Goodbye Economic Growth, Now It's Over

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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.

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