Massive stimulus will boost France's recovery

Crédito y Caución (Atradius) expects cumulative growth in insolvencies in 2021 from 2019 pre-pandemic levels to reach 8% and rise further in 2022
Crédito y Caución expects the cumulative growth in insolvencies in 2021 from pre-pandemic 2019 levels to reach 8% and to continue rising in 2022.

PHOTO/REUTERS  -   Crédito y Caución expects the cumulative growth in insolvencies in 2021 from pre-pandemic 2019 levels to reach 8% and to continue rising in 2022

According to the latest France Country Report, the French economy is forecast to grow 5.4% in 2021, mainly driven by domestic demand. Both household consumption and investment will increase 3% and 10.5% respectively, while real government consumption will grow 4.7% and exports are forecast to rebound 11%. In 2022, the French economy is expected to grow by a further 5.3%. However, rising unemployment could hamper private consumption.

Since the outbreak of the pandemic in France, the French government has launched massive stimulus measures to support consumers and enterprises alike. Due to those stimulus measures and to the negative impact of the pandemic on tax revenues, the French fiscal deficit increased to 9.4% of GDP in 2020. In 2021 and 2022, the deficit is expected to persist at levels of 9% and 6.5%, respectively, due to continued stimulus to prioritise economic growth over fiscal consolidation.  Currently, the economic agenda is focused on the implementation of a 100-billion-euro recovery plan, of which 40 billion euros will come from EU funds. Public debt will rise to almost 120 per cent by 2021, making it the third highest in the eurozone.

Despite the sharp economic contraction in 2020, French business insolvencies decreased 39% year-on-year. The decline was mainly due to a temporary bankruptcy moratorium and extensive fiscal support. While a moratorium on the requirement to file for insolvency expired at the end of August 2020, the massive stimulus measures to support businesses have kept insolvency figures low. With the expiry or abatement of fiscal support, it is expected that business failures will increase again towards the end of 2021. Looking at the cumulative insolvency growth between 2019 and 2021, French business failures are forecast to increase 8%, with further rising insolvencies expected in 2022.

In this context, there is an improvement in the credit risk of some key sectors of the French economy, albeit from very deteriorated levels in most cases. In automotive and transport, the credit risk situation of many businesses remains strained, as the 2020 downturn has led to severe liquidity strains and cash shortfalls. In the French aerospace industry, many subcontractors will continue to suffer from the moderation of activity and will disappear in the short to medium term. Construction, already facing liquidity problems and difficulties in financing its working capital needs, is expecting a pick-up in activity. However, material shortages, volatile input pricing and postponement of projects are weighing on businesses with tighter margins. In electronics, credit risk is moderate thanks to increased spending by companies and employees due to a sharp rise in telecommuting. Machinery and engineering has a positive outlook for the second half of 2021 and 2022 thanks to previously postponed capital investments. Metals and Steel will see a recovery in orders and sales this year, as demand from some key buyer industries (automotive, construction and machines/engineering) is rebounding. Services: Due to the comprehensive lockdown measures and the ongoing pandemic, many segments have suffered heavily, especially hotels and catering, restaurants, bars, entertainment and cultural events, travel agencies and tour operators. Tourism flows will not fully recover in 2021, as some people will refrain from travelling to limit health risks.