Uncertainty about whether the country can fix its finances has itself started to weigh on economic activity
By Don Nico Forbes
The French government desperately needs a return to strong growth if it is to contain its rapidly rising debts. But uncertainty about whether the country can fix its finances has itself started to weigh on economic activity.
France only narrowly avoided a recession in the second quarter, as activity stagnated after extreme heat hit agricultural output and the energy price shock from the war in Iran continued to squeeze households and businesses.
But uncertainty about the country's political and fiscal future has also contributed to a slowdown in what was once one of Europe's more reliable growth engines. French bond yields surged close to debt-crisis levels last week following a poorly-received budget, compounding unease among investors that political gridlock could keep the country locked in a debt spiral.
France's troubles have been years in the making, said Holger Schmieding, chief economist at Berenberg. He noted that political uncertainty has remained a profound drag on the economy since President Emmanuel Macron called a snap parliamentary election in mid-2024, which split parliament and left successive governments struggling to pass budgets and pursue economic reforms.
"French political uncertainty came to the fore exactly in the middle of 2024," Schmieding said. "Ever since, we've had many more questions about France than before."
This has contributed to a notable reversal of roles in Europe. For much of the last decade, France has been a source of relative economic stability as Germany, the eurozone's largest economy, struggled. Now Germany is beginning to recover, helped by a surge in government spending and a revival in industrial activity, while France is losing momentum.
The most visible economic casualty has been investment, as companies are delaying spending amid uncertainty over taxes, regulation and the direction of economic policy. Business investment has effectively stagnated since 2024, after growing 4.5% in 2023, according to French statistics agency Insee. In the second quarter of 2026, investment fell 0.3%, following a 0.8% decline in the first three months of the year.
The Bank of France has said investment growth is expected to remain moderate as businesses remain stuck in a "wait-and-see" mode.
A survey by Medef, France's largest employer federation, showed that political uncertainty remains a top concern for businesses. Some 82% of firms said they were pessimistic about the impact of the next government's economic policy, while 66% said their company would become vulnerable or even go bankrupt if economic policy doesn't change in the next five years.
Consumers have also become increasingly pessimistic, said Leo Barincou, an economist at Oxford Economics, in a note.
"Both household income and confidence are suffering from the labour market downturn, a consequence of the higher uncertainty after the snap elections of 2024 and less supportive fiscal policy," he said.
And political gridlock means weakness has become self-reinforcing. As policy uncertainty weighs on growth, it has become harder for the government to demonstrate economic progress and gain broad support for a policy agenda, in turn driving uncertainty up, and confidence down.
"This is a negative feedback loop," Schmieding said. "The very uncertainty, because it is weighing on the economy, makes it even more difficult for the mainstream parties to argue 'vote for us.'"
France's fiscal position makes the problem harder to escape, with the country having one of the largest budget deficits in the eurozone. Debt as a proportion of gross domestic product rose 1.5 percentage points to 119% in the second quarter, according to Insee, nearing pandemic highs and nearly double the European Union's 60% target.
Higher borrowing costs following the global bond-market selloff have brought public spending into sharper focus, ING economist Charlotte de Montpellier said.
The pressure is likely to intensify as France approaches the 2027 presidential election, which could offer a route out of the current political impasse -- or prolong it.
"Political fragmentation may persist well after the 2027 elections, meaning that France's next government will continue to kick the public-finance can down the road. This would avoid the sharp near-term drag from fiscal consolidation, but it would also