France rally
There is unrest on the streets, businesses are in retreat, and the economy just contacted by its biggest quarterly margin. Image Credit: Reuters

Paris: The French economy experienced its sharpest contraction on record in the second quarter when strict coronavirus lockdowns choked off manufacturing, tourism and consumer spending across Europe.

Output in the euro area's second largest economy declined 13.8 per cent, statistics agency Insee said Friday, with huge declines in consumer spending, trade and investment. While the contraction isn't as bad as the 15.2 per cent forecast by economists, it's the worst since the series began more than 70 years ago.

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"It's a severe figure, but less severe than expected," French Finance Minister Bruno Le Maire said. "We need to continue to provide radical and powerful responses to recover as fast as possible."

The virus fallout has been widespread, with figures due later Friday expected to show the euro area suffered a 12 per cent slump in the three months through June. The data will likely confirm the uneven hit to the region, with France, Italy and Spain potentially suffering the most. Germany, Europe's largest economy, shrank 10 per cent while Spain contracted nearly twice that amount.

And yet gaining on the dollar

Despite the gloomy picture for the continent, the euro continued to gain versus the dollar, briefly breaking through $1.19. That follows a sharp drop in US GDP, as well as rising concerns about the virus in America, and political uncertainty in the buildup to the presidential election.

The euro-area recovery, which is already under way, will be supported by European Central Bank stimulus as well an historic deal between countries for a shared recovery fund. But the threat of job cuts across the region, as well as a renewed outbreak of infections, mean a recent rebound in activity may not be sustained.

It could still be undone

Already, there's been an uptick of COVID-19 cases, with Germany sounding the alarm over rising infection rates. In the U.K. the government reimposed lockdown restrictions across a large part of northern England.

Having spent roughly 136 billion euros on emergency measures, the French government is now preparing a 100 billion-euro stimulus package that will target industrial investment and a transition to a greener economy. The aim is to get economic output back to pre-crisis levels by the start of 2022.

The data on Friday showed that France's construction sector was hit particularly hard by the lockdown, with a 24 per cent drop in output in the second quarter after a 12.8 per cent drop in the first.

There have been some encouraging signs with consumer spending in June surging to a higher level than before the lockdown in February and inflation rebounding more quickly than expected in July to 0.9 per cent. But household confidence declined this month, and the government expects job losses and bankruptcies to rise further.

Cuts and more cuts

Some of the country's biggest employers have already announced cuts, with Renault SA planning to eliminate about 14,600 jobs worldwide and Airbus SE eyeing an 11 per cent reduction in its global payroll.

"I'd like to be able to tell you we are out of the woods, but it isn't the case," Le Maire said at a hearing of the National Assembly's economic affairs committee this week. "The worst is ahead of us."