France’s Political Mire Drags Economy Backward
Business and consumer confidence remains on the rocks
The French economy shrank in the final months of last year as political deadlock took its toll on business and consumer confidence and the glow from the summer’s Olympics faded.
Gross domestic product was 0.1% less in the fourth quarter than the third, when a boost from the games held in Paris in July and August helped the French economy grow at the fastest rate last year.
For the year as a whole, France’s economy kept the same pace as in 2023, growing at 1.1%.
Alongside a second-straight year of contraction in beleaguered Germany, the eurozone’s largest economy, France’s weak rate of growth is weighing on the currency area, which is likely to face continued challenges at the start of 2025.
Spain has proved a rare sunny spot for Europe, boosted by free-spending tourists, investment and a robustly growing labor force, and likely growing faster even than the U.S. last year. Still, the European Central Bank is all but certain later Thursday to cut its key interest rates for a fifth time in eight months as it aims to ease some of the restraints it imposed on businesses and households in an effort to tame high inflation.
France’s economic situation has deteriorated sharply since the summer, said Charlotte de Montpellier, an economist specializing in France at Dutch bank ING.
“Uncertainty over future budget adjustments, including potential tax hikes for businesses and households, along with political instability, the aftermath of the Olympics, and a less favorable international environment, have weighed on fourth-quarter activity,” she said.
France’s business confidence remains on the rocks in the face of a government that has remained in limbo since the summer, when President Macron’s decision to call snap legislative elections saw his party, already without a majority in the National Assembly, further weakened.
Macron delayed the appointment of a new prime minister for months, and his eventual choice to lead the government was forced to step down in December after losing a confidence vote in the legislature. That has left France with little hope of dealing with its widening budget deficit, which already stands well above the threshold considered acceptable under European Union rules.
Macron’s hamstrung government is struggling to implement measures to narrow that gap between income and outlay, whether through higher taxes or lower spending. Macron’s landmark move to raise the retirement age to 64 is seen as key to shoring up the country’s finances, but remains unpopular among swathes of voters on both left and right. Moves to bump up the number of hours French people work have been floated by members of new premier Francois Bayrou’s administration, as have higher taxes on big businesses. That attracted criticism this week from Bernard Arnault, head of France’s largest company, luxury group LVMH, and himself one of the world’s wealthiest men.
“[The tax changes] would mean taxing anything ‘Made in France’… As a means of encouraging the offshoring of operations, it’s perfect. I don’t know if that’s the aim of the government, but that’s what it will achieve,” he told a press conference, a week after attending U.S. President Trump’s inauguration in Washington, D.C.
“Coming back to France after a few days in the U.S. is a bit of a cold shower. Over there, you’re welcomed with open arms,” Arnault said, praising Trump’s plans to reduce taxes and promote domestic manufacture.
The uncertain climate is delaying investment and cooling the country’s labor market. Unemployment rose in the fourth quarter, though as with the wider eurozone it remains below the levels common before the Covid-19 pandemic.
Inflation has fallen, standing at below 2% at the end of 2024, and lower interest rates should also be encouraging firms to invest and consumers to spend. But French households remain cautious, and are more inclined to save rather than splash out, ING’s De Montpellier said.
“Rising fears about unemployment and uncertainty are likely to lead to a further rise in the household savings rate,” she said. Consumer spending failed to pick up pace over the last months of 2024, growing at 0.4%.
A more protectionist trade policy in Washington will meanwhile limit any recovery at French factories, De Montpellier said.
“With exports likely to be hit by renewed trade tensions, there is every reason to believe that industrial activity in France will be very modest over the coming months,” she said.