French Economy Shrinks as Political Crisis Deepens

The French economy ends the year 2024 on a worrying note with a contraction of 0.1% of its GDP in the fourth quarter. This situation occurs in a particularly tense context, where the public deficit reaches the alarming level of 6% of GDP, placing France among the worst performers in the eurozone.

An economy weakened by political uncertainties

The French economy is stagnating at the end of 2024. After a growth of 0.4% in the third quarter, GDP contracted by 0.1% in the last three months of the year, according to Insee. This decline coincides with the end of the Paris 2024 Olympics, which had temporarily boosted economic activity.

Warning signals are multiplying. Household consumption is slowing down, dropping from an increase of 0.6% to just 0.4% this quarter. On the business side, investment is at a standstill, while that of households decreased by 0.3%.

This situation reflects a climate of widespread mistrust, amplified by the political crisis the country has faced since the dissolution of the National Assembly in June.

The business world is sounding the alarm. Bernard Arnault, CEO of LVMH, denounces excessive taxation that pushes companies to invest outside of France. Medef echoes these concerns, mentioning a “real deterioration” in the business climate and a growing “anger” among entrepreneurs.

Public finances under high tension

The situation of French public finances is becoming particularly worrying, with a deficit reaching 6% of GDP, a level that puts France in a delicate position regarding its European partners.

The new Prime Minister, François Bayrou, faces a major challenge with the crucial vote on the 2025 budget scheduled for next week. His government aims to achieve over 50 billion euros in savings to reduce the deficit to 5.4% of GDP by 2025, a goal that seems increasingly difficult to achieve.

The confidence of international investors is eroding, as evidenced by the growing gap between French and German borrowing rates for 10 years. Even more worrying, French rates now exceed those of Spain and Portugal, an unprecedented situation that illustrates the deterioration of the perception of French creditworthiness in financial markets.

In summary, the outlook for 2025 remains bleak, with expected growth of only 0.5%, well below government forecasts. In the face of a worsening crisis, particularly on the employment front, the Bayrou government will have to find a balance between deficit reduction and support for the economy to avoid an even sharper deterioration of the situation.