French Lockdown to Push Economy Back Into a Contraction

(Bloomberg) -- France‘s second lockdown will push the economy back into a slump and slow the recovery in 2021, even though restrictions to contain the coronavirus aren’t as severe as earlier in the year.

In a best-case scenario of restrictions ending Dec. 1 and a quick return to the levels of activity seen just before the second lockdown, output would still drop 2.5%, statistics agency Insee said Tuesday. If activity remains at November’s levels through December, the contraction could be as deep as 6%.

Separately, Finance Minister Bruno Le Maire cut the government’s growth forecast for 2021 to 6% from 8%. He noted there is also a risk from stricter social distancing rules hurting many sectors in the long term.

The gloomier outlooks underscore how the resurgence of the pandemic is transforming the economic crisis from a sharp shock into a prolonged slump clouded by uncertainty. The hospitality sector faces particularly acute risks amid reports the government could keep bars shut until mid-January, far later than the initial goal to reopen on Dec. 1.

“The second epidemic wave and the renewed confinement of the population has hurt the rebound and changed the tempo of the crisis,” Insee said. “It is now quite probable that the health and economic situation will continue to be linked at least through the first half of 2021.”

The Bundesbank warned on Monday Germany’s economy could stagnate or even shrink in the final three months of the year. Economists surveyed by Bloomberg expect the euro area to contract for a third quarter this year.

Still, Insee said activity in France is holding up better in November than April because the restrictions are looser and new health protocols have allowed more businesses to continue operating. Consumption is also suffering less as a wider variety of stores is open.

It estimates that the French economy is running around 13% below pre-crisis levels during the second lockdown compared with 30% in April.

Government Support

Le Maire said the French economy can still recover to 2019 levels of activity in 2022, although he added that now is not possible until the end of that year.

In the meantime, the finance minister said he is working on changes to support for sectors like hospitality, which could include covering some operating losses for small firms. He is also revising plans for state-backed partial equity loans for small companies, with the aim of increasing the duration to eight years from seven and lifting the limit on the total volume issued, instead of targeting 20 billion euros ($24 billion).

The government will update its debt and deficit forecasts in early December, once it knows the full cost of new measures.

“As long as the pandemic goes on and restrictive measures are needed, we will support the sectors that are the most weakened and in particular those who can’t open immediately,” Le Maire said.

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