French Economy’s 2020 Virus Slump Forecast to Exceed 10%

(Bloomberg) -- French economic output will take two years to recover from the virus-related slump that that will inflict even longer lasting damage on the labor market, the country’s central bank said.

The Bank of France report shows that even with robust growth in the next two years, unemployment will continue rising to reach a record high close to 12% in the first half of 2021 and decline to only 9.7% by the end of 2022. The economy, which will shrink more than 10% this year, will recover to the level reached last year around mid-2022.

“The French economy is recovering quite quickly from the brutal plunge in March, but we are far from being out of the woods,” Bank of France Governor Francois Villeroy de Galhau said on France Info radio. “All this has consequences and a cost, and now we must buckle down to rebuild.”

If the pandemic were to intensify again and the state maintained restrictions, the recovery would be further delayed and output would contract 16% in 2020, according to the central bank’s adverse scenario.

The forecasts -- the Bank of France’s first since the pandemic -- show the coronavirus casting a long shadow over economic prospects despite massive spending by governments to protect jobs and businesses. A report in Spain on Monday showed a similar picture, where even in the best-case-scenario, unemployment will remain above 17% through 2022.

In France, even with the government’s furlough program, unemployment claims have already surged and the Bank of France expects around 1 million fewer jobs in the economy by the end of 2020. Company profit margins will register their steepest declines in 40 years.

At the peak of the French lockdown, economic activity was around a two thirds of normal levels. At the end of May, activity was about 17% below normal, according to the Bank of France, but improvement is gradual and the gap will still be about 7% at the end of the year.

There is high uncertainty surrounding the forecasts, notably regarding household savings rates that will play a big part in the rebound, the Bank of France said. It estimates that savings could be 100 billion euros above pre-crisis expectations by the end of the year.

“Only the appearance of a lasting medical solution mid-2021 would restore household confidence enough for a clear reduction in the savings rate,” the Bank of France said.

©2020 Bloomberg L.P.