France - OECD Economic Outlook June 2020

200 _

France France is facing a deep recession, as consumption and investment fell sharply during the confinement period. If the pandemic is contained by the summer, real GDP will fall by about 11.4% in 2020 and rebound by 7.7% in 2021. Yet, if there is a second virus outbreak in autumn, GDP is projected to decrease by 14.1% in 2020 and to rebound by 5.2% in 2021. Policy measures such as the strengthened short-time work scheme will help contain the rise in the unemployment rate, but it is set to peak at respectively 12.4% and 13.7% by end-2020 in the two scenarios. Despite government support, investment and consumption will recover only progressively since high uncertainty is set to persist. The fiscal deficit will reach 10.4% and 12.0% of GDP in 2020 in the two scenarios, and the downturn will push the debt-to-GDP ratio (Maastricht definition) to 116% and 126% by end-2021.

Rapid fiscal measures have reinforced the healthcare system and protected jobs and firms, including through extensive loan guarantees and tax deferrals to safeguard liquidity and solvency. To avoid a second sanitary crisis, the government should speed up the expansion of hospital and testing capacities to limit bottleneck risks and identify infected people more rapidly. On the economic side, restoring confidence and lowering precautionary saving are key challenges. Temporarily boosting public investment, notably green investment, and measures to contain business failures would help. As the recovery commences, progressively reducing the coverage of the short-time work scheme and ensuring an efficient implementation of the lifelong learning reform would ease the reallocation of workers.

The healthcare system came under heavy strain The COVID-19 virus started to spread rapidly at the end of February. This resulted in hospitals being rapidly overwhelmed in some regions, in part because of the relatively limited number of beds in intensive care units. Yet, a quick expansion of intensive care capacity and the transfers of some patients to less affected regions reduced local bottlenecks. The number of patients in need of intensive care is declining at the national level and the southern and western parts of France continue to experience relatively low numbers of confirmed cases.

France 1 Consumption and production have fallen during the lockdown M-o-m % changes 5

The recovery path is uncertain Real GDP

Volume

Index 2019Q4 = 100 105

Single-hit scenario Double-hit scenario

100

0

95

-5

90 -10

Goods consumption

85

Industrial production

-15

80

-20 -25

75 2018

2019

0

0

2019

2020

2021

70

Source: OECD Economic Outlook 107 database; and INSEE. StatLink 2 https://doi.org/10.1787/888934139347

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

_ 201

France: Demand, output and prices (double-hit scenario) 2016

2017

Current prices EUR billion

France: double-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1

2 232.4 1 211.0 530.1 486.8 2 227.9 18.4 2 246.3 675.1 689.0 - 13.9

Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate3 (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2019

2020

2021

Percentage changes, volume (2014 prices)

2.4 1.7 1.4 5.0 2.3 0.2 2.5 4.6 4.7 -0.1

1.8 0.8 0.9 3.2 1.4 0.0 1.4 4.6 3.1 0.4

1.5 1.5 1.7 4.3 2.2 -0.4 1.8 1.8 2.6 -0.3

-14.1 -16.2 0.2 -24.6 -14.4 0.0 -14.3 -15.3 -15.9 0.4

5.2 7.1 2.4 7.8 6.0 0.0 5.9 9.9 12.2 -0.7

0.5 1.2

1.0 2.1

1.2 1.3

1.6 0.4

0.3 0.2

_ _ _ _ _ _ _ _

2018

0.5 0.9 0.6 0.5 0.2 9.4 9.0 8.4 11.3 11.2 -2.9 -2.3 -3.0 -12.0 -8.2 123.2 121.6 124.2 148.3 151.7 98.3 98.0 98.1 122.2 125.5 -0.7 -0.6 -0.7 0.7 0.0

1. Contributions to changes in real GDP, actual amount in the first column.

2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

3. National unemployment rate, includes overseas departments.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934137789

