Economic projections Macroeconomic projections – March 2021

▪   French GDP fell by 8.2% in 2020 after following a bumpy path over the year. The overall contraction was slightly smaller than we predicted in December, albeit still historic in size. The second lockdown had a smaller than expected impact on activity as the measures were more targeted and the economy was better-equipped to adapt to the public health situation.

▪   Based on the assumption that, in average terms, the first half will continue to be marked by significant health restrictions, activity should remain stable over the first part of 2021. This is consistent with our economic surveys for the start of March. Economic activity should then recover sharply as of the second half of 2021, as the vaccine roll-out enables a gradual lifting of the health restrictions, leading household consumption to rebound.

▪   Over the full year 2021, GDP is expected to grow by 5.5%. The figure is slightly higher than our December projection as the lower growth in the first half of 2021 should be offset by the greater resilience in activity at end-2020 and its more dynamic pace in the second half of 2021. The rebound should extend into 2022, with growth remaining very vigorous at around 4%, and activity is projected to return to its pre-Covid level by the middle of the year.

▪   The anticipated rebound in household consumption seems all the more likely given that household income has largely been preserved during the crisis, thanks both to the government cushioning measures and to the notable resilience of the labour market.

▪   The deterioration in employment should indeed be less severe than anticipated in our December projection, as the adjustment to the activity shock seems to have been made more via working hours than via staff numbers. Unemployment is predicted to remain well below 10% in 2021, and should then decline again to below 9% by the end of our projection horizon.

▪   Inflation is expected to be fairly volatile in 2021, varying between 0.5% and 1.5% year-on-year. It should nonetheless remain moderate over the entire projection horizon, at an annual average of around 1%.

This projection is still subject to major risks, linked notably to the strong uncertainties over public health. Based essentially on different assumptions about the health situation, we are continuing to frame our baseline trajectory with two alternative scenarios, but these are more balanced than in our December projection.

The decline in activity at end-2020 was less severe than anticipated and a marked rebound is expected for the second half of 2021

The 8.2% contraction in activity in 2020 was smaller than that predicted in our December 2020 macroeconomic projections (–9%), mainly because the renewed slump in GDP in the fourth quarter ultimately proved relatively contained (–1.4%). The more targeted nature of the restrictions introduced in November-December 2020, and the ability of businesses and households to adapt to the constrained environment, all helped to mitigate the economic impact of the second lockdown compared with the shock of March-April 2020. Household consumption did admittedly fall markedly in the fourth quarter (–5.4%), but household and business investment proved more resilient (+4.2% and +0.9% respectively) and exports continued to rebound (+5.8%).

Our baseline scenario for 2021 is based on a number of assumptions. First, the assumptions regarding the international and financial environment, for which the cut-off date is 16 February (see Table A in the appendix) are the same as those used in the Eurosystem projections for the entire euro area. The upward revision to global demand for French goods and services is largely offset by the rise in oil and commodity prices. The new measures announced by the US administration (the “Biden Plan”), which have not yet been completely finalised, are not taken into account in our baseline scenario, but are included among the risks to our projection (see last section of this publication). Second, and most importantly, the evolution of the economic environment remains contingent on the health situation. We assume that the first half of 2021 could be marked by periods of tightening and relative easing of the restrictions, but that, in average terms, the constraints to economic activity will remain comparable to those at the start of the year. In this baseline scenario, it is the widespread roll-out of the vaccines from the second half and their effectiveness against the different variants that succeeds in slowing the pandemic significantly and allows the restrictions to be gradually lifted.

Activity is only expected to remain stable in the first half of 2021, which at this stage is confirmed by the short-term indicators available since the start of January.

In the third quarter, however, household consumption and activity should rebound markedly and this momentum should be maintained over the end of 2021 and start of 2022. 2022 is also expected to be a catch-up year and growth should remain strong (+4%), driven by household consumption. The economy should therefore reach its end‑2019 level of activity by around mid-2022. Chart 1 shows the trajectory of this return to a “normal” level of activity. 2023 is then expected to see a normalisation, with growth remaining robust but returning gradually to the potential rates seen before the pandemic.

