Would the lock-down economic contraction be a prelude to a major depression?

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Jacques SAPIR
Professor at EHESS-Paris
CEMI – Robert de Sorbon centre 

April 11th, 2020

The coronavirus epidemic strikes the imagination: medias are filled with images of hospitals in distress, and much of the world experiences unprecedented partial or total lock-down. Beyond the human aspect, with its dramas, its pain, there is also the question of the economic cost of this epidemic[1], and especially of lock-down measures[2]. We know, since the Spanish Flue of 1918-1920 that pandemics can have a distinct economic impact even if the death number is quite restricted[3]. We also know that the use of non-pharmaceutical interventions (i.e. quarantine and lock-down) is improving the situation[4]. Nevertheless these measures also have a cost. Obviously, the longer would the lock-down situation go, the higher the economic cost. But, at some point, we could have some irreversible consequences. One could then ask the question to know if the health emergency linked to epidemic is not paving the way to major an economic crisis, one that could dwarf all other post-1945 crises.

  1. A Significant impact on the world economy

It is clear today that the impact of the coronavirus epidemic will be very significant. All statistical institutions and think tanks are racing toward making estimates. As a matter of fact, early March 2020, the OECD published previsions, which are looking today tragically rosy[5]. The Euro area was moved from a 0,8% forecast to à -0,3% one, the German economy was downgraded from 0,3% to -0,1%, the French economy from 0,9% to -0,3% and the Italian economy from 0,0% to -0,4%[6]. However, imposition of lock-down in various countries dramatically changed the situation.

One has then to notice the quite pessimistic forecast established by the Italian bank UniCredit[7]. By comparison with official, or semi-official estimates, this forecast is describing a very bleak future. UniCredit estimates are done on the assumption that containment (lock-down) is to go at least June.

Table 1

UniCredit estimates: GDP rates of growth for 2020 and 2021

2020 2021 2021 in % of 2019
World -6,00% 8,60% 102,1%
US -10,80% 11,80% 99,7%
Eurozone -13,00% 10,00% 95,7%
of which
Germany -10,00% 10,00% 99,0%
France -13,80% 11,60% 96,2%
Italy -15,00% 9,00% 92,7%
Spain -15,50% 9,50% 92,5%
United Kingdom -10,50% 9,80% 98,3%
Norway -5,50% 6,50% 100,6%
Switzerland -10,20% 9,70% 98,5%
Asia
China 0,60% 10,0% 110,6%
Japan -7,50% 6,0% 98,0%
Russia* -4,10% 2,6% 98,4%

Table reconstituted from data of Table 1, Silvestre C., (ed), The mother of all recessions has arrived, Milano, The UniCredit Economic Chartbook, Q2-2020, April 2nd, 2020, p. 4.

* Data communicated by Alexander Schirov, deputy-director, Institute of Economic Forecating – RAS, Moscox

It is here important to read the commentary attached to these figures: “We expect the bulk of containment measures in the US and Europe to last through June. In this environment, uncertainty surrounding forecasts is huge. Nevertheless, today, we present our best guesses[8]. This amount to 12 weeks when other estimates are done on a shorter laps of time and could explain the very “pessimistic” mood of UniCredit experts. Quite interestingly, and to the contrary of other studies, UniCredit experts are forecasting quite a swift recovery, but they temper optimism with a possible second pandemic wave: “We suspect that the trough is likely to be much deeper –and the recovery swifter –than in the 2008-09 financial crisis. Risks are skewed to the downside, particularly with respect to the strength of the recovery. There is a risk of a second wave of infection, while business failures and much-higher unemployment may cause long-term damage to productive potential[9]. This is quite the opposite of what is commonly accepted, and one can think that here UniCredit experts are probably wrong. On the other hand, if we take estimates for a lock-down 8 weeks duration, GDP losses, if higher than what the INSEE said are much more in line with what has been forecasted.

  1. What impact on France?

The confinement of the population has put a stop to a large part of production in France. Another part of the production was affected by the slowdown in production in countries with which we have a lot of economic trade and the lack of spare parts. Telework, often presented as a quick fix, is not applicable in many industries, and it is done with a sharp drop in productivity. Finally, the end of confinement will not immediately mean a return to normal. The end of confinement will be gradual, and so will the return to a normal rate of activity. This impact can therefore be estimated. We know that there are already more than 7 million workers on partial unemployment in France. INSEE, the national statistical bureau, published estimates on March 26[10] and confirmed them by April 9th[11].

The OFCE, a well-known institute linked to the Higher School of Political Sciences (Sciences Po), has also produced estimates[12]. INSEE and OFCE estimates differs, and not only because assumptions about the lock-down duration are different but also because we have a significant difference in method. OFCE is modelling and computing major a demand shock. One not denies that such a shock exists. But, the lock-down of the society is mostly inducing a supply shock by the physical closing of activities and plant. This is what has been observed in China in the Hubei province[13].

