Country Report France | Massive stimulus will boost economic recovery
Crédito y Caución (Atradius) | In the first quarter of this year, French GDP grew 0.4% quarter-on-quarter, supported by the fact that another national lockdown was suspended until April. Growth was mainly driven by investment spending and a modest increase in private consumption.
While the growth rate in the second quarter will be affected by the comprehensive lockdowns imposed in April, the gradual easing of those restrictions in May and June, coupled with the rollout of the vaccination, will lead to a rebound in the second half of the year. According to Oxford Economics, the French economy is expected to grow by 5.4% in 2021, after a sharp contraction of 8.2% in 2020. The economic rebound will be mainly driven by domestic demand. Household consumption and investment will increase by 3% and 10.5% respectively, with business investment benefiting from the significant stimulus measures underway (see below). While real public consumption will increase by 4.7%, exports are expected to rebound by 11%, after contracting more than 16% last year. Inflation will rise 1.5% this year, driven by the recovery and rising energy prices.
In 2022, the French economy is expected to grow by 5.3%, with a further increase in investments and exports (+ 4.5% and 9% respectively). Private consumption is expected to grow by 6.7%. As in H2 2021, the purchasing power of households will be supported by the government’s leave scheme and the savings accumulated during the lockdowns. However, rising unemployment (which is expected to rise to 9.2% in 2022, against 8.3% in 2021 and 7.8% in 2020) could dampen private consumption.
Massive stimulus measures have pushed up public debt
Since the outbreak of the pandemic in France, the French government has launched massive stimulus measures to support consumers and businesses. In order to support businesses affected by the pandemic, the government has launched several measures, for example a leave scheme, a Solidarity Fund to help small businesses and micro-entrepreneurs, a large program of loans guaranteed by the state ( PGE), and measures facilitating the establishment of moratoriums on debt and the payment of rents.
As a result of these stimulus measures and the negative impact of the pandemic on tax revenue, the French public deficit increased to 9.4% of GDP in 2020. With additional public spending to support the economy in 2021 and in 2022, another deficit of nearly 9% of GDP is expected this year, followed by a deficit of 6.5% of GDP next year. Currently, the government’s economic policy program is focused on implementing a € 100 billion supply stimulus plan (of which € 40 billion will come from the € 750 billion stimulus fund). EU, subject to final approval by the European Commission and the European Council). . The recovery plan mainly aims to boost the industrial sector by increasing competitiveness and investments in digitization and ecology (green businesses), while another pillar is the strengthening of social and territorial cohesion (including the creation jobs / minimize the rise in unemployment).
Public debt will rise to nearly 120% in 2021, the third highest debt-to-GDP ratio in the euro zone after Greece and Italy. However, in the short term, the government will prioritize economic growth over fiscal consolidation. This is helped by the fact that the European Central Bank (ECB) indirectly supports France’s public finances with its extraordinarily loose monetary policy. The ECB has committed to purchasing assets under the Pandemic Asset Purchase Program (PEPP), and increased and extended the PEPP in December 2020. The ECB will buy up to 1.85 trillion euros in bonds until March 2022, and will reinvest principal payments until the end of 2023. This will keep financing costs low for now and give euro area governments some room to increase their debt issuance.
Performance forecast upgrades for certain industries
Due to the improving economic outlook, the outlook for credit risk / business performance for some key industries has recently been revised upwards, albeit from a very low level in most cases.
Automotive / Transportation: Automotive sector output is expected to increase by around 22% this year, after declining 28% in 2020. However, despite the strong rebound, the credit risk situation for many companies remains tight as the slowdown of 2020 resulted in severe strains on liquidity and cash flow deficits. Despite comprehensive stimulus measures (eg direct spending and tax relief measures), many Tier I and II subcontractors, and even some medium-sized businesses, face increased credit risk. The production of the French aerospace industry will rebound by around 13%, but it recorded a contraction of more than 30% in 2020. Subcontractors will continue to suffer from sluggish activity, with no real recovery expected before 2024-2025 . As the segment needs to consolidate, many players will disappear in the short and medium term. As a result of all of these unfavorable factors, the sector’s performance outlook remains “grim” for the time being. Construction / Building Materials: the performance outlook for the sector has been revised up a notch, but it remains “Bad” for the time being. The sector was performing poorly before the coronavirus epidemic, with increased cash flow problems for businesses due to difficulties in financing their working capital needs.
Construction output contracted by 14% in 2020. While residential and non-residential construction activity continued to decline in early 2021, the renovation sub-sectors have remained resilient so far. . Construction output is expected to rebound around 12% in 2021, but material shortages, volatile input prices and project postponement are weighing on firms with tighter margins. Thanks to government support measures, defaults in the construction sector remained low in 2020 and the first quarter of 2021, but an increase in business failures is expected towards the end of this year.
Electronics / ICT: Sales have deteriorated due to business closures due to lockdowns, and some retail businesses are facing a reduced level of inbound cash flow. However, business and employee spending on digital goods and services has increased due to the surge in remote working, and ICT output is expected to increase by 5% this year. As a result, the sector’s performance outlook has been upgraded from “Poor” to “Fair”.
Machines / Engineering: Machine production should rebound by 13% in 2021 after a contraction of the same figure in 2020. After a difficult period due to the freeze on investments in many industries, a rebound has started since the end of 2020. The outlook remains positive for H2 2021 and for 2022, because the previously postponed capital investments will finally be made. Engineering output is expected to increase by 11% this year and 4.5% in 2022. As a result, the sector’s performance outlook has been raised two notches from “grim” to “acceptable”.
Metals and Steel: Both sectors will see a pickup in orders and sales this year as demand from some key buying sectors (automotive, construction and machinery / engineering) rebounds. French steel production is expected to increase by 14.5%, following a contraction of 18.5% in 2020. While producers are currently benefiting from higher selling prices due to growing demand and shortages of steel and metal products, higher input prices due to a lack of raw materials is a problem. The Metals and Steel sectors have been upgraded from “Bleak” to “Poor”.
Services: Due to the comprehensive lockdown measures and the ongoing pandemic, many segments have suffered severely, especially hotels and catering, restaurants, bars, entertainment and cultural events, travel agencies and tour operators. After a 10% contraction in 2020, service output is expected to rebound by around 4% this year. The recovery of the tourism sector to its previous levels will take some time. Tourist flows will not fully resume in 2021, with some people refraining from travel to limit health risks. With the easing of restrictions, the hard-hit hotel and restaurant segment will rebound, but only by around 8% in 2021, after contracting 29% last year. The performance forecast for the service sector remains “grim” for now. Rise in insolvencies expected in the second half of 2021 Despite the strong economic contraction of 2020, the insolvencies of French companies fell by 39% over one year, to 31,200 cases. According to the Banque de France, business failures fell by 35% over the period April 2020 – April 2021. This drop is mainly due to a temporary moratorium on bankruptcy and significant budget support. While a moratorium on the obligation to file for insolvency expired at the end of August 2020, massive stimulus measures to support businesses have kept insolvency figures low. With the expiration or reduction of tax support, business failures are expected to increase again towards the end of 2021. Considering the cumulative growth in insolvencies between 2019 and 2021, business failures are expected to increase again towards the end of 2021. French companies are expected to increase by 8%, and a further increase in insolvencies is expected in 2022.