France's economy experienced a 0.1% contraction in the third quarter of 2026, marking the second decline this year. The country's GDP had previously dropped by 0.2% in the first quarter and remained stagnant in the second. In contrast, the eurozone achieved a growth rate of 0.4% during the same period, surpassing analyst expectations. This growth was driven by strong performances from Germany and Spain.
The French economy's decline was primarily attributed to a significant decrease in capital investment, which fell by 0.6%. Additionally, rising borrowing costs, high energy prices, and increased political tensions contributed to the contraction. According to Klaus Visten, an economist at Pantheon Macroeconomics, the French economic data is "not reassuring" and will likely put pressure on the government to accelerate and expand austerity measures.
France's inflation rate also rose to 3.8% in October, exceeding analyst expectations of 3.6% and September's rate of 3.4%. This increase coincided with a significant sell-off in the French bond market, pushing long-term borrowing costs above 5% for the first time since 2002. Although yields later decreased to 4.94%, the spread between French and German bond yields widened to 1.7 percentage points, the highest level since the eurozone crisis.
The French government's efforts to pass the 2027 budget are being complicated by the economic challenges and a divided parliament. The proposed budget includes a €43 billion package aimed at balancing spending cuts and tax increases to reduce the deficit to 5%. However, with weak growth and high borrowing costs, achieving these targets appears uncertain. The budget is based on assumptions of 1% growth and 4.3% interest rates on 10-year bonds.
Finance Minister Roland Lescure described the current situation as an "unprecedented combination of external and internal shocks," citing the heatwave and tensions in the Strait of Hormuz. He emphasized the need to "reboot the economy." The government is facing opposition from unions and students protesting funding for education and living costs.
If the parliament fails to reach an agreement, Lescure may resort to using Article 49.3 to bypass parliamentary voting or, for the first time in French history, issue the budget by decree. The Oxford Economics think tank warned that France's financial crisis "could get worse before it gets better." Lescure stressed that restoring market confidence is "vital" and cannot be delayed.
The euro remained relatively stable, rising 0.2% against the dollar to $1.12. Investors are concerned about France's public finances and the political instability surrounding the upcoming presidential election in April. The country's public debt is approaching 120% of GDP, resulting from years of excessive spending and failed structural reforms.
Key points
- France's economy contracted for the second time this year, with a 0.1% decline in Q3.
- The country's inflation rate rose to 3.8% in October, exceeding analyst expectations.
- The government faces challenges in passing the 2027 budget due to a divided parliament and economic uncertainty.
