. But it is the condition of a successful exit from the crisis. The lessons to take will come after, regarding both the re-adaptation of the enterprises to globalization and the indisputable put in place of an extended conception of national security including sanitary isues.     


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