A pedestrian crosses a flooded street following heavy rainfall in Paris on October 17, 2024.
Joel Saget | Afp | Getty Images
France’s economy shrank slightly in the fourth quarter, flash data showed Thursday, highlighting the urgent need for warring French lawmakers to overcome their differences and agree on a 2025 budget.
The economy recorded a 0.1% contraction in the fourth quarter on the previous three months, the country’s statistics agency INSEE revealed Thursday, down from growth of 0.4% in the third quarter of 2024. Economists polled by Reuters had expected growth to be flat.
France’s beleaguered economy was given a boost by the Olympic Games in Paris last summer, but political upheaval has ensued since then, leaving fiscal challenges — namely, France’s big budget deficit and growing debt pile — unresolved.
Political stasis has dogged Paris since snap parliamentary elections were held last June and July. Both the far-left and far-right performed well in respective rounds of the vote, prompting wranglings in the National Assembly over who should govern. In the end, President Emmanuel Macron installed a conservative government in September, alienating political factions to the left and right.
Reliant on the far-right for support, then-Prime Minister Michel Barnier’s centrist government was vulnerable to challenges from both sides of the political spectrum and, after his deficit-reducing 2025 budget plans were rejected, the government was ousted in a no-confidence vote in December.
A new government under Prime Minister François Bayrou was put in place in December and thanks to both the far-right National Rally and Socialist Party refusing to back the motion, he survived a vote of confidence brought by the far-left earlier in January.
A 2025 budget is yet to be passed, however, and Bayrou has already been forced to make concessions to the left to garner support for his fiscal plans, by reopening the thorny debate over pension reform and agreeing to extra spending and jobs creation in the health and education sectors.
Analysts say Bayrou’s government has a better chance of getting a 2025 budget through parliament, although talks came close to collapse this week.
“François Bayrou’s chances of passing a 2025 deficit-cutting budget have strengthened significantly thanks to a series of political and financial concessions to the Socialists in the National Assembly,” Mujtaba Rahman, managing director of Europe at Eurasia Group, said in emailed comments Monday.
“[He] is now in a good position to resolve France’s short-term budgetary crisis by the end of next month or early March,” Rahman added.
The Socialists’ support for a deal is far from solid, however, with budget discussions looking close to collapse on Wednesday as officials from the center-left party suspended their participation in talks in protest over Bayrou’s remarks about immigration.
Even if talks resume, it’s likely that the government will fall short of its ambition to hit a budget deficit target of 5.4%. The finance ministry expects the budget deficit to stand at 6.1% of GDP in 2024.
“We believe that he [Bayrou] now has a good chance of succeeding but the final budget text may fall short of even his reduced ambition of a 5.4% of GDP deficit this year,” Rahman said.
As for France’s growth prospects, economists warn of a grim outlook for 2025.
“French political uncertainty, in our view, will have a negative impact on activity in the coming quarters,” J.P. Morgan Senior Economist Raphael Brun-Aguerre said in emailed comments Thursday.
“We also assume that trade uncertainty will weigh on business sentiment this year. As a result, we expect French GDP to only expand modestly in 2025 (by 0.5%). How these uncertainty channels unfold and their impact on activity however remain uncertain,” he said.
Charlotte de Montpellier, senior economist of France and Switzerland at ING, agreed that “ending 2024 with a contraction in GDP means a weak carry-over effect for 2025 and the government’s forecast of 0.9% GDP growth over 2025 as a whole will be very difficult to achieve. The first indicators published for 2025 also point to a weak first quarter,” she noted in emailed comments.
“The uncertainty surrounding the 2025 budget and the possible fall of the Bayrou government continue to weigh on domestic demand, and this is likely to persist over the coming months,” she added.
“Although the 2025 budget has not yet been voted on, and many uncertainties remain over fiscal policy for this year, the need to reduce the public deficit, which reached 6.1% of GDP in 2024, will weigh on GDP growth,” ING’s economist said.