France 2 Unemployment is heading up

The build-up of household savings will support the recovery Single-hit scenario Index 2018Q1 = 100 % of disposable income 110 25 ← Private consumption, volume

% of labour force 16 Single-hit scenario

14

Households' gross saving ratio¹ →

Double-hit scenario

12

100

20

90

15

80

10

10 8 6 4 2 0

2018

2019

2020

2021

0

70

2018

2019

2020

2021

5

1. National definition.

Source: OECD Economic Outlook 107 database; and INSEE. StatLink 2 https://doi.org/10.1787/888934139366

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

202 _

France: Demand, output and prices (single-hit scenario) 2016

France: single-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate3 (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2017

Current prices EUR billion

2 232.4 1 211.0 530.1 486.8 2 227.9 18.4 2 246.3 675.1 689.0 - 13.9

2019

2020

2021

Percentage changes, volume (2014 prices)

2.4 1.7 1.4 5.0 2.3 0.2 2.5 4.6 4.7 -0.1

1.8 0.8 0.9 3.2 1.4 0.0 1.4 4.6 3.1 0.4

1.5 1.5 1.7 4.3 2.2 -0.4 1.8 1.8 2.6 -0.3

-11.4 -12.6 0.1 -20.3 -11.5 0.0 -11.5 -12.7 -12.9 0.2

7.7 9.5 1.6 12.2 8.0 0.0 7.9 8.3 9.1 -0.3

0.5 1.2

1.0 2.1

1.2 1.3

1.7 0.4

0.6 0.5

_ _ _ _ _ _ _ _

2018

0.5 0.9 0.6 0.5 0.5 9.4 9.0 8.4 11.0 9.8 -2.9 -2.3 -3.0 -10.4 -5.5 123.2 121.6 124.2 144.1 142.2 98.3 98.0 98.1 117.9 116.0 -0.7 -0.6 -0.7 0.5 0.1

1. Contributions to changes in real GDP, actual amount in the first column.

2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

3. National unemployment rate, includes overseas departments.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934137808

With the healthcare system under severe strains, the authorities had to resort, like in most European economies, to strict national containment measures from mid-March. They imposed the closure of non-essential shops and entertainment facilities and banned large gatherings. Day-care, schools and universities closed and a ban of all non-essential outings and long-distance travel was introduced.

Reduced pressures on the healthcare system allowed a gradual easing of these restrictions after 11 May, although some social and economic restrictions remain in place. As the authorities are gradually managing to increase the supply of masks and testing capacities, initially in insufficient supply, they are moving towards mass testing to isolate infected people quickly.

Policy responses have been rapid and substantial The authorities have taken many measures to head off macroeconomic destabilisation and to support households and businesses negatively affected by the outbreak and economic restrictions. Discretionary budgetary measures will reach about 1.9% of GDP in 2020 under the single-hit scenario and are estimated to reach about 2.9% of GDP in event of a second virus outbreak (double-hit scenario). The high take-up of the short-time work scheme, with firms claiming coverage for 13 million workers in early June, accounts for a significant part of this discretionary fiscal support. This is welcome as it reduces the risk of employees losing attachment to their employers and the labour market. A solidarity fund, worth EUR 7 billion, is also in place to support small companies, including the self-employed. These measures help support the income of workers. The sharp increase in households’ saving rate will help sustain the recovery by allowing an increase in consumption once confidence and consumption opportunities return.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

_ 203 The European Central Bank has committed to “do everything necessary within its mandate� to preserve the euro area economy. Accommodative monetary policy and expanded asset purchases will support aggregate demand. On the macro-prudential side, the Banque de France removed the counter-cyclical capital buffer to facilitate bank lending. The French policy package also aims to alleviate corporate costs and to keep corporate credit flowing (via public guarantees covering loans up to EUR 315 billion), in order to avoid redundancies and to facilitate a more rapid resumption of production. The deferrals of monthly payments of social contributions and taxes, and the advance payments of tax credits have increased to up to EUR 49.5 billion. The smallest firms will benefit from a 3-month tax holiday (if they had to close) and be able to delay paying rents and utility bills. In the tourism sector, prolonged employment and liquidity measures will also support small firms. In addition, EUR 20 billion have been earmarked for equity injections into companies facing significant temporary difficulties, notably in the transport and automotive sectors, while increased incentives for electric vehicle purchases aim to boost consumption.

