France’s Economy May Shrink 10%, Shed 1 Million Jobs This Year: Central Bank

France’s economy is likely to shrink by about 10% this year due to the covid-19 pandemic, while 1 million jobs will be lost, said the Bank of France on Tuesday.

The central bank also warned that France, the euro zone’s second biggest economy, will not recover economically to pre-pandemic levels until the middle of 2022.

In the second quarter of this year, gross domestic product may plunge by as much as 15% due to the “very sharp shock” of the nationwide lockdown in the first quarter. But the economy should begin to show signs of a “gradual” recovery starting in the third quarter.

The bank also said the French economy should expand by 7% in 2021, then gain another 4% in 2022.

However, the unemployment rate is expected to soar to 11.8% by mid-2021 – the previous jobless peak was about 10.7% in 1987.

By 2022, however, the national unemployment figure should ease back to 9.7%, the bank added.

Due to consumer jitters, the bank forecast that household savings could jump by 22% this year, while household spending – a major driver for economic growth -- may drop 9.3%.

The Bank of France cautioned that its predictions were subject to uncertainties due to the unprecedented impact of the virus and they assume that the outbreak will remain under control.

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

The central bank’s forecasts generally agree with the French government’s assessment of an 11% GDP crunch this year.

France’s economy contracted by 5.3% in the first three months of the year, while the government’s statistics office Insee warned of a 20% shrinkage in the second quarter.

"The French economy is recovering quite quickly… but we are far from out of the woods," said Francois Villeroy de Galhau, governor of the Bank of France.

In April, French economy minister Bruno Le Maire announced a 110 billion euro ($125 billion) stimulus package for businesses hurt by Covid-19. Last week, Le Maire vowed that another relief package will be unveiled in "a few weeks" and introduced in September.

The French government has also extended its wage subsidy scheme for up to two years in order to avert mass bankruptcies and layoffs.

Muriel Penicaud, France’s labor minister, said that at the end of April about 8.6 million workers were benefiting from the wage scheme, under which the government pays subsidies to companies to provide salaries to those who cannot work.

“We are going to put in place a long-term partial-activity scheme through which employees could have fewer working hours and be partly supported by the state,” Penicaud said.

She also said the government will make extensive inspections by the end of the summer to detect and punish fraudulent use of the subsidy scheme.

“I think [the wage subsidy] makes sense even if the fiscal cost is going to be huge,” said Gilles Moec, Axa’s chief economist. “There would be less of a prominent loss in terms of skills and human capital if we could keep people attached [to their jobs]. We may end up ultimately in a situation where some sectors and some companies may not survive, but we don’t know yet.”