French central banks trims growth outlook on trade tensions

The Bank of France has revised its 2024 GDP growth forecast for the French economy downward to 0.6% from 0.7%, citing the impact of U.S. trade tensions and associated economic uncertainty, which are estimated to cost 0.4 percentage points of GDP through 2027. While domestic demand and inventory rebuilding will support economic activity this year, foreign trade is expected to weigh negatively on growth, and inflation forecasts have also been cut due to lower power and oil prices.

Analysis

The Bank of France has lowered its 2024 GDP growth forecast for the French economy to 0.6%, a downward revision from the 0.7% projected three months prior, primarily attributing this slowdown to the adverse effects of U.S. trade tensions and the ensuing economic uncertainty. These trade-related headwinds are estimated to reduce French GDP by a cumulative 0.4 percentage points through 2027, with the central bank emphasizing that the general climate of uncertainty surrounding potential 10% U.S. tariffs, rather than direct tariff impacts, constitutes the main drag on growth. The bank's monthly business climate survey indicates a modest 0.1% growth for the second quarter, consistent with the first quarter's performance. Looking further ahead, growth projections for 2026 and 2027 have also been trimmed to 1.0% and 1.2% respectively, down from March estimates of 1.2% and 1.3%. For the current year, economic activity is expected to be supported by domestic demand and companies rebuilding inventories, though foreign trade will act as a negative contributor. The anticipated recovery in 2026-2027 hinges on real wage gains stimulating consumer demand and lower interest rates bolstering private investments, particularly in housing. Concurrently, inflation forecasts have been revised downwards, with EU harmonized consumer price inflation now expected at 1.0% for this year (down from 1.3%), 1.4% for 2026 (down from 1.6%), and 1.8% for 2027 (down from 1.9%), reflecting lower power and oil prices.

Key Decisions for Investors

• Investors should adopt a more cautious stance towards French assets sensitive to economic growth, particularly within export-oriented sectors, given the downward GDP forecast revisions and the persistent impact of trade uncertainties.
• Closely monitor developments in U.S. trade policy and rhetoric, as these are identified as key determinants of French economic performance and could trigger further forecast adjustments or market volatility.
• Consider potential longer-term opportunities in French domestic-focused sectors that could benefit from anticipated real wage growth and lower interest rates from 2026, while acknowledging the current subdued growth environment and risks to the recovery drivers.