Economic activity has collapsed The strict national containment measures brought the economy to a sudden stop. Plunging consumption and investment, as well as a rapid export contraction, led to a sharp drop in economic activity in the first quarter. Indicators of business and household confidence fell further in April and economic activity is expected to have decreased during the lockdown by around 33% compared to a normal period according to the French Statistical Institute (INSEE), which is below the OECD benchmark estimate of -26%. The lockdown has badly hit the construction, tourism, retail and accommodation sectors. Activity losses are also particularly high for transport manufacturers and refineries. Despite the high take-up of the strengthened short-time work scheme, the unemployment rate has increased rapidly, with new hires dropping in March and the increase in registrations to the unemployment agency reaching a record high.

Younger and low-skilled workers, as well as those on short-term contracts (who could not benefit from the short-time work scheme), have been disproportionately affected.

The recovery path is uncertain The single-hit scenario is based on eight weeks of stringent containment measures from mid-March to 11 May, while restrictions on air transport, accommodation and food services, as well as on the entertainment industry will remain in place over the summer. Under these assumptions, economic activity is projected to recover only partially from an 11.4% decline in 2020 to an expansion of output by 7.7% in 2021. A second outbreak in the autumn would stifle the recovery. If the additional containment measures were to have half the initial effect on economic activity compared to the first lockdown, output in 2020 could decline by 14.1% and the unemployment rate increase to 13.7% at the end of 2020. After an initial rebound driven by the construction and manufacturing sectors and postponed consumption, growth will remain fragile. High saving and low energy prices will support consumption growth, but elevated unemployment will dent household confidence. Business investment will remain depressed, reflecting reduced profit margins and high uncertainty.

Some industries, such as passenger transport, tourism and cultural activities, will likely bear enduring scars from the crisis. Not only are they likely to reopen after other businesses but they will face reduced demand until a vaccine or an effective treatment is available. Furthermore, businesses have built up sizeable debt.

As a result, some businesses will face liquidity and solvency concerns, which could precipitate large-scale firm liquidations and dent economic prospects. A slower recovery of the world economy, particularly the main trading partners of France in the euro area, would also delay the recovery. On the upside, high pentup demand could foster a faster-than-projected rebound in consumption. The additional measures to be

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

204 _ announced with the updated budget law could increase the deficit by about 1% of GDP in 2020 and support the recovery further.

Strengthening the recovery The government has committed to spend what is necessary to deal with the health and economic crisis.

The priority is to improve coordination within the healthcare sector and to boost healthcare resources to ensure that the strategy of mass testing and isolation is successful. Restoring confidence and lowering household precautionary saving in the aftermath of this crisis are also key challenges. Temporarily boosting public investment in healthcare and innovation could support aggregate demand and kick start the recovery. A specific focus on green investment will also be necessary to reduce urban air pollution that remains well beyond European commitments, as it makes individuals more vulnerable to acute respiratory illnesses and to this sanitary crisis. As elsewhere, the crisis legacy is likely to include some lasting shifts in the structure of economic activity. An efficient reallocation of resources will require a reduction in the use of the short-time work scheme by progressively increasing private cost sharing and to ensure a broad access to lifelong learning for low-skilled and long-term unemployed workers, as well as an efficient implementation of quality standards for these programmes. Targeted tax cuts, such as the suspension of some distortive production taxes, or tax credits towards capital-intensive and more affected firms could help to alleviate cascading business failures, notably among smaller firms.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020