France’s economy stalls as budget deadlock fuels uncertainty

France’s economy contracted by 0.1 percent in the third quarter of 2024, according to figures released by the national statistics agency Insee on Friday. This follows stagnation in the second quarter and a 0.2 percent decline in the first, leaving the eurozone’s second-largest economy on the brink of recession. The figures come amid a volatile social climate, with a new nationwide day of mobilisation against the high cost of living and in support of young people’s demands planned.

Household consumption increased by 0.4 percent, but a fall in output was one of the main drivers of the GDP contraction. Transport equipment output dropped 3.5 percent, dragged down by a 4.5 percent fall in aerospace and a 1.5 percent decline in automotive. The agri-food sector also fell by 1.5 percent, hit by poor summer harvests. Inflation stood at 3.4 percent year-on-year in October, up from 3.1 percent in September and the highest level since January 2024.

Recession risk and market pressure

Experts say the poor figures are no surprise given the unfavourable macroeconomic environment. Jérémie Peloso, chief strategist for Europe at BCA Research, told Euronews that “France is highly likely to experience a technical recession over the coming quarters.” He added that this scenario was already conceivable before the recent budgetary turmoil and bond market rout. French borrowing costs rose above 5 percent on financial markets last week, and the 10-year government bond yield stood at 4.9 percent as of Friday, 0.17 percentage points below its peak on 22 October. The spread between French and German bonds was around 1.55 percentage points.

The government is under pressure to secure adoption of the 2027 budget on time, but it lacks a parliamentary majority. Economy and Finance Minister Roland Lescure said on Franceinfo that the French economy is “at a standstill” and warned the country “will hit the wall” if the recovery budget is not adopted. The government is not ruling out using article 49.3 of the Constitution, which allows a bill to pass without a vote unless a no-confidence motion is carried, or even ordinances, which have never been used to pass a budget since the Fifth Republic was created in 1958.

Uncertainty weighs on confidence

Jérôme Mathis, professor of economics at Paris-Dauphine University, argued that adopting the budget is not decisive in itself and would not “through any kind of leverage effect, miraculously revive activity in the short term.” He explained that a fiscal adjustment plan generally tends to weigh on growth in the immediate future. The issue, he said, is not just passing the bill but giving investors medium- and long-term visibility over France’s public finances. “Each rise in interest rates gradually feeds through into the state budget, reduces future room for manoeuvre and ultimately weighs on private investment,” Mathis said.

Mathis warned that budget uncertainty can drag on activity, as companies postpone investments, households defer spending, and markets demand a higher risk premium. He noted that the current situation differs from more classic budget crises because markets are not questioning France’s technical ability to raise taxes or repay debt. “They are more doubtful about its ability to slow their increase,” he said. As long as this question remains, pressure on interest rates is likely to persist, whatever institutional vehicle is chosen to pass the budget.