France's Growth Expectations Decline Amid Political Uncertainty

The Banque de France has lowered its growth forecasts for the domestic economy following the recent appointment of François Bayrou as the fourth Prime Minister within a year. The central bank cites political instability as the main reason for the decline in confidence among households and businesses. The bank's latest forecast predicts only 0.9% economic growth for 2025, down from the previously estimated 1.2%. The estimate for 2026 has also been reduced by 0.2 points to 1.3%. These adjustments come in response to political turbulence that began with the early elections in June. The government crisis and the associated challenges in budget planning contribute to the deterioration of economic prospects. Consumer demand is influenced by fiscal consolidation measures as well as broader uncertainty. The central bank only expects moderate growth in household spending after a rather sluggish development in 2024, while investments will continue to negatively impact the economy. Bayrou is now attempting to form a government capable of bridging existing divides in the National Assembly. In discussions with opposition parties, the right-wing populist leader Marine Le Pen expressed satisfaction after initial talks, while the Socialists showed a willingness to compromise. However, Bayrou lacks a clear majority to implement the necessary but unpopular budget cuts intended to bolster investor confidence. In a sign of the worsening fiscal situation, Moody’s Ratings recently downgraded France. François Villeroy de Galhau, Governor of the Banque de France, is urging political parties to overcome their self-interests and jointly address the issue of rising national debt. Without an agreement, France risks a gradual economic and European decline. The current forecasts of the central bank were made before the government collapse. The previously planned budget, which aimed to reduce the deficit to 5% of GDP next year, has been scrapped. France will initially rely on emergency laws currently being debated in parliament to operate with unchanged taxes and minimal spending from January 1.