Covid-19 sabotages France’s upward trajectory

In the opening months of 2020, France’s economic outlook appeared to be favourable. Strong domestic consumption and increased levels of foreign investment were lifting the economy, while the government was pushing through a raft of business-friendly reforms. By March, the picture had changed drastically. The spread of Covid-19, initially known as coronavirus, had the country in its grip, in what was a prelude for worse to come: a full-scale lockdown of French citizens, enforced by 100,000 police officers. These measures, replicated to varying degrees in almost every country affected by the virus, were the opening gambit in a struggle that is set to last many months. 

The fallout from Covid-19 will almost certainly lead to a global economic recession, and leave initial projections of France’s 2020 economic growth looking wildly innacurate. But as president Emmanuel Macron’s government acts decisively to halt the virus’s spread, it is also taking measures to safeguard the economy. Chief among them is the mobilisation of hundreds of billions of euros to support the French private sector. About €45bn will be allocated to alleviate the pressure of tax payments and payroll charges for companies, while a further €300bn of government loan guarantees has been extended to French businesses. Further interventions are anticipated in the coming months. 

A possible rebound?

Encouragingly, these measures are expected to mitigate the damage to the economy, which was on track to expand by about 1% in 2020. According to Julien Manceaux, senior economist at ING, France will experience a contraction of gross domestic product (GDP) in 2020 before rebounding in the following year. “Thanks to these measures, and based on the hypothesis that the number of Covid-19 cases peaks by mid-April [2020], the GDP contraction could be limited to 1%, before rebounding in 2021,” he says. 

This view is grounded in the fact that the fundamentals of the economy are relatively strong. Indeed, France has been one of the eurozone’s standout performers in recent years, acting as an engine of growth at a time when many of its peers have stalled. This is no accident. France’s economic model has shielded the country from the impact of growing international trade tensions. “France is less dependent on exports than some of its peers in Europe, so the risks associated with global trade wars are less acute for the economy,” says Xavier Musca, deputy CEO at Crédit Agricole. 

Additionally, structural reforms pursued by the Macron government have generated something of a jobs miracle. Until the arrival of Covid-19, the economy was creating longer term, secure jobs at a rapid rate. This had helped to push down unemployment levels to about 8%, from recent highs of more than 10% in 2016. In tandem, productivity and wage growth were also on the rise. This reflects, in large part, the impact of changes to employment taxes, unfair dismissal costs, job benefits and efforts to discourage employers from hiring workers on temporary contracts. 

“Mr Macron has achieved more on the economy in two-and-a-half years than [previous presidents] François Hollande and Nicolas Sarkozy combined. And we are seeing the results,” says Maxime Sbaihi, managing director of Paris-based think tank GenerationLibre. 

Pressing ahead

These reforms have not been without their challenges, however. Mr Macron has faced the twin difficulties of the gilets jaunes protests, a quasi-political movement that emerged in response to government efforts to raise fuel prices; and widespread dissent against a move to reform the country’s creaking pension system. Together, they have contributed to frequent scenes of disruption and, at times, violence in urban areas across France. As these developments have unfolded, the president’s approval rating has suffered; in the opening months of 2020 it hovered between 33% and 34%. 

Nevertheless, at the start of 2020, before the arrival of Covid-19, the government was maintaining its commitment to reform. Its pension bill, for example, was pushed through the National Assembly by constitutional decree in February. Yet, given the uncertainties around the impact of the virus and the urgent need to address the related economic fallout, the pace of change is likely to slow for the remainder of the year. However, in interviews conducted in February 2020, many of the country’s business leaders were clear about the progress that had been made and the implications this was having on the conduct of business. 

“There are lots of positive dimensions to France’s reform agenda. In particular, it has helped to trigger strong levels of domestic investment by French corporates,” says Sebastien Rozes, executive officer and head of corporate banking for Europe, the Middle East and Africa at MUFG. 

In the World Economic Forum’s annual Global Competitiveness Index, published in 2019, France was one of only three advanced economies to improve its position, rising to 15th place. This is notable because it coincides with a broader shift in the way that France is perceived around the world. The country is shrugging off typical stereotypes that reference a rigid economy, and is instead building on its strengths to benefit from higher-value-added economic sectors. This is helped by expanding levels of foreign investment. 

“International investors are discovering that France has some strengths that have historically been undervalued, including high productivity, a highly educated workforce, good infrastructure and an ideal position in Europe,” says Mr Musca. 

Investment stays strong

In terms of its foreign direct investment (FDI) profile, France’s inward flow of FDI grew from $23.06bn in 2016 to $37.29bn in 2018, according to figures from the United Nations Conference on Trade and Development. Meanwhile, government estimates indicate that 2019 could be a record year in terms of FDI. While these numbers can be expected to fall in 2020 in light of the ongoing challenges posed by Covid-19, there is every reason to believe a further expansion of FDI could occur over the medium term. 

Domestically, France’s business landscape is also changing. The country’s strong social welfare system, and its improving business and regulatory environment, are nurturing a new generation of start-ups. Today, the country is emerging as something of a start-up powerhouse. This marks a notable change from even the recent past and points to the ambition and capability of the country’s younger generation. 

The world’s largest start-up campus, for example, is located in Paris. Known as Station F, it covers 51,000 square metres and houses more than 1000 start-ups. In this space, up-and-coming French businesses interact with established giants in the domains of technology, finance and beyond, to generate the ideas that will underpin the economy of tomorrow. 

“France has established itself as a credible centre for fintechs and for start-ups in general. We’ve always had the schools and universities to grow the right mindset for this type of activity but we lacked the right environment for them to grow. That has changed and Station F is an example of that,” says Jacques d’Estais, deputy chief operating officer and head of international financial services at BNP Paribas. 

Before the spread of Covid-19, France’s economic trajectory was, in relative terms, clear. Promising structural reforms had helped to unlock new domestic and foreign investment, while rising wages and productivity were boosting the country’s growth prospects. But as of April 2020, its future, like that of many other European markets, is far less certain. 

Though the economy is expected to rebound in 2021, the implications of a lengthy social and economic lockdown will be difficult to measure. France, like the rest of Europe, may well be contending with an unforeseen set of domestic, regional and global challenges as a result of Covid-19. Blessed with what seems to be competent leadership and a robust and diversified economy, it is, at least, in a good position to face them.