One senior OFCE researcher, Mr Eric Heyer, has produced on his own another estimates on the ground of the drop experienced by electricity consumption in France[14]. This is interesting as it covers the drop of supply. He deduces from his finding a drop of monthly GDP in line with OFCE estimates. But, one has to remember that electricity industrial consumption declines less than proportionally with industrial production, a fact demonstrated in the 1990 in the Russian transition. That could be explained by the fact that even if in a given plant we have production at 10% of normal, the need to lighten buildings, to heat them or to climatize then, to power instruments and machine tools, will imply a consumption of electricity higher than 10% of normal power. The relation between production and electric consumption is not linear and probably vary with the production level. So, again, Heyer’s estimates, if very ingenious and interesting, are probably too optimistic in the present situation.

The OFCE estimates, because they concentrated on a demand shock are then slightly less severe than INSEE ones. First, the supply shock is obviously treated as residual. We think that is misunderstanding logics for a lock-down economy, reacting much closer to a war economy than to a civil-time one. An ample literature exists on this topic[15]. As a result of this misunderstanding of the situation, the OFCE reaches a slightly smaller (-2,6% against -3% for INSEE) result for shock consequences on one month.

Table 2

OFCE estimates

OFCE, « Evaluation au 30 mars 2020 d l’impact économique de la pandémie de COVID-19 et des mesures de confinement en France », Paris, Policy Brief n°65, 30 mars 2020.

  1. What impact on Germany and Italy?

If we compare French results to ones of other European countries, we are to find also some interesting bias.

German authorities are planning a coronavirus induced contraction of the economy between 7,6% and 20%[16], the last one being obviously a worst case. It is interesting to note that the Italian statistical institute (ISTAT) has adopted too a demand-linked approach. In its April 7th document[17], ISTAT is then computing a drop in GDP of only -1,9% if the lock-down goes till the end of April[18]. This looks hard to believe when one knows that Italy has been the European country the most affected by the pandemic so far. The European Union ECFIN has clearly established that the deterioration of the economic mood has been the worse and the fastest in Italy.

Figure 1


Even if we take at face value the drop in GDP assuming a lock-down till the end of June, the number, -4,5% of yearly GDP, seems far too conservative. Of course, a large part of Italian GDP is produced in SME located in the “Terza Italia[19]” going from Milano to Roma. And some of them have been less affected by the lock-down than larger enterprises of the North. But, some of these SME are slow to register for a lack of work.

As for French OFCE estimates, we think that we have a trend of underestimating economic consequences of lock-down and assuming a return to economic “normalcy” much too fast. The transition from lock-down to a return to “normalcy” is not to be smooth and new economic losses are to be sustained[20].

We are back here to methodology problem. Are estimates to be done by looking to the supply constraint, or to the demand constraint, as done by OFCE? On that point, it is interesting to look at the IMF. The IMF has noted about China: “What started as a series of sudden stops in economic activity, quickly cascaded through the economy and morphed into a full-blown shock simultaneously impeding supply and demand—as visible in the very weak January-February readings of industrial production and retail sales. The coronavirus shock is severe even compared to the Great Financial Crisis in 2007–08, as it hit households, businesses, financial institutions, and markets all at the same time—first in China and now globally.[21]

Economic policy, under lock-down situation[22], as recommended by the IMF is quite interesting and consistent with a war economy. Economic policy is to be mostly concerned by guaranteeing the functioning of essential sectors that is maintaining health care, food production and distribution, essential infrastructure, and utilities must be maintained. This could involve direct actions by governments to provide key supplies through recourse to wartime powers with conversion of industries, or selective nationalizations like that was possible in the US through the Defense Production Act. Rationing, price controls, and rules against hoarding may also be warranted in situations of extreme shortages. Then, another priority is to provide enough resources for people hit by the crisis. Unemployment benefits should be expanded and extended. Cash transfers are needed to reach the self-employed and those without jobs. Then, governments have to prevent excessive economic disruption.

We consider, then, that the supply shock is probably the worse in the lock-down or containment situation. We will then discuss the different estimates and also presents our own estimates.

  1. France: a huge economic shock

We have then to look back at the French situation. It is important to remember that France entered the lock-down by March 15th. Six weeks containment is then to go to April 27th and eight weeks to May 11th. These dates could be seen as quite conservative. If we adopt UniCredit views a lock-down exit by 9th June would correspond to 12 weeks.

First of all, it is clear that the French economy is to suffer major a shock with the society lock-down, and a shock that is to be greater the longer the lock down will be implemented. We will begin by looking at the INSEE estimates disclosed by March 26th.

Very clearly, the sectors most affected will be industry and construction. INSEE estimates the loss of activity at -52% for industry and -89% for construction[23]. In a more recent studies published by the French Central bank, the Banque de France, on April 8th, the productive capacities are computed for late March à 56%[24], in in January they were at around 85%.

