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Alain Boublil Blog


Growth : The worst is to be feared

INSEE has just published, along with its first estimation of the GDP evolution during the 1st quarter, figures of household goods consumption in March and inflation in April. These figures are important because they allow making a first analysis of the economic agents reaction to the lockdown measures adopted since March 16th. GDP has fallen by 5.8% compared to the previous quarter and household goods consumption by 17% compared to March 2019. Inflation, month on month, has been 0.1%, i.e. on one year 0.4%.

The GDP fall is especially alarming that it comes after a light contraction during the previous quarter (-0.1%) following an already low period of growth, hardly above 1% as an average for two years. The worry is increasing when we analyze GDP components and if we notice that the lockdown was only effective during the quarter final two weeks. Total household consumption fell by 6.1% and investments by all economic agents by 11.8%. Investment decisions are the outcome, especially for public administrations and household, of a rather long decision process. So these delays are not only related to the corona virus outbreak. During the three first 2019 quarters, corporate investments had increased by more than 3% on a yearly rhythm but this trend was interrupted during the 4th quarter.

Foreign exchanges contribution has been once more negative (-0.2%) as during the full 2019 year, despite the household consumption fall, which is generally considered as the culprit of the deficit due to their non “patriotic” attitude and despite the first impact of the oil prices fall, which is the most important component of the French foreign trade deficit. These results show once more that the economic strategy based on the reduction of charges weighting on enterprises allowing them to recover their competitiveness and to increase their market shares has not given until now convincing results.

At last the increase of enterprises inventories has represented a 0.6% contribution to the GDP. It is another very worrying point. Enterprises have been too slow to adjust their production to the crisis. Household, or foreign clients, have reacted much quicker to the sanitary crisis and inventories have been accumulated. That production which is included in 1st quarter accounts will weight on the activity of the following ones.

Year on year, we notice a very low inflation rate: 0.4%. Compared to the previous month, it is even lower because it has only reached 0.1%. But this almost stability is hiding very different evolutions between  goods, with a significant fall of energy prices, as a direct consequence of oil prices dip which is starting to be transmitted to petrol and domestic natural gas. Industrial products prices are also falling. Household have almost stop to go shopping and proposed prices, for instance through internet or in large malls, have fallen. To the opposite, the disruptions on supply chains have generated tensions on fresh products supply which have caused a sharp prices increase (9%). 

Household goods consumption evolution in March is revealing of the economic consequences of the lockdown, which, it is useful to remain, has only affected half of the month. It fell from 47 to 38.5 billion euro. So household saved 8.5 billion which went to abound banking or saving accounts. Only foods consumption was increasing. It went from 17 to 18.5 billion under the combined effects of precautionary buys when the first shortage threats appeared and of the obligation to take their meals at home. The rise should accelerate in April. Water and domestic energy consumption were flat, around 4 billion but petrol one fell by one billion. It logically would fall again in April because private travels have been very strongly reduced due to the lockdown and reach less than 2 billion. At last, durable goods consumption (car, textiles, clothes and home equipments) have been almost divided by two and came back to 13 billion. According, here again due to the fact that the lockdown period was a half-month one in March, April figures would show a deep dip and not to overpass 7 billion. As a total, it is possible to estimate that in April household will have spent around 30 billion in goods, a higher than 30% fall compared to February. New car registrations number, for instance, has fallen by 72% in March and 89% in April, year on year.

Until now the recession has been provoked by lockdown measures. But its end, fore cast for May 11th is not going to provoke a return to a normal situation for two reasons. First, it is going to be very progressive. Many services activities, notably tourism and transportation which will remain very limited, will continue to weight on growth and employment. More generally, to the outbreak shock will be added its economic consequences on employment and on household behavior. It has been frequently attributed to the worry caused by the economic reforms regarding pensions and labor rules the almost stagnation of the French economy at the end of 2019. Now, the threat is much sharper with the real explosion of unemployment caused by the outbreak. March unemployment numbers (246 000 more jobseekers) are just a foretaste.

The massive supporting measures announced by the government have been largely focused on enterprises. Their survival is indispensable. But it first depends on the coming back of their clients. The causing anxiety messages issued by both the medical body and public authorities are definitely not going to incite consumers to go back shopping when they will reopen. It is likely that the precautionary saving will increase again. In its supplementary finance bill, the government forecasts for the full 2020 year a GDP fall by 8%, based on a household consumption fall by 10% and an enterprises investment one by 17%. To the opposite, foreign trade and inventories variation would bring a positive contribution. That forecast is too optimistic because it is based on a rapid return of confidence and a change in the household behavior that nothing allows us to forecast. In particular the threats which are weighting on Summer vacations which constitute the engine of the economy during the 3rd quarter are able to impeach any rebound which could offset, at least partly, the production losses of the first half of the year.

The supportive measures announced by the government are necessary but not enough. What the economy needs, it is that the employees return to their jobs, the consumers can satisfy their needs or their desires and that the enterprises have clients to buy their products or their services. As soon as these guarantees haven’t been provided in all these fields, the activity will continue to fall and the recession could be much worse than what is now forecast.                


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