October 21, 2020

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France set to close GDP gap on Germany with public sector rebound

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France is set to close the economic gap with Germany that opened up because of differences in how the countries measured the impact of the coronavirus lockdown on their public sectors, according to economists.

The French economy shrank almost 19 per cent in the first six months of the year, dragged down by the sharp drop in activity in its vast public sector, while Germany’s contracted 11.5 per cent in the same period.

Gilles Moëc, chief economist at French insurer Axa, said the drop in public sector activity was “a significant issue” after it knocked 2.5 percentage points off the country’s gross domestic product in the second quarter, while it boosted Germany’s economy 0.3 per cent.

Assuming French government activity has returned to pre-pandemic levels, Mr Moëc estimated it would “mechanically lift French third-quarter GDP by 3.9 per cent”, adding: “This would offset quite some of the differential with Germany.”

France and Germany suffered record GDP contractions in the second quarter as offices, factories and schools were closed and their healthcare systems prioritised coronavirus patients. But France’s lockdown was more severe and lasted longer than Germany’s. 

During France’s six-week lockdown, many of its millions of public sector employees could not go to work or do their jobs remotely at home. France’s public sector accounts for more than a fifth of its economy, one of the largest proportions in Europe.

Insee, the French statistics agency, assessed that non-healthcare public sector employee numbers fell 25 per cent during the lockdown — reducing input — even though they continued to be paid.

This led to a 13 per cent fall in government consumption in France during the first six months of this year. Ludovic Subran, chief economist at German insurer Allianz, said this was “a statistician’s artefact”.

The UK took a similarly cautious approach to France, for instance by assessing how much time teachers had spent working compared with normal, which led to a 35 per cent drop in UK educational output in the second quarter.

Germany, in contrast, had a less strict lockdown and most of its public sector staff continued to work. Destatis, the German statistics agency, said that even though schools closed, teachers still worked and were paid to deliver lessons remotely via online learning systems, so it judged their output to be mostly unchanged.

As a result, German government consumption continued to grow despite the pandemic, rising 2 per cent during the first half of the year. In Spain, government consumption also advanced 2 per cent, while it fell 2 per cent in Italy, even though both countries had lockdowns that were at least as strict as France’s.

“The bulk of this is purely driven by the fact Insee chose to take into account the fact that many public sector employees could not work,” said Mr Moëc. 

Eurostat, the EU statistics agency, issued guidance to national bodies on how to calculate government output during the pandemic. It said the differences between countries could be as much to do with the strictness of their lockdowns as any variation in measurement methods. 

Thomas Laurent, head of quarterly accounts at Insee, said he expected French government consumption to rebound in the third quarter. “Normally we would come back to normal, as schools are open, unless of course they have to close again,” he said.

Insee has forecast the French economy will rebound with 19 per cent growth in the third quarter. The eurozone’s second-largest economy was given a boost last week when the government announced a €100bn investment plan to support a rebound from Covid-19.

“Provided that schools and hospitals get back to normal these measurement differences may be reversed in the third quarter,” said Jessica Hinds, economist at Capital Economics. “But these statistical issues do suggest that we should take the estimates and rankings of the fall in GDP in the first half with a fairly large pinch of salt.”

2020-09-06 08:18:53

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