Table 3

Loss of economic activity linked to the lock-down

Economic sectors Share in GDP

Assumption of activity loss

(in %)

INSEE

Activity loss as computed by Banque de France

Impact on activity loss (in GDP %)

INSEE

Agriculture and food-processing industry 4% -4% -6% 0,0%-
Industry without food-processing 12% -52% -46% -5,0%
Construction 6% -89% -75% -6,0%
Services 56% -36% -37% -20,0%
Non-market services 22% -14% -9% -3,0%
Total 100% -35% -32% -35,0%

Source: INSEE https://www.insee.fr/fr/information/4471804 Banque de France, Point sur la Conjoncture Française à fin mars 2020, Paris, Banque de France, April 8th, https://www.banque-france.fr/sites/default/files/media/2020/04/08/200407-point_de_conjoncture_banque_de_france_v2a_modele2.pdf

The lock-down induced losses appear then to be at around one-third of the value-added, which is in the same range that what was computed by INSEE by late March. However, there are some discrepancies as shown in table 2.

These figures however are nevertheless probably below the actual situation (Annex I)[25]. Production losses in agriculture and services are underestimated. Certain services, those linked to tourism, hotels and restaurants, are much more affected than in INSEE estimates. By the way, we should add that the shock impact will be different depending on whether we think of large companies or SMEs (Small and Medium Enterprises) and VSEs (Very Small Enterprises). The loss of income for VSEs and SMEs is dramatic. And, we tend to forget that SMEs and VSEs are the first employers in France. According to these estimates, for the whole of 2020, the loss of production could reach -6.5% of GDP for a lock-down period of 6 weeks and -8% for 8 weeks. On the other hand, the Banque de France is estimating the loss of yearly GDP for the two lock-down weeks of March at around -1,5%, something close to the INSEE estimates[26]. Is it nevertheless to be noted that the Banque de France is not taking into account the possible cumulative effect of lock-down.

Table 4

Lock-down impact on quarterly and yearly GDP

(INSEE estimates)

Duration of lock-down Impact on quarter GDP Impact on yearly GDP
One month -12,0% -3,0%
Two month -24,0% -6,0%

Source: INSEE, https://www.insee.fr/fr/information/4471804

Table 5

Losses in yearly GDP with time

Comparison between INSEE and OFCE estimates

Duration of lock-down INSEE Banque de France OFCE UniCredit
One month -3,0% 3,0% -2,6% 4,6%
Two month -6,0% 6,0% 9,2%

Source: INSEE, https://www.insee.fr/fr/information/4471804, OFCE, « Evaluation au 30 mars 2020 de l’impact économique de la pandémie de COVID-19 et des mesures de confinement en France », Paris, Policy Brief n°65, March 30th 2020, Banque de France, Point sur la Conjoncture Française à fin mars 2020, Paris, Banque de France, April 8th, UniCredit, adapted from table 1.

As has been said, both these estimates are probably, how bleak they could be, still too optimistic. If we include the production losses, which come from the fact that the efficiency of telework is less than that of “direct” work, losses induced by the fact that agriculture and the food industry will lack seasonal labour, that the return to work activity can only be progressive if only because all the countries have not been hit at the same time, we understand that the longer the duration of confinement and the greater the losses per week. Estimates made at the Center for the Study of Industrialization Pattern (CEMI – Robert de Sorbon Center) reveals more pessimistic hypotheses. We also added in these hypotheses, as in those made by INSEE, the inevitable production losses in the period of « de-lock down ».

Table 6

Global lock-down losses in GDP percent

INSEE

 

UniCredit

CEMI

Assumption 1

CEMI

Assumption 2

6 weeks of lock-down -6,5% -8,2% -7,6%
8 weeks of lock-down -8,0% -9,2% -10,3% -9,7%

Source : CEMI

CEMI-1: Assuming a constant level of losses through weeks.

CEMI-2: Assuming a progression of losses with passing weeks.

We can therefore estimate that the losses for the year 2020 would be greater than what INSEE estimated by at least 1,1% (for 6 weeks) or 1,7% (for 8 weeks) and could range from -7.6% for six weeks to -10.3 for eight weeks.

Such a shock, which has been without equivalent for the French economy but also to the world since 1945, will have disastrous consequences on employment. The rise in unemployment once the lock-down will be lifted could reach between 500,000 and 1 million people, depending on the nature of the measures taken to avoid a disaster in SMEs and very small businesses. The risk is therefore real, given the measures modifying access to unemployment insurance system, which came into force on January 1, 2020, that the French economy would enter a cycle of recession-depression.

Hence, even if non-pharmaceutical intervention could ease the situation by comparison with countries or with cities not applying such measures as demonstrated by various studies on the “Spanish flue” of 1918-1920, they have their cost on their own[27]. Conditions for exiting the lock-down situation are then of the utmost relevance.

  1. Questions about leaving lock-down situation

Two questions are important here, the recovering of supply (production), but also the reconstitution of demand[28].

The question of supply recovering has a double dimension, internal and external. From an internal point of view, and assuming that the lock-down is lifted on the same date throughout the metropolitan territory, which will probably be not the case at least in France, the main question will lie in the capacity of SMEs and VSEs to resume their activity, after having stayed between 6 weeks to 8 weeks idle and without cash receipts. From an external point of view, a large part of the countries exporting to France have the same problems as we do. The end of the lock-down situation will certainly not be on the same date depending on these countries. The de-synchronization of the return to activity is raising the risk of seriously disrupting production chains. The example that immediately comes to mind, and by no means the only one, is the automotive industry. Given that the countries of central and Eastern Europe are, for the time being, relatively late in being affected than France, Italy and Spain, we can think that they will emerge from the lock-down procedures – more or less strict – after us. It is therefore clear that in many branches, production will not be able to return to its level before lock-down for several weeks, even several months, just for technical reasons and whatever the demand would be.

