Bank of France cuts growth forecast amid political turmoil

On Monday, the Bank of France released its quarterly outlook, revealing a downward revision in the country's economic growth projections for the coming years. The central bank now expects France, the euro zone's second-largest economy, to grow by 1.1% in 2024 and by 0.9% in 2025, a decrease from the previously forecasted 1.2% growth for 2025. This adjustment reflects the combined impact of domestic political challenges and global economic volatility.

The central bank highlighted that the government's fiscal consolidation efforts and the prevailing political uncertainty are expected to dampen consumer spending and private sector investment. A succession of political crises throughout the current year has led to heightened caution among consumers and businesses, who are wary of the economic future amidst the potential for increased U.S. tariffs.

Further political disruptions occurred on Friday when President Emmanuel Macron appointed a new prime minister, the fourth this year, following the ousting of the previous government by opposition lawmakers over disagreements on the 2025 budget bill. The bill aimed to reduce the public deficit from 6.1% of output this year to 5% in 2025.

The Bank of France warned that if the new government proposes a budget with reduced fiscal consolidation, any potential growth benefits would be negated by the extended political uncertainty, particularly concerning the state of public finances. Governor Francois Villeroy de Galhau, in remarks to Le Figaro newspaper, cautioned that without addressing the budgetary issues, France could economically lag behind its European counterparts.

Despite these challenges, the central bank forecasts a recovery in economic growth to 1.3% for both 2026 and 2027, supported by wages increasing more rapidly than inflation. However, it noted that this growth could be undermined if households choose to increase their savings due to the ongoing uncertainty.

The Bank of France also projected that inflation would remain below the European Central Bank's target of 2% over the next three years, with the rate anticipated to ease to 1.6% in 2025 and then to gradually rise to 1.7% in 2026 and 1.9% in 2027. Without more stringent fiscal measures, France's debt is expected to continue its upward trajectory, reaching 117% of GDP by 2027.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Source: Investing.com