French Economic Rebound Grinds to a Halt as Virus Crushes Growth

(Bloomberg) -- The French economy is set to stagnate in the last three months of the year, as uncertainty and the risk of lockdowns stifle investment and consumer spending in the euro area's second-largest economy.

Insee, the country's statistics agency, downgraded its growth forecast to zero from 1%. It said sentiment surveys are “tinged with worry” about the near future, undermining the confidence that built up after a strong rebound in activity when France lifted its nationwide restrictions early in the summer.

The services sector is particularly morose and households' fears of unemployment are at levels not seen since the global financial crisis over a decade ago.

The euro extended losses after the report, which heightens concern that Europe's recovery has run out of steam. Investors and economists expect the European Central Bank to expand its pandemic bond-buying program later this year.

“This forecast for zero growth reflects the huge uncertainty that characterizes the coming months,” Insee economist Julien Pouget said.

European governments are struggling to balance preserving economic activity with the need to contain a resurgence of the virus. ECB President Christine Lagarde warned on Tuesday that new lockdown measures pose a risk to the whole region and called on states to maintain fiscal support.

In France, restrictions are creeping back with the government ordering bars in Paris to close and imposing new rules on restaurants. On Saturday, the country reported a record rise in cases of nearly 17,000 in 24 hours.

To gauge the economic impact of restrictions in real time, Insee has used high frequency data. That is proving less conclusive for the recent regional and targeted measures, it said, but data on card transactions and Internet searches still indicate a slowdown in consumer spending in September.

Any further changes to restrictions could tip the French economy either way at the end of the year.

“A prolonged tightening of health restrictions could cause another contraction in GDP in the fourth quarter,” Insee said. “On the other hand, if the health situation stabilized, GDP could be positive.”

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