France Country Risk Report

With no party or coalition securing an absolute majority in the July 2024 elections, the divided National Assembly has increased uncertainty for the economy. For instance, the government of Michel Barnier was taken down in end-2024 by a no confidence vote over the budget. The government had to pass a ‘’Special Law’’ to keep the state functioning and allow Social Security payments to be processed. Uncertainty over potential tax hikes and spending cuts are hurting corporate sentiment, with many businesses and households delaying or cancelling investment plans. Moreover, financial conditions are a bit tighter than they would have been under a no-election scenario amid a rising interest rate spread of French bonds relative to German bonds. Tighter financial conditions are visible in the housing market where mortgage rates, which are fixed on French government bond yields, have barely decreased, postponing the recovery in housing transactions and residential construction.

In this environment, we expect French GDP growth to slow down to a meagre +0.7% in 2025. A weak German economy, as well as expected increased in US tariffs, will add headwinds to the French economy. New export orders have been weak for the past few months – a reflection of weak overseas demand, increasing Chinese competition and weak consumer goods spending – and the industrial sector is struggling. Against this backdrop, loosening monetary policy will provide some relief to borrowers by lowering the cost of funding and, potentially, reduce the incentives to save for households (French households have a historically high savings rate), provided that the political situation settles down. Low inflation and a resilient – though easing – labor market should also provide some welcome tailwinds to consumer spending.   
 
Corporate bankruptcies have reached historically high levels in 2024, with most sectors feeling the pinch. May companies are struggling with a heavy debt load, rising interest expenses and changing consumer spending patterns. Lower growth and still tight, though easing, financial conditions should keep corporate bankruptcies elevated in 2025.

France’s labor market has held up remarkably well since the pandemic and the structural unemployment rate has decreased over the past few years. The labor participation rate picked up sharply to reach its highest recorded level. The government’s ambitious labor market policies – such as changes to the unemployment benefit insurance scheme and subsidies for apprenticeships and vocational training – have helped to improve a long-standing French weakness. However, much remains to be done to increase the French employment rate close to the levels of Northen European countries. Long-lasting structural issues (e.g., the lack of qualified workers, skill mismatches and little incentives to start work) are likely to prevent the unemployment rate from dropping significantly below 7% in the coming years. Political infighting could also reduce the momentum for further reforms.

France has fared very poorly in terms of productivity performance in recent years. The continuous drop in school proficiency for French students and the poor skills of the labor force are a big headwind for future productivity growth. Also, excessive regulation and ever-increasing public spending have likely increasingly weighed on productivity.

Export performance is an area where France continues to underperform. Export performance has been held back by a wide range of structural issues. The government has rolled out ambitious industrial subsidies to try to shore up manufacturing and exports but incentives for corporates to restore production in a country with low potential growth are weak. To boost the post-Covid-19 export recovery, the challenging sectoral specialization (e.g. aircraft and automobiles), poor price and quality competitiveness and the lack of qualified (technical) workers are amongst the chief issues to address.