The question of demand reconstitution also has an internal component and an external component. As for the internal aspect, the question of consumer psychology will weight heavily. However, it is to be understood that psychology is not the same according to the different social positions, the conditions of lock-down and the level of education. Here what can be called an extension of the endowment effect described by Tversky and Kahneman will certainly have a decisive relevance[29]. But, the Framing Effect will too play a role[30]. How the process of exiting from the lock-down will be presented to individuals? Is the accent to be put on uncertainties inherently plaguing this process or on it possible irreversibility? Such a question is of tremendous relevance for the reconstitution of demand, but also for it very structure at the micro-economic level.

If we can reasonably anticipate a burst of consumption in the immediate post-lock-down period, as we can see now in China and as we saw in the immediate post-war period, it is far from certain that it will be sustainable. Some of consumptions, like travels and holidays which have been planned before the coronavirus outbreak, can no longer take place in the same way and must, at least in part, be carried over to the year 2021. The consumption of durable goods will be subject to trade-off with the constitution of precautionary cash and an increase of saving[31]. Here, government responsibility will be very important. If he announces measures suggesting that households may have to pay part of the cost of containment, and if he is preparing a possible return of the epidemic with the same incompetence that he demonstrated in February and early March at the arrival of the Covid-19 (at least in France), we can fear that the volume of this precautionary savings would be very large as it was demonstrated in other pandemics[32].

As for the external component, we should understand that France realizes around 29% of its GDP from exports. What will be the foreign demand? If we can imagine that the demand for luxury goods will be relatively little affected, the same is not true for transport equipment, for example. This fall, or this very slow recovery, in external demand will penalize the recovery of some of the branches of the French economy and will cascade then into the whole economy. Consumption will not automatically recover its volume, or its composition, from the pre-containment. Again, this could significantly delay the economy’s “return to normal”.

It will therefore take at least 2 months, and perhaps much longer, for the French economy to return to its normal level of activity, if it has to find it again. Because, there is a real risk, which could be aggravated if the government implements an unsuitable macroeconomic policy because a public-debt obsession, that the economy locks itself in a depressive equilibrium, standing steadily at a level well below that reached in 2019. The figures that can be estimated at the moment are therefore likely to be increased. If we go back to UniCredit estimates, they are forecasting for several countries a 2021 GDP lower to the 2019 one. And these estimates are taking as granted a “quick” return to activity. As a matter of fact there is a significant possibility that the depressive state of the economy would go for years.

  1. Government responses

The French government is committed to guaranteeing the wages of employees through what is called “partial unemployment” benefits, and that means that the ASSEDICs will have to spend around 2,5 billions of euros per week. The government has pledged to guarantee loans and to help companies overall. It wanted at first to inject 45 billion euros into the economy in direct spending. Now, by April 11th, this target has been moved to 100 billions[33]. In addition it plans to spend 300 billion in financial guarantees[34]. However, these figures remain below needs. There is no doubt that theses amount will be greatly exceeded, and all the more so since confinement will last a long time.

Table 7

Budget consequences of the Covid-19

(INSEE and CEMI)

INSEE1

CEMI

Assumption 1

CEMI

Assumption 2

Losses in GDP (Six weeks of lock-down) -6,5% -8,2% -7,6%
Losses in GDP (Eight weeks of lock-down) -8,0% -10,3% -9,7%
Losses in budget income (6 weeks) in bln euros** -81,6 -102,9 -95,4
Losses in budget income (8 weeks) in bln euros -100,4 -129,3 -121,7
New expenditures (6 weeks) in bln euros# 100[35] 100 100
New expenditures (8 weeks) in bln euros ## 130 130 130
Additional deficit (6 weeks) in bln euros -181,6 -202,9 -195,4
Additional deficit (8 weeks) in bln euros -230,4 -259,3 -251,7
Forecasted deficit in the finance law in bln euros -54,5 -54,5 -54,5
Forecasted deficit in the finance law in GDP% -2,2% -2,2% -2,2%
Total deficit (6 weeks) in bln euros -236,1 -257,4 -249,9
Total deficit (8 weeks) in bln euros -284,9 -313,8 -306,2
Total deficit (6 weeks) in GDP% * -10,3% -11,4% -11,0%
Total deficit (8 weeks) in GDP% * -12,4% -13,9% -13,5%
  1. Deduced from INSEE data

# Forecasted amount

## Deduced amount if lock-down pushed to 8 weeks

* With GDP volume adjusted to estimates.

** Income losses for all sectors.

Direct spending could reach more than 130 billions if the lock-down is to go for 8 weeks. Financial guarantees are now up to around 450 billion. In addition, the government will lose revenue (VAT, income tax) due to the sharp drop in activity.