The rise in the unemployment rate should be contained over the first part of the projection horizon.
Unemployment should then decline again

Job losses proved relatively contained in 2020 given the magnitude of the drop in GDP. At end-2020, employment was down 1.4% year-on-year, representing a net loss of 400,000 jobs (as measured in the quarterly national accounts). The fall proved much smaller than we anticipated and the short-time work scheme appears to have played a very powerful cushioning role. Indeed, year-on-year, the number of hours worked declined by 7.3% in the fourth quarter of 2020, outstripping the contraction in GDP (–4.9%). For the time being, therefore, and contrary to what would usually be expected (in 2008-09 for example), the labour market appears to have principally adjusted to activity via working hours per capita and to a much lesser extent via job numbers (see Chart 2). This trend is expected to continue in the first half of 2021.

Over the end of 2021 and start of 2022, employment should be helped by the improvement in the health situation which should enable most of the restrictions to be lifted. However, it could also be negatively impacted by the expiry of a number of public aid mechanisms and a “catch-up” effect in bankruptcies after many were averted in 2020.

Our baseline scenario therefore assumes that employment will bottom out at the end of 2021 before recovering again in 2022-23. Productivity per capita should gather momentum as of mid-2021 and is expected to rise vigorously in 2022, before easing back to more usual rates of growth in 2023.

Against this backdrop, the unemployment rate (see Chart 3) should peak at close to 9.5% at the end of 2021, which is well below the level we predicted in December. It should then begin to decline again, tracking the activity rebound although at a slight lag, and is expected to fall below 9% by the end of our projection horizon.

From mid-2021 onwards, activity should be buoyed by the rebound in private consumption, while investment should remain dynamic

On average over 2021, the GDP growth of 5.5% should be driven by the rebound in household consumption, the support provided by public demand and the resilience of investment (see Chart 4).

Household consumption is expected to remain constrained at the start of 2021 due the extension of the health restrictions such as the curfew and local lockdowns. In mid-2021 it should still be 6% below its end-2019 level. In counterpart to this, the household saving ratio should remain high over the first half of 2021, as in the second half of 2020. The excess financial savings households have built up since March 2020 should therefore continue to rise until mid-2021 (see Chart 5).

Each quarter, households save part of their income which, in the case of financial savings, corresponds to the difference between their disposable income and their expenditure on consumption and housing investment. We measure the excess savings accumulated since the start of the health crisis as the cumulative difference between observed or projected financial savings for each quarter and the level that would have been reached if household income and expenditure had continued to rise since end-2019 at the rate observed before the crisis. These excess savings are expected to peak at around EUR 165 billion at the end of 2021 (up from EUR 110 billion at end-2020).

Household consumption is then expected to recover vigorously in the second half of 2021 as the health restrictions are gradually relaxed. The saving ratio should therefore fall sharply, coming back below its pre-crisis level over the course of 2022 (before rising again slightly to more normal levels).

Public demand should also help to stimulate activity in 2021, thanks to the combined effect of the normalisation of public sector activity and a rebound in government investment linked to the recovery plan. The latter should also support business investment. Business investment proved less sensitive than expected to the decline in activity in 2020, but this should mean it also reacts less strongly to the rebound in 2021, with the investment ratio expected to have peaked in 2020.

France’s export performances, measured as the ratio of exports to foreign demand, deteriorated considerably in the spring of 2020 but improved again at the end of the year – although they are still not back at pre-crisis levels. In 2021, stronger global demand for French goods and services and the stabilisation of French export performances should mean net trade makes a positive contribution to growth in 2021, after a strong negative contribution in 2020 (–1.5 percentage point). The contribution should turn negative again temporarily in 2022 as imports peak with the rebound in household consumption. It should then be close to neutral in 2023.

Government measures have so far supported household and business income, and the economic recovery should subsequently take over

The relative resilience of the labour market and scale of the government cushioning measures both helped to preserve household purchasing power in 2020 (see Chart 6), although this of course masks considerable differences in circumstances depending on the household category. Real household income is expected to rise in annual average terms between 2021 and 2023 as the economic situation improves.

In the case of businesses, their profit margin rate contracted in 2020 from 33.2% to 29.3% (this includes the negative base effect caused by the “double accounting impact” of the CICE – tax credit for competitiveness and employment – in 2019, which accounts for around –1.5 percentage point of the decline). The scale of the short-time work and support measures, such as the solidarity fund, did not completely offset the steep drop in activity. However, the corporate margin rate should improve considerably in 2021 and especially in 2022: on the one hand, the weight of the wage bill is expected to be alleviated by the rebound in activity; on the other, the business support measures included in the recovery plan, such as the cuts to production taxes and the introduction of certain investment subsidies, should help to boost margins.

Inflation is expected to be fairly volatile and should rebound temporarily in 2021, before remaining contained in 2022 and 2023

Inflation as measured by the Harmonised Index of Consumer Prices (HICP) surprised on the upside in January 2021 thanks to the combined impact of three factors. First, since our December 2020 projections, the price of oil has recovered significantly (to USD 59.4 a barrel in January 2021, which is USD 16 higher than the assumption underlying our December 2020 forecast). Second, the pushing back of the winter sales resulted in a spike in manufactured goods inflation which was subsequently reabsorbed in February. Third, services prices have been less sluggish than expected in the short term due to one-off rises in certain sectors, notably communications and air transport.

Headline HICP inflation is expected to remain very moderate, at 1.1% in 2021, while HICP inflation excluding energy and food is now projected to come out at 0.9%. These upward revisions to the very low forecasts in our December 2020 publication reflect the positive surprises of January 2021, as well as the upward revision to the price of oil (to USD 59 in 2021 based on futures contracts, which is USD 15 dollars higher than our December assumption) and a better than expected labour market.

Headline HICP inflation and HICP inflation excluding energy and food should nonetheless prove volatile in 2021 (see Chart 7). In Appendix D we attempt to clarify one of the causes of this volatility – the impact of the change in HICP weights to reflect unusual shifts in the structure of household expenditure in 2020 as a result of the health crisis. These effects are expected to be neutral on average over 2021 but should lead to fluctuations, notably in the summer.

After 2021, HICP inflation excluding energy and food should remain moderate, at 0.9% in 2022 and 1.0% in 2023, while headline HICP inflation should come out at 0.9% in 2022 and 1.1% in 2023. The inflation projections for these years have only been revised slightly versus our December publication, reflecting changes in our forecasts for unemployment which are in part offset by our assumption, based on oil futures, that the price of oil will decline in 2022 and 2023.

After rising significantly in 2020, the government deficit should remain high in 2021 before gradually falling again as activity recovers; government debt is expected to reach slightly over 115% of GDP in 2023

The extension of the emergency support measures due to the maintenance of the health restrictions, and the roll-out of the recovery plan should all mean the government deficit remains high in 2021, at 7% of GDP, after rising markedly between 2019 and 2020 (to 8% of GDP in 2020 in our projection; INSEE will publish its preliminary figures for the 2020 government deficit and debt on 26 March 2021). This projection is based on the assumption that the health restrictions – and therefore the associated support measures – will be kept in place over the first half of 2021 to control the spread of the pandemic. Then, as the economy returns to growth, the exceptional measures are wound down and the European support funds start to come in, the deficit should gradually decline despite the continuing recovery plan, reaching around 4% of GDP by the end of our projection horizon.

In the absence of any fiscal consolidation measures, the government deficit should thus remain higher than predicted before the health crisis, and higher than the level that would allow the government debt-to-GDP ratio to stabilise. Based on these assumptions, the debt ratio should continue to rise after the high reached in 2020 (113% of GDP in our projection), and should slightly exceed 115% of GDP in 2023.

This projection is subject to several risks regarding both the health situation and the macroeconomic environment

This projection remains strongly contingent on the evolution of the health situation in France and the rest of the world, which poses both an upside and downside risk. Owing to this high degree of uncertainty, we have framed our baseline forecast with two alternative scenarios, one based on more severe assumptions regarding public health, and one where the environment is more favourable (see box).

In addition to the uncertainty over the outlook for the epidemic and health restrictions, there are also various macroeconomic risks to our projection, both to the downside and the upside.

On the one hand, firms have had to borrow significantly during the health crisis to cover their liquidity needs, and tensions in their finances could prevent them from investing or hiring. On the other hand, in light of the most recent indicators published, such as industrial output for January, first-quarter 2021 growth could prove slightly stronger than projected when these forecasts were finalised. Households could also spend the excess savings they have built up to a greater extent or at a faster pace than in our baseline scenario. At the international level, the stimulus measures announced by the US administration, which are not incorporated into this projection, are liable to boost global demand and confidence, even though their direct impact on France will probably be limited compared with that seen in the United States.

The general macroeconomic environment already suggests prices will remain sluggish, but this dampening effect could be amplified if growth were to disappoint. Conversely, inflation could strengthen more markedly if the macroeconomic situation were to improve, especially if the extra costs linked to the health measures became more permanent, if the recent sharp price rises for certain commodities and goods such as semi-conductors continued, and if certain sectors saw a return to profitability with the rebound.