French companies: Improved business environment but mind cyclical risks

In 2021, France reported the fewest business insolvencies on record (statistics are beginning in 1990), with nearly 27,500 companies entering court-ordered administration or liquidation proceedings according to Banque de France data. This is about half of the insolvencies reported in 2016 (which was quite comparable to its long-term average). The decline started before the Covid pandemic, with insolvencies down 15% between 2016 and 2019, and accelerated during the pandemic with the implementation of “whatever it costs”. This decline in business insolvencies not only reflects a more buoyant economy but also a corporate situation that has generally improved in recent years.

French companies have seen an improvement of their business environment

Companies have benefited from a buoyant economic environment, as illustrated by the dynamic pace of turnover growth. In manufacturing industry and construction in particular, it rose by 11% and 30%, respectively, between 2016 and 2021 (despite the pandemic), compared to declines of 1% and 2.5%, respectively, during the previous five-year period.

After a severe shock, the pandemic did not jeopardize all companies’ financial situation. Strong fiscal support contributed to a further significant decrease in terms of insolvencies.

Moreover, as emphasized by the Coeuré report1, massive public finance support did not increase zombification (lending to non-viable companies, i.e. in which gross operating profit was not enough to cover financial expenses over a 3-year period) beyond the usual weight of zombie companies within the economy. This reduces the risk of a massive upturn in insolvencies once public support is withdrawn.

The decline in insolvencies can also be seen in the resilience of the labor market during the pandemic. In other words, the decline in business insolvencies reduced the number of job destructions (chart 2), saving a cumulative total of nearly 170,000 jobs according to our estimates for the 2-year period 2020-2021 (or 210,000 jobs between 2016 and 2021). We obtained these results by comparing the number of job destructions linked to insolvencies that actually occurred with the number of job destructions based on a counterfactual scenario of unchanged insolvencies (using Altarès statistics on jobs threatened by insolvencies).

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