He predicted at first that the budget deficit could reach -3.9% and not -2.2% of GDP, or a direct increase by -1,7%[36]. But, in reality, the total budget deficit should be much higher. Mr Alberic de Montgolfier the head of the French Senate budget committee has spoken of a deficit of -6,2%[37] by March 24th 2020. By April 9th, the government revised the budget deficit figures to 7,6%[38].

If one adds the different assumption made here the total budget deficit for the 2020 fiscal year is to be closer to -10% to -13% of GDP than to the -3,9% announced by the French government.

Here again we have to compare with UniCredit estimates. Here again, these estimates are done for a longer time, 12 weeks on average. But, it is interesting to note that budget deficit is very high on 2020 and will for some country still goes on for 2021.

Table 8

Financial consequences of the pandemic

(UniCredit estimates)

2020 2021 Debt in GDP %, 2021
US -13,00% -10,00% 133,00%
Eurozone -11,00% -4,00% 102,00%
of which
Germany -12,90% -2,90% 72,60%
France -12,20% -4,50% 112,70%
Italy -12,30% -4,90% 155,50%
Spain -12,50% -4,50% 119,70%

Table 1, Silvestre C., (ed), The mother of all recessions has arrived, Milano, The UniCredit Economic Chartbook, Q2-2020, April 2nd, 2020, p. 4.

But, the budget deficit is not what raises now concerns. The main question is to know how the French economy could exit from the lock-down with the minimum of pain. It is therefore important that the government reserves part of the consumption of public administrations for SMEs and VSEs, to provide them with the conditions for a good restart[39]. Like what is done in the United States with the Small Business Act, about 30% of public orders should be reserved for SMEs and VSEs working in France. The government must then make sure that no big business goes bankrupt. Bruno Le Maire, the Minister of Economy, raised the possibility of nationalization[40]. They must be carried out whenever the survival of the company is in question and the risk of significant job losses is present. The Italian government has already begun the nationalization process with the Alitalia air transportation company[41]. Finally, it will have to provide an income guarantee to households, while the economy is back on track.

Beyond that, this epidemic made it clear to political leaders that it is no longer possible to depend at the point where we were, on foreign imports. For all strategic products, in the health sector but also elsewhere, 50% of national consumption should be satisfied by national production. This would allow, if trade relations would again be interrupted, to be able to rapidly increase the production of domestic producers. This implies close monitoring of production capacities, but also a subsidy and price system in order to guarantee this strategic production reserve.

  1. How to fund the pandemic and its consequences?

In the medium term, the arbitration for the various governments will be between the speed of a « return to normal » of the economy and additional debt. The conditions for breaking out of confinement will certainly be more difficult than what is expected today, and the subsidies, both to households and to businesses, will have to be massive. In this situation, if the debt issue is not resolved by the end of the year, it will weigh heavily on the economic conditions of 2021 and beyond. The risk is that the exogenous shock of the epidemic will then be followed by an endogenous recessionary shock of budgetary origin. Indeed, the amount of debts is today such that it is excluded, except to cause a new depression with its political consequences, to make pay these debts by the households. The idea put forward by Ms Christine Lagarde and the IMF in 2013 of an authoritarian levy of 10% of savings would also have significant depressive effects[42], because households would like to replenish their savings as quickly as possible and would severely limit their consumption[43]. Huge losses experienced in stock markets are indeed already pushing the economy in this direction.

What could be possible solutions? The idea of using special pandemic European bonds, called “coronabonds” has been plainly refused by Germany[44]. So was the Italian proposal to use the European Solidarity Mechanism (ESM) but without constraints usually imposed by such a mechanism[45]. This too was refused by Germany.

A direct monetary funding done by European Central Bank, could in a way ease the situation. The PEPP or Pandemic Emergency Purchasing Program decided (for a total of 750 bln euros) on March 24th is clearly a step in the good direction[46]. But, funding problems are probably to stay with us for a quite long period. The “temporary” nature of this program is probably to be extended and the ceiling so far decided probably exceeded. A significant issue is the fact that the ECB has lifted the 33% of a given country limit in its new sovereign securities purchasing program. This limit had been decided after a 2018 judgement of the European Union Justice Court, following a complaint filed by Germany. The future of the PEPP looks then hung in balance with a possible new judicial action from Germany[47].

What would be long-term consequences? Could the ECB be transformed in a kind of defeasance fund for sovereign debts? The possible consequences for the Eurozone are clearly disturbing for the government and for those supporting the Euro.

Then, an Eurogroup meetings convened on April 9th 2020 reached a compromise, which excluded still “coronabonds” as wanted by Italy, but pledged, through different sources, around 500 billions euros. However, this amount of money is just a small portion of what is actually needed. If we agree with UniCredit estimates, a budget deficit of -11,0% of the Eurozone GDP would imply more than 1150 billions euros for 2020. If we add to that the potential deficit for 2021, 455 billions euros, we are to reach the total amount of 1605 billions euros. This is a level greater than what has been spent in 2008 and 2009, even when recomputed in constant euros. As the global Eurozone GDP is to shrink to 95,7% of its 2019 level, the debt to GDP ratio is to increase dramatically. This would produce some political reactions. The risk of an austerity-induced depression plaguing Europe for years is then very real.

