The trough has passed, but the effect remains

The National Bureau of Economic Research (NBER) Cycle Date Committee announced in July 2021 that the US economy had peaked two months ago and then escaped from recession in April 2020. This is the shortest recession the United States has ever experienced. How about in France? Can you think of the economic crisis associated with Covid-19 behind us?

According to the French Economic Cycle Dating Committee (CDCEF) of the French Association of Economic Sciences (AFSE), the purpose is to establish and keep it up-to-date with the historical chronology of the turning points of the French economic cycle. .. , This question needs to be answered positively.

First, remember that the business cycle is defined as a phase of declining activity, that is, a phase of negative economic growth (recession) and a phase of this same level of rise, that is, a series of positive growth. (Expansion). These different periods are separated by valleys (lowest level activity) and mountains (highest level activity) that correspond to the turning points of the cycle.

The overall difficulty lies in dating such turning points, unless the cycle is observable by definition. For this purpose, you will most likely have to resort to various approaches that are statistical and econometric. The methodology adopted by CDCEF is unique in the sense that it combines a statistical and econometric approach on the one hand and a historical approach on the other.

Therefore, turning point dating is performed through the evaluation of the duration, amplitude, and diffusion criteria of the cycle phase (the “DAD” rule) and is based on two pillars. Quantitative pillars based on econometric approaches and qualitative pillars based on narrative approaches (such as by experts).

The lowest point in the second quarter of 2020

At a meeting on October 25, 2021, CDCEF, which had previously identified the peak of France’s business cycle in the fourth quarter of 2019, agreed to record a valley in the second quarter of 2020.

But if such a conclusion might seem logical, it was still unclear due to the dominant uncertainty today. Faced with the unprecedented nature of this cycle, CDCEF decides because economic activity has been dominated by the Covid-19 epidemic and the accompanying advances in hygiene measures since its first containment in March 2020. I chose to wait intentionally before.

Therefore, a continuous wave of pandemics could have shifted the lowest point of the cycle beyond the second quarter of 2020. In general, dating committees take much longer than starting (7 months on average for NBER) to identify the exit of a recession (for example, 15 months on average for NBER). In this regard, at the eurozone level, the Center for Economic Policy Research (CEPR) dating committee has not yet dated the exit from the recession, as long as the situation is very uneven from country to country.

The French economy experienced a strong recovery in the third quarter of 2020, but cumulatively approached zero in the following three quarters. It recorded a negative value in the fourth quarter of 2020. Confirmation of recovery in summer 2021 (GDP According to the latest national accounts data provided by INSEE on October 29, 2021, it grew by 3% in the third quarter of 2021, but the economy actually caught up with the activity. You can think of it as being in the third quarter of 2020 (see Graph 1).

Exhibit 1: France’s GDP and business cycle. Note: Gray bars correspond to the period of recession estimated by CDCEF. GDP is expressed in constant euros of billions of euros (quarterly real GDP at link prices in the previous year).
Insee, data available on October 29, 2021

Therefore, even though the November 2020 and April 2021 confinement emphasized activity, the methodology adopted by CDCEF can assert that the lowest point of the cycle occurred in the second quarter of 2020. To Taken into account, total business investment, employment and capacity utilization in the industry show continued growth since the second quarter of 2020. Industrial production and working hours experienced greater fluctuations during this period.

In addition, the proliferation of catch-up phases within the economy shows that between the third quarter of 2020 and the first quarter of 2021, only five of the 15 sectors, primarily non-agricultural markets, declined. .. ..

These sectors most affected by the November 2020 and April 2021 captivity (trade, transportation, hotels and restaurants, home services, transportation equipment industry) account for less than 20% of GDP. Most of the predominantly non-agricultural market sector, which accounts for almost 60% of economic activity in 2019, conversely recorded growth during this period.

Historical but short recession

The shock experienced by the French economy in 2020 is unprecedented in some respects. The peak-to-trough phase of the cycle is the shortest since the 1970s, compared to the average of four quarters of the last four recession episodes identified by the CDCEF, due to its two-quarter period (1974). -Investment cycle of 1975 and 1980, 1992-93, Great Recession due to the financial crisis of 2008-09).

Table 1: CDCEF dating of the French business cycle. Note: The duration of the bear phase is expressed in quarters, the amplitude is expressed in%, and the severity is defined by the following formula: 0.5 x duration x amplitude |. The peak day t corresponds to the end of the expansion period (that is, the recession begins with t + 1). The trough date t corresponds to the end of the recession (that is, the expansion starts with t + 1). * By convention, the dates of the last two turning points are considered tentative.
CDCEF (October 2021)

However, because GDP loss is 18.4% between peaks and troughs, this recession is most pronounced in terms of amplitude and severity, with a previous recession average of 1.6% (see Table 1). ..

If the bottom of the Covid-19 pandemic-related cycle is now behind us, can we consider the effects of the crisis to be completely absorbed? If the growth forecast for 2021 is fairly good (6.75% according to the IMF), it should be remembered that this rebound will come after a historic decline of about 8% in 2020.

In addition, empirical studies highlight the often catastrophic nature of recessions for long-term growth. These are, for example, the effects of hysteresis highlighted in the 1980s by economists Olivier Blanchard and Lawrence Summers. It is now empirically well established that the cycle can affect potential growth factors in the economy, especially the long-term performance of the labor market. France has not avoided this phenomenon as GDP turned from an average quarterly growth of about 1.3% between 1970 and 1974 to an order of 0.3% per quarter between 2009 and 2019. It seems that.

Overall, past experience is wise to stay vigilant, even if the bottom of the Covid-19 pandemic-related cycle is behind us and the French economy is currently in the process of catching up with its activity. It teaches us that future growth, especially with regard to supporting economic policies for activities.