France: Economy bounces back at record-breaking pace in Q3
October 30, 2020
The economy bounced back strongly in the third quarter, growing at the fastest rate on record as the lifting of Covid-19 containment measures enabled the gradual firming of activity. According to a preliminary reading, GDP expanded 18.2% on a seasonally-adjusted quarter-on-quarter basis in Q3, contrasting the 13.7% contraction recorded in Q2 and beating market analysts’ expectations of a 15.4% rebound. However, output still fell 4.3% on an annual basis, following the 18.9% contraction in the previous quarter.
The strong rebound in activity reflected a notable improvement in domestic as well as external demand. Household spending jumped 17.3% on a quarterly basis, which contrasted Q2's 11.6% contraction, as consumers resumed their purchases following the reopening of businesses. Moreover, fixed investment surged 23.3% in Q3, contrasting the 14.3% decline recorded in the prior quarter, while government expenditure grew at the fastest pace on record, expanding 15.4% (Q2: -10.4% s.a. qoq).
On the external front, exports of goods and services bounced back in the third quarter, growing 23.2% (Q2: -25.7% s.a. qoq), largely owing to recovering aggregate EU demand. In addition, imports of goods and services expanded 16.0% in the quarter, contrasting Q2’s 17.1% contraction.
Despite the third quarter’s upturn, downside risks to the recovery have increased recently due to the rapidly rising number of new Covid-19 cases, which led the authorities to reinstate a national lockdown for at least a month, effective from 30 October. This was highlighted by Charlotte de Montpellier, economist at ING, who reflected:
“With the closure of non-essential shops, merchant services (which account for 56% of GDP) are likely to be affected in a similar way in November as they were in April (a drop in activity of around 30% compared to the pre-crisis level). Therefore, we estimate that French GDP could contract by 5% QoQ in the fourth quarter. […] By the end of 2020, the economy is likely to be more than 9% below its end of 2019 level. While some recovery can be expected in the first quarter of 2021 on the back of a softening of the lockdown measures, it is highly unlikely that it will be as dynamic as the one observed in the third quarter. […] French GDP growth figures for the third quarter are like a ray of sunshine that pierces the clouds for a short moment on a rainy autumn day: they remind us nostalgically of the heat of summer, but do not allow us to forget that current realities are much less pleasing. France has entered its second dip and the prospects for a significant recovery in 2021 are darkening sharply.”
Author: Hanna Andersson, Economist