This crisis is much more serious than the 2008 one. In addition, the 2008 crisis was initially financial and then it affected the production sector. The current crisis starts with the shutdown or the dormancy of part of the production due to containment. The drop in production figures is closer to the level of the 1929 crisis. But what is new is the speed with which production is almost at a standstill. So this is an unprecedented crisis. It will profoundly change the attitude of the people and, hopefully, of those in power.

Annex 1

From INSEE data about the French GDP disaggregation we constructed the following table.

AT1

GDP at current prices (billions euros) 2018 2019 Week
Agriculture, forestry and fishing 38,2 39,0 0,750
Manufacturing, mining and other industries 280,2 286,4 5,508
    Extractive industries, energy, water, waste management and depollution 51,8 53,0 1,019
      Extractive industries 1,9 1,9 0,037
      Production and distribution of electricity, gas, steam and air conditioning 34,7 35,5 0,683
      Water production and distribution; sanitation, waste management and depollution 15,2 15,5 0,299
    Manufacture of food, beverages and tobacco products 41,7 42,6 0,820
    Coking and refining 5,0 5,1 0,099
    Manufacture of electrical, electronic and computer equipment; machinery manufacturing 30,9 31,5 0,606
      Computer, electronic and optical product manufacturing 12,5 12,8 0,246
      Manufacture of electrical equipment 6,6 6,8 0,130
      Manufacture of machinery and equipment n.e.c. 11,7 12,0 0,230
    Transport equipment manufacturing 27,7 28,3 0,545
    Manufacture of other industrial products 123,1 125,8 2,419
      Textile manufacturing, clothing industries, leather and footwear industry 4,8 4,9 0,094
      Woodworking, paper and printing industries 12,0 12,3 0,237
      Chemical industry 19,3 19,7 0,379
      Pharmaceutical industry 12,4 12,6 0,243
      Rubber, plastic and other non-metallic mineral product manufacturing 18,7 19,1 0,367
      Metallurgy and manufacture of metal products, excluding machinery and equipment 26,8 27,4 0,528
      Other manufacturing industries; repair and installation of machinery and equipment 29,1 29,7 0,572
Construction 117,4 120,0 2,308
Mainly market services 1 187,7 1213,9 23,345
  Wholesale and retail trade, transport, accommodation and catering 371,8 380,1 7,309
    Trade ; repair of motor vehicles and motorcycles 216,2 221,0 4,250
    Transport and storage 94,0 96,1 1,848
    Accommodation and catering 61,7 63,0 1,212
  Information and communication 112,0 114,4 2,201
      Publishing, audiovisual and broadcasting 25,6 26,1 0,502
      Telecommunications 24,9 25,5 0,490
      IT activities and information services 61,5 62,8 1,208
  Financial and insurance activities 80,6 82,4 1,585
  Real estate activities 269,9 275,9 5,305
  Scientific and technical activities; administrative and support services 292,9 299,4 5,757
      Legal, accounting, management, architecture, engineering, control and technical analysis activities 116,3 118,9 2,287
      Scientific research and development 37,3 38,2 0,734
      Other specialized, scientific and technical activities 16,6 17,0 0,326
      Administrative and support service activities 122,6 125,3 2,410
  Other services 60,4 61,7 1,187
      Arts, shows and recreational activities 29,3 29,9 0,575
      Other service activities 28,2 28,8 0,554
      Activities of households as employers 3,0 3,0 0,058
Mainly non-market services (*) 467,5 477,8 9,189
      Public administration and defense – compulsory social security 163,2 166,8 3,209
      Education 112,5 114,9 2,210
      Human health activities 123,0 125,8 2,419
      Medico-social and social accommodation and social work without accommodation 68,7 70,3 1,351
Total branches 2 090,9 2137,2 41,100

From Table AT-1 we deduced the simplified table AT-2

AT-2

  Weekly production – 2019 CEMI – Assumption Weekly value
Agriculture, forestry and fishing 0,75 0,880 0,66
Manufacturing, mining and other industries 5,51 0,567 3,12
    Extractive industries, energy, water, waste management and depollution 1,02 0,850 0,87
    Manufacture of food, beverages and tobacco products 0,82 0,950 0,78
    Coking and refining 0,10 0,700 0,07
    Manufacture of electrical, electronic and computer equipment; machinery manufacturing 0,61 0,300 0,18
    Transport equipment manufacturing 0,54 0,250 0,14
      Textile manufacturing, clothing industries, leather and footwear industry 0,09 0,250 0,02
      Woodworking, paper and printing industries 0,24 0,400 0,09
      Chemical industry 0,38 0,500 0,19
      Pharmaceutical industry 0,24 1,000 0,24
      Rubber, plastic and other non-metallic mineral product manufacturing 0,37 0,600 0,22
      Metallurgy and manufacture of metal products, excluding machinery and equipment 0,53 0,330 0,17
      Other manufacturing industries; repair and installation of machinery and equipment 0,57 0,250 0,14
Construction 2,31 0,110 0,25
Mainly market services 23,34 0,733 17,1
    Trade ; repair of motor vehicles and motorcycles 4,25 0,400 1,70
    Transport and storage 1,85 0,660 1,22
    Accommodation and catering 1,21 0,150 0,18
  Information and communication 2,20 0,800 1,76
  Financial and insurance activities 1,59 0,700 1,11
  Real estate activities 5,31 0,200 1,06
  Scientific and technical activities; administrative and support services 5,76 0,600 3,45
      Public administration and defence – compulsory social security 3,21 0,660 2,12
      Education 2,21 0,330 0,73
      Human health activities 2,42 1,000 2,42
      Medico-social and social accommodation and social work without accommodation 1,35 1,000 1,35
TOTAL 41,10 0,514 21,14

