The Bank of France (BdF) has raised its growth forecast to 5.5% for 2021, announced the Governor of the Banque de France, François Villeroy de Galhau, on RTL on March 16. A crazy figure when the first quarter already starts in the red with the curfew and the closure of restaurants, hotels, ski resorts, etc. It would take 7-8% over the next three quarters to reach this forecast... Let's get serious again.
GDP growth in France has been inexorably decreasing from decade to decade since the first oil shock in 1973, and has been around 1% for the past few years. We are now heading towards zero, and why not towards a permanent recession. The rest of Europe, which is not in such bad shape, will also see its growth regress.
The fundamental reason for this slump is the widespread zombification of the economy. According to the Bank for International Settlements (BIS), a "zombie company" is "a publicly traded company that has been in existence for more than ten years and whose interest coverage ratio (ICR) has been less than one for at least three consecutive years". In other words, a company unable to pay the interest on its debt with the results generated by its activity. It survives by issuing bonds or by convincing banks to lend to it again and again.
By surviving in this way, these companies capture resources that would be better used by other, younger and more dynamic companies, the "creative destruction" theorized by Schumpeter is stopped and, as a consequence, the overall growth of the economy decreases because of this misallocation of resources. Moribund companies take resources without bringing anything in return.
Until now, this phenomenon only concerned large companies. With the Covid-19 crisis and its confinements, assistance programs have been put in place (rightly so since it is the government that decided on the restrictions), and it is now all companies that are concerned, SMEs, VSEs and even the self-employed! In 2020 in France, contrary to what one might have thought, the number of bankruptcies decreased by 38% compared to 2019, despite the shutdown of entire sectors. Thanks to this government assistance and to the deferral of charges, companies that would have gone bankrupt without the Covid crisis have taken advantage of it to prolong their activity. No one would blame them, but there are battalions of zombie companies, SMEs and VSEs this time. And the phenomenon is comparable in Europe.
Entire sectors of the economy are now affected, like a sick body, weakening the whole organism. The abrupt abandonment of this support would provoke a wave of bankruptcies that no government could electorally support, so the various aids will be prolonged and the statism, not to say the sovietization, of the economy will be reinforced. Unemployment will probably not increase significantly, but we might as well say goodbye to growth, it will only be a dream from now on.
The European Central Bank's printing press is the only thing left to provide glitter, cheap illusions, stock market and real estate bubbles that will turn heads but will only last a short time. An ECB that will also hold at arm's length a banking sector burdened with bad debts... Our economy is definitely confined.
Reproduction, in whole or in part, is authorized as long as it includes all the text hyperlinks and a link back to the original source.
The information contained in this article is for information purposes only and does not constitute investment advice or a recommendation to buy or sell.
