France Economy Hit by Virus as Central Bank Slashes Outlook

(Bloomberg) --

The French economy will barely grow this quarter as the coronavirus outbreak slams the brakes on activity in both services and industry, according to a Bank of France survey.

The downbeat assessment comes amid concern that Europe may be headed for a recession after Italy put its industrial heartland into lockdown, and global equities and oil prices tumbled. It’s a grim start to the week for European Central Bank policy makers, who meet in Frankfurt and may be forced to cut interest rates again.

The virus is another blow to France, the euro area’s second largest economy, after disruption from strikes caused output to shrink at the end of 2019. Based on a monthly measure of businesses activity, the Bank of France says the economy will only narrowly escape another contraction this quarter with 0.1% growth. Only a month ago, it forecast 0.3% growth.

“This slowdown is potentially severe but temporary,” Bank of France Governor Francois Villeroy de Galhau said in a rare statement accompanying the monthly report. “How long it lasts will depend on the public health measures necessary in China and in Europe.”

The sharp decline in France’s outlook shows how fast the virus outbreak has shifted the outlook. Morgan Stanley on Monday said the euro-area economy will probably suffer a technical recession in the first half of the year, and it cut its 2020 growth prediction to just 0.4% from 0.9%.

Policy makers have shifted to deal with the fallout, with the U.S. Federal Reserve cutting rates by 50 basis points last week. The ECB hasn’t yet changed policy.

Even amid the downbeat French survey, Villeroy urged “calm,” noting that the economy “will continue to have abundant liquidity.”

“Faced with this exceptional situation, we must keep our eyes wide open but remain coolheaded,” Villeroy said. “Our main economic risk in the long term would be to move on from necessary vigilance to a chain of over-reaction that would block us.”

According to the Bank of France survey, 19% of French companies across all sectors expect an impact on their business from the coronavirus. Industrial companies and services providers both expect activity to take a hit in March.

The central bank said there’s a “significantly bigger margin of uncertainty than normal” because of the speed of the epidemic. The survey of 8,500 businesses was conducted between Feb. 26 and March 4.

--With assistance from Catherine Bosley and James Regan.

To contact the reporter on this story: William Horobin in Paris at whorobin@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss

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