Covid-19: how France ended up in Europe's "economic wagon"

For once, France is leading the way, not Germany. The Hexagon is the first European country to give tangible signs of economic recovery after the shock of the period of confinement linked to the Covid-19 pandemic. "The second European economy has returned to the path of growth in activity even though the rest of the world is still in decline," noted with envy the American news channel CNN, Wednesday June 24.

What is this sign that has enabled France to become "the leading economic wagon of Europe at the moment", in the words of Chris Williamson, economist at IHS Markit, an American economic information firm? It is the PMI index of services and manufacturing production, in other words the barometer of private sector activity. Since the beginning of June, this indicator has jumped from 32.1 to 51.3, said IHS Markit, the manager of the index, on Tuesday. This allows France and Australia to be the only countries among the major economic powers analyzed by IHS Markit to have exceeded the 50 point mark, a level which had not been reached since February. Above this threshold, economists consider that activity is no longer in decline.

June's Flash France PMI pointed to a rebound in activity as the country's lockdown measures were further wound down. The expansion in activity was broad-based but predominantly driven by a sharp rise in the manufacturing sector.
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Winning services

Admittedly, the PMI index does not have the media prestige of the growth rate (which should always fall in France by around 10% in 2020, according to OECD estimates), and one could say that we are content with little in these times of economic lean cows. But "this indicator better illustrates the economic health of a country than the growth rate, because it is finer and incorporates more variables", underlines Pascal de Lima, chief economist at the financial consulting firm Harwell Management, contacted by France 24.

For him, this great leap forward in the PMI index reflects above all the return of the consumer to the front of the economic scene. "We note that almost 60% of the savings accumulated during the confinement - which exceeded 50 billion euros - have been spent since the end of the confinement," notes Pascal de Lima. Incidentally, "this also proves that public policies have achieved their immediate goal, that is to say to avoid the multiplication of bankruptcies," said the economist.

But most of the other countries have also started to get out of confinement while spending without counting to avoid the worst ... without, however, experiencing the same success. In Germany, for example, the PMI index only returned to 45.8. It's a nice comeback, but Berlin remains in the red, just like the United Kingdom. 

If the deconfinement befits France so well, it is because "the French economy is very sensitive to the services which have themselves been particularly affected by the period of restriction to activity and travel", underlines Frédéric Rollin, investment strategy advisor at the asset management firm Pictet AM, contacted by France 24. In other words, France's luck is that the return to normal benefits first of all the restoration, tourism and all the local services in which the French traditionally spend more than the Germans.

Insufficient good news

The multiplication of new foci of Covid-19 contamination on the other side of the Rhine in recent weeks may also have played a role. "There is also perhaps less uncertainty in France than in Germany regarding the health situation. This serenity is an important psychological factor in the behavior of consumers", specifies Pascal de Lima. 

But we must not overestimate, either, the renewed confidence of consumers. "Ultimately, it depends above all on the employment situation," says Frédéric Rollin. The real test will take place in the fall, when public support measures for businesses will be phased out and employers will find themselves alone facing the hole in their cash flow.

In this regard, the rebound in the PMI index is an encouraging sign. "He points out that the recovery has been faster than expected by most economists and suggests that companies have been less severely affected and could therefore be less severe in layoffs," summarizes the financial analyst. The dream scenario of emerging from the crisis then emerges: deconfinement accompanied by a sharp increase in consumption which gives a boost to activity in the private sector, leading to less drastic cuts in the workforce. This would further improve consumer morale, prompting them to spend more.

But if "the good performance of the PMI index is clearly good news, it is not enough", moderates Frédéric Rollin. For the moment, France remains isolated in its good momentum and "as activity in the rest of the world is still at half mast, this recovery is fragile", explains the French analyst. In a globalized economy, if other nations do not follow the same path, and if international trade does not restart, the hexagonal rebound risks remaining as a happy accident.

And the latest estimates from the IMF, which predicted, Wednesday, June 24, an even deeper than expected global recession do not bode well. Not to mention that the risk of a second wave of the epidemic, leading to new economically painful confinements, is far from having disappeared.

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