French central bank sees growth outlook clouded by politics

The Bank of France raised its 2024 economic growth forecast for France to 0.7% from 0.6%, driven by inventory build-up and anticipated export gains. However, it trimmed projections for 2026 and 2027 to 0.9% and 1.1% respectively, citing renewed political instability that creates uncertainty around fiscal policy, alongside less favorable international conditions. This political turmoil is expected to induce 'wait-and-see' behavior among consumers and businesses, posing significant downside risks to growth after 2025, while inflation is projected to remain below 2% through 2027.

Analysis

The Bank of France has issued a mixed but deteriorating economic outlook, characterized by a minor near-term upgrade overshadowed by significant medium-term headwinds. The 2024 GDP growth forecast was marginally increased to 0.7% from 0.6%, attributed to temporary factors including inventory accumulation and expected export growth rather than robust domestic demand. More critically, the central bank has trimmed its forecasts for 2026 and 2027 to 0.9% and 1.1% respectively, citing the re-emergence of political instability and the resulting uncertainty over future fiscal policy. This domestic political risk is compounded by less favorable international conditions, including a stronger euro and higher oil prices. The Bank of France explicitly warns that risks to growth after 2025 are tilted to the downside, as uncertainty could trigger 'wait-and-see' behavior from both households and businesses, suppressing consumption and investment. In contrast to the growth concerns, inflation is projected to remain exceptionally low, averaging just 1.0% this year and staying below the 2% target through 2027, while the unemployment rate is expected to hold steady near 7.5%.

Key Decisions for Investors

• Adopt a cautious stance on French equities with high domestic revenue exposure, as the downgraded growth outlook and political uncertainty could pressure corporate earnings and consumer spending.
• Given the sustained low inflation forecast, French government bonds may offer relative value, but investors must closely monitor credit spreads for any widening due to the heightened political risk premium.
• Scrutinize the currency exposure of French-domiciled multinationals, as the forecasted strength in the euro poses a headwind to unhedged foreign earnings.
• Closely monitor upcoming announcements on French fiscal policy and high-frequency data like consumer and business confidence, as these will be key indicators of the 'wait-and-see' behavior cited as a primary downside risk.