French economy on brink of recession amid GDP fall, rising borrowing costs and budget deadlock
France has had no growth this year, and GDP fell 0.1% between July and September. How to restore financial credibility as the government pushes parties to adopt the 2027 budget? Analysis.
A setback. French gross domestic product fell by 0,1 % in the third quarter, the National Institute of Statistics and Economic Studies (Insee) said on Friday, after stagnating in the second quarter and slipping by 0,2 % in the first.
It is another blow for the government. France’s borrowing costs climbed above 5 % on the financial markets last week and social tensions remain high, on the eve of a new nationwide day of protest against the high cost of living and in support of young people’s demands.
This decline in activity effectively puts the euro area’s second largest economy on the brink of recession. At the same time, inflation accelerated to 3,4 % year on year in October, from 3,1 % in September. That is its highest level since January 2024, according to Insee.
The poor figures come as no surprise to experts, against a particularly unfavourable macroeconomic backdrop. "France is highly likely to experience a technical recession over the coming quarters", Jérémie Peloso, chief Europe strategist at BCA Research, told Euronews.
"This scenario was already conceivable before the recent budget turbulence and the bond market rout", he added.
"We will hit the wall"
The government has been shaken by the news and is insisting on the need to have the 2027 budget adopted on time, in a parliament without a majority.
Speaking on Franceinfo, Economy and Finance Minister Roland Lescure described the French economy as "at a standstill". He also warned that the country "will hit the wall" if the "turnaround" budget is not passed.
If parliamentary debates fail, the government is not ruling out the use of article 49.3 of the Constitution, which allows a bill to be adopted without a vote unless a motion of no confidence is passed. Another option would be to resort to ordinances, a procedure that has never been used to pass a budget since the creation of the Fifth Republic in 1958.
"The main risk for the French economy is not the lack of a budget"
According to Jérôme Mathis, professor of economics at Paris-Dauphine University and author of the blog "La finance au cœur de nos vies" (source in French), adopting a budget is not "crucial" in itself, since it would not, "through any kind of leverage effect, miraculously revive activity in the short term".
"On the contrary, a fiscal adjustment plan generally tends to weigh on growth in the immediate term". The researcher stresses that the issue is not just to get the government’s bill through, but to give investors medium and long-term visibility on the trajectory of France’s public finances.
France is borrowing at ever higher rates on the markets. "Each increase in rates gradually feeds through into the state budget, narrows future room for manoeuvre and ultimately weighs on private investment", Jérôme Mathis points out. Budget uncertainty can also become a drag on activity, he warns. "Companies postpone some investments, households delay some spending and markets demand a higher risk premium".
This Friday, the yield on 10-year French government bonds stands at 4,9 %, down 0,17 percentage point from the peak reached on 22 October. The French-German spread, which measures the gap between the two countries’ borrowing costs, is hovering around 1,55 percentage point.
"Yesterday’s ECB meeting, which contained few surprises, certainly helped this easing, even though its president, Christine Lagarde, refused to comment on the situation in France", notes a strategy paper written by Jérémie Peloso for BCA clients and seen by Euronews.
"The main risk for the French economy is not the absence of a budget. It is the lack of visibility on the trajectory of public finances", says Jérôme Mathis. In this context, "the main economic cost of the current deadlock lies less in the content of the measures that would not be voted than in the prolongation of uncertainty".
As for a possible adoption of the budget by ordinance, the professor does not see it as "an obvious economic solution". In his view, markets do attach importance to the speed of political decision-making, but also to its "legitimacy" and its "durability". A budget adopted by ordinance may reduce uncertainty in the short term, but is not enough on its own to restore long-term fiscal credibility, he warns.
"Markets generally prefer a contested decision to a prolonged lack of decisions. But if a budget adopted by ordinance is seen as fragile, likely to be called into question after the presidential election or as a sign of a lasting inability of the political system to build majorities, the positive impact on confidence could be limited", explains Jérôme Mathis.
This, in his view, is precisely what sets the current situation apart from "more conventional" budget crises: markets do not doubt France’s technical ability to levy taxes or repay its debt. "They have more doubts about its ability to slow the pace of that increase".
"As long as this question remains, pressure on interest rates is likely to persist, whatever institutional vehicle is chosen to adopt the budget", he concludes.