The first column gives the weekly production in value (billion euros) in 2019. The second, the estimated level of the activity under confinement (1 = no impact / 0 = total cessation of the activity), and finally the third column gives the production in estimated value under confinement. We then obtain an overall estimate in value of 21.14 billion against 41.10 billion in 2019, i.e. an activity coefficient of 51.4% (loss of 48.6%) against the estimate of INSEE which on a coefficient of 65% (loss of 35%).

[1] Eichenbaum, M. S., S. Rebelo, and M. Trabandt, The macroeconomics of epidemics, Working Paper n° 26882, National Bureau of Economic Research, 2020.

[2] Markel, H., H. B. Lipman, J. A. Navarro, A. Sloan, J. R. Michalsen, A. M. Stern, and M. S. Cetron, Nonpharmaceutical Interventions Implemented by US Cities During the 1918-1919 Influenza Pandemic. In Journal of American Medical Association, vol. 298(6), 2007, pp. 644–654.

[3] Garrett, T. A., Economic Effects of the 1918 Influenza Pandemic: Implications for a Modern-Day Pandemic, Federal Reserve Bank of St. Louis, 2007. Brainerd, E. and M. V. Siegler, The Economic Effects of the 1918 Influenza Epidemic, CEPR Discussion Papers n°3791, C.E.P.R. Discussion Papers, 2003.

[4] Hatchett, R. J., C. E. Mecher, and M. Lipsitch, « Public health interventions and epidemic intensity during the 1918 influenza pandemic », in Proceedings of the National Academy of Sciences Vol. 104(18), 2007, pp. 7582–7587

[5] OECD, Interim Economic Assessment, Coronavirus : The World Economy at Risk, OECD, Paris, March 2nd, 2020.

[6] Idem, p. 2.

[7] Silvestre C., (ed), The mother of all recessions has arrived, Milano, The UniCredit Economic Chartbook, Q2-2020, April 2nd, 2020.

[8] Idem, p. 3.

[9] Idem, p. 3.

[10] https://www.insee.fr/fr/information/4471804

[11] https://insee.fr/fr/statistiques/4478214?sommaire=4473296

[12] OFCE, « Evaluation au 30 mars 2020 d l’impact économique de la pandémie de COVID-19 et des mesures de confinement en France », Paris, Policy Brief n°65, 30 mars 2020.

[13] https://blogs.imf.org/2020/03/20/blunting-the-impact-and-hard-choices-early-lessons-from-china/

[14] https://www.ofce.sciences-po.fr/blog/quelle-est-lampleur-du-ralentissement-industriel-apres-15-jours-de-confinement-une-analyse-a-partir-de-la-consommation-delectricite-en-france/

[15] We are just to quote Milward A.S., War, Economy and Society, Berkeley and Los Angeles, University of California Press, 1977 : Hardach G., The First World War, 1914-1918, Berkeley and Los Angeles, University of California Press, 1977 ; Fridenson P. et Griset P.,(dir), L’industrie dans la Grande Guerre, Paris, Comité pour l’Histoire Economique et Financière de la France, 552 p ; Feldman G.D., Army, Industry and Labor in Germany, 1914-1918, Princeton (NJ), Princeton University Presse, 1966.

[16] https://www.dw.com/en/coronavirus-germany-counts-costs-of-economic-shutdown/a-52890813

[17] https://www.istat.it/it/files//2020/04/notamensile_marzo_fin.pdf

[18] ISTAT, Nota Mensile Marzo 2020, n°3, Roma, ISTAT, April 7th, figure 11, p.9,

[19] See Bagnasco A., Tre Italie. La problematica territoriale dello sviluppo italiano, Bologna, Il Mulino, 1977.

[20] https://edition.cnn.com/2020/04/06/business/germany-coronavirus-economy/index.html

[21] https://blogs.imf.org/2020/03/20/blunting-the-impact-and-hard-choices-early-lessons-from-china/

[22] https://blogs.imf.org/2020/04/01/economic-policies-for-the-covid-19-war/

[23] https://www.insee.fr/fr/information/4471804

[24] Banque de France, Point sur la Conjoncture Française à fin mars 2020, Paris, Banque de France, April 8th, https://www.banque-france.fr/sites/default/files/media/2020/04/08/200407-point_de_conjoncture_banque_de_france_v2a_modele2.pdf

[25] For a more precise discussion on INSEE estimates : https://www.les-crises.fr/russeurope-en-exil-lhypothese-blanche-neige-les-previsions-de-linsee-et-leur-discussion-par-jacques-sapir/

[26] Point sur la Conjoncture Française à fin mars 2020, Paris, Banque de France, April 8th, op.cit., p. 5.

[27] Correia S., S. Luck, and E. Verner, Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu, Draft, Federal Reserve Bank of New York, March 30th, 2020.

[28] See the Op-ed paper written in the digital newspaper « La Tribune »: www.latribune.fr/opinions/tribunes/covid-19-choc-d-offre-ou-choc-de-demande-rate-les-deux-843729.html

[29] Kahneman D., J. Knetsch et R. Thaler, « The Endowment Effect, Loss Aversion and StatuQuo Bias », Journal of Economic Perspectives , vol. 5/1991, n°1, p. 193-206 ; Kahneman D., « New Challenges to the Rationality Assumption » in K.J. Arrow, E. Colombatto, M. Perlman et C. Schmidt (edits.), The Rational Foundations of Economic Behaviour, New York, St. Martin’s Press, 1996, p. 203-219.

[30] Tversky A., « Rational Theory and Constructive Choice », in K.J. Arrow, E. Colombatto, M. Perlman et C. Schmidt (edits.), The Rational Foundations of Economic Behaviour, op.cit., p. 185-197, p. 187 ; McNeil B.J., A.S. Pauker, H. Sox Jr. et A. Tversky, « On The Elicitation of Preferences for Alternative Therapies », New England Journal of Medicine, vol. 306, 1982, p. 1259-1262.

[31] Nakamura E., J. Steinsson, R. Barro and J-F Ursua, « Crises and Recoveries in an Empirical Model of Consumption Disaster », in American Economic Journal, Macroeconomics, n°5, 2013, pp. 35-73.

[32] Jorda O., Singh S.R., Taylor A.M., « Longer-Run Economic Consequences of Pandemics », San Francisco, Federal Reserve Bank of San Francisco Working Paper Series, Working Paper 2020-09, March 30th, 2020, https://doi.org/10.24148/wp2020-09

[33] Figure given by Bruno le Maire, French Minister of the economy, April 9th, https://www.lesechos.fr/economie-france/budget-fiscalite/exclusif-coronavirus-gerald-darmanin-et-bruno-le-maire-e-plan-durgence-revise-a-100-milliards-deuros-1193765

[34] https://www.economie.gouv.fr/coronavirus-soutien-entreprises

[35] Figure given by Bruno le Maire, French Minister of the economy, April 9th, https://www.lesechos.fr/economie-france/budget-fiscalite/exclusif-coronavirus-gerald-darmanin-et-bruno-le-maire-e-plan-durgence-revise-a-100-milliards-deuros-1193765

[36] https://www.lesechos.fr/economie-france/budget-fiscalite/coronavirus-le-deficit-public-va-se-creuser-dans-des-proportions-encore-inconnues-1186670

[37] https://www.lesechos.fr/economie-france/budget-fiscalite/coronavirus-pourquoi-le-deficit-public-va-encore-saggraver-1188109

[38] https://www.usinenouvelle.com/article/le-gouvernement-prevoit-un-deficit-de-7-6-du-pib-en-2020.N952126

[39] http://www.cci-paris-idf.fr/informations-territoriales/ile-de-france/actualites/aider-entreprises-surmonter-epidemie-coronavirus-ile-de-france

[40] https://www.ouest-france.fr/sante/virus/coronavirus/coronavirus-les-eventuelles-nationalisations-d-entreprises-seront-temporaires-6799107

[41] https://www.latribune.fr/economie/france/coronavirus-le-retour-des-nationalisations-842721.html

[42] https://www.lefigaro.fr/conjoncture/2013/10/09/20002-20131009ARTFIG00524-le-fmi-propose-une-supertaxe-sur-le-capital.php

[43] This would be a kind of reverse « wealth effect », Ando, A. and F. Modigliani, “The ‘Life Cycle’ Hypothesis of Saving: AggregateImplications and Tests”, in American Economic Review, vol. 53, n°1, 1963, pp. 55-84, Arena, J.J., “Capital Gains and the ‘Life Cycle’ Hypothesis of Saving, in American Economic Review, vol. 54, n°1, 1964, pp. 107-111, Ando, A., “Reflections on Some Recent Evidence on Life Cycle Hypothesis of Saving”, in Studies in Banking and Finance, n° 5, 1988, pp. 7-25

[44] https://www.capital.fr/entreprises-marches/lallemagne-soppose-aux-coronabonds-souhaites-par-la-france-et-litalie-contre-la-crise-1365932

[45] https://www.lopinion.fr/edition/economie/zone-euro-l-italie-reclame-recours-conditions-mes-215003

[46] https://www.ecb.europa.eu/ecb/legal/date/2020/html/index.en.html?skey=ECB/2020/17

[47] https://www.usinenouvelle.com/article/coronavirus-la-bce-suspend-ses-limites-aux-rachats-de-dette-souveraine.N946181

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