A poor performance. France’s gross domestic product fell by 0.1% in the third quarter, the National Institute of Statistics and Economic Studies (Insee) announced (source in French) on Friday, after stagnating in the second quarter and contracting by 0.2% in the first.
This is a new blow for the government, coming just after France’s borrowing costs passed 5% on financial markets last week and with the social climate still extremely tense, on the eve of another nationwide day of protests against the high cost of living and in support of young people’s demands.
This drop in activity effectively puts the eurozone’s second-largest economy on the brink of recession. At the same time, inflation accelerated to 3.4% year on year in October, up from 3.1% in September. That is its highest level since January 2024, according to Insee.
The poor figures do not come as a surprise to experts, given a particularly unfavourable macroeconomic environment. “France is highly likely to experience a technical recession over the coming quarters”, Jérémie Peloso, chief European strategist at BCA Research, told Euronews.
“This scenario was already conceivable before the recent budget turbulence and the collapse of the bond market,” he added.
“We will hit the wall”
The government has been shaken and is insisting on the need to get the 2027 budget passed on time, in a parliament where it has no majority.
Speaking on the Franceinfo set, 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 “recovery” budget is not adopted.
If parliamentary talks fail, the government is not ruling out the use of article 49.3 of the Constitution, which allows a bill to be passed without a vote unless a motion of no confidence is adopted. Another option would be to resort to ordonnances, a procedure that has never been used to pass a budget since the start 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 “decisive”, in that it would not, “through any kind of leverage effect, miraculously restart activity in the short term”.
“On the contrary, a budget adjustment plan generally tends to weigh on growth in the immediate term.” The researcher stresses that the issue is not just getting the government’s text passed, but giving investors medium and long-term visibility on the trajectory of France’s public finances.
France is borrowing at increasingly high rates on the markets. “Each rise in interest rates gradually feeds through into the state budget, reduces future room for manoeuvre and ultimately weighs on private investment,” Jérôme Mathis recalls. 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 French 10-year bonds stands at 4.9%, 0.17 percentage point below the peak reached on 22 October. The Franco-German spread, which measures the gap between the two countries’ borrowing rates, is around 1.55 percentage points.
“Yesterday’s ECB meeting, which was relatively free of surprises, has certainly contributed to this easing, even though its president, Christine Lagarde, refused to comment on the French situation”, notes a strategic memo written by Jérémie Peloso for BCA clients and seen by Euronews.
“The main risk for the French economy is not the lack of a budget. It is the lack of visibility on the trajectory of public finances”, Jérôme Mathis insists. In this context, “the main economic cost of the current deadlock is less the content of the measures that would not be voted than the prolongation of uncertainty”.
Ordonnances: what signal?
As for the possible adoption of the budget by ordonnances, the professor does not see this as “an obvious economic solution”. In his view, investors do care about the speed of political decisions, but also about their “legitimacy” and their “durability”. A budget adopted by ordonnance may reduce uncertainty in the short term, but it is not enough on its own to restore long-term budget credibility, the researcher warns.
“Markets generally prefer a contested decision to a prolonged absence of any decision. But if a budget adopted by ordonnance is seen as fragile, likely to be overturned after the presidential election or indicative of a lasting inability of the political system to build majorities, the positive effect on confidence could be limited”, explains Jérôme Mathis.
This, in his view, is precisely what sets the current situation apart from more “classic” budget crises: markets do not doubt France’s technical ability to levy taxes or repay its debt. “They are more doubtful about its ability to slow its increase.”
“As long as this question remains, the pressure on interest rates is likely to persist, whatever institutional vehicle is chosen to adopt the budget”, he concludes.