22 June 2020

“The health crisis has taken the form of Schumpeterian creative destruction, opening the way for new responses to structural challenges”

Ultimately, the recovery will not be a smooth ride. That is the spirit behind our U-shaped scenario. However, some of the solutions to the crisis will create new conditions that can strengthen our confidence in the growth prospects beyond 2021.

Christophe Morel
[Christophe Morel, Chief Economist]

The scenario of a U-shaped recovery

By now, there is nobody who doubts the scale of the impact of the health crisis on the economic environment. For example, our estimates for 2020 of a recession of 12% in France, with a 14% deterioration of the budget deficit and a debt-to-GDP ratio of 125% are practically the consensus.

With the easing of lockdown, the signs of recovery are accumulating. Although the worst of the economic crisis is behind us, the recovery will not be V-shaped. That is the main hypothesis of our scenario of a “U-shaped” recovery, whereby company bankruptcies will increase; unemployment rates will only fall very gradually; the weakness of global trade will hold back the growth models of the emerging countries, and, in particular, the budget support measures (especially in Europe) will need time and negotiations before they can be implemented.. During the second half of 2020 and in 2021, the restoration of confidence of business and households will enable growth to rebound.

However, certain risks that had begun to attenuate could reappear: for example, the health crisis could flare up again; the probability of a hard Brexit at the end of the year is increasing; the American elections are fuelling uncertainty, and the conflict between China and America has a structural nature that will persist regardless of the winner of presidential election in the United States.


COVID-19 as a “black swan” …and a historic opportunity to solve the fundamental challenges that existed before the crisis 

Even if uncertainties remain concerning how the economy will perform over the next 18 months, our confidence is stronger with regard to the medium/long-term recovery: crises are accelerators of pre-existing trends and enable disruptive policies to be put into effect. The health crisis constitutes an excellent opportunity for Europe to make the investments necessary for the digital and environmental transition.

Before the crisis, we had identified several challenges that did not seem to have a solution, such as persistent stagnation, “zombification” of the economy, the need to reallocate resources to new needs (environment, digital economy etc.) and the deadlock in European construction. Since the health crisis has affected every country simultaneously, it provides a “historic” opportunity to envisage solutions to all these long-term challenges in the form of Schumpeterian “creative destruction” and, in the case of Europe, to initiate federalism through budgetary solidarity. This creates a new playing field.

Several factors make us more confident of a prolonged growth cycle.

  • Before the crisis, the developed economies – especially the United States – were vulnerable to an economic downturn (which at the beginning of the year was the basis for our recession scenario). Now, in this new situation, “cyclic cleansing” is being replaced by the need to make up lost ground, thereby leading to a cycle of extended growth.
  • Budget policies will now finally have their big day: after phase 1 of urgent emergency measures and managing the need for liquidity, these policies are now progressing to phase 2 of stimulating the recovery. They will provide strong support for growth for 4 reasons. The budget stimulus has become massive, as seen in the EUR 130 billion announced in Germany or the “Next Generation EU” plan for EUR 750 billion.. The policies have a multi-year horizon, which will help to break the hysteresis effect of the crisis. The investment plans in the environment and digital sectors will by definition have a significant “multiplier” effect. Fourth, the impact will be reinforced by the fact that all the developed countries are applying the same measures at the same time (de facto coordination of economic policies, even in the absence of de jure coordination)
  • Finally, the central banks will support this recovery by maintaining their key rates unchanged for several years and pursuing their policy of unconditional asset purchases, with reinforced puts on financial assets (especially after the Fed’s decision to intervene on the credit markets).


Ultimately, the recovery will not be a smooth ride. That is the spirit behind our U-shaped scenario. However, some of the solutions to the crisis will create new conditions that can strengthen our confidence in the growth prospects beyond 2021.


Find the webinar of the scenario by clicking here



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