France's normally booming tourism industry has taken an abject beating during the Covid-19 pandemic. Credit: AFP/France24.

The French economy will likely shrink about 10% this year due to the coronavirus pandemic and will not recover to pre-crisis levels until mid-2022, the Bank of France said Tuesday.

It said signs of a “gradual” recovery should be seen from the third quarter of this year, after a slump in output of 15% expected in the three months to June due to the “very sharp shock” resulting from the countrywide lockdown imposed in March.

The economy should then expand 7% in 2021, gaining another 4% in 2022, it said.

But unemployment is expected to surge to above 11.5% by mid-2021, well above previous peaks, the bank said. 

The forecasts are in line with the government’s forecast of an 11% GDP contraction this year as the country braces for its worse recession since World War II.

France’s economy shrank 5.3% in the first three months of the year, and statistics office Insee has said the contraction could reach 20% in the second quarter.

The Bank of France’s forecasts assume that the coronavirus will continue to spread but remain under control, and that the economy will adapt to the health measures required.

The outlook remains dependent on many uncertainties, the bank said in its report, and the trade-off between savings and spending will be crucial for the future.

“It is likely that the expected increase in unemployment and the highly uncertain global context will continue to weigh on consumer confidence,” it said.

As a result, household savings could surge by 22% this year, while household spending – a key driver of the economy – could fall 9.3%, it said.

With profit margins thin due to the slowdown, companies are in turn likely to reduce capital investment by about 23%.

Combined, these difficulties “will cause a significant drop in employment,” but government efforts to reduce the blow will mean the jobless rate rises relatively slowly – to more than 10% this year and then to above historic highs of more than 11.5% by the middle of next year.

By 2022, however, unemployment should come down to 9.7%.

Prices are likely to be under pressure, and may even fall outright at the end of this year, as energy costs remain weak, meaning inflation will run at less than 1% through to end-2022, the bank said.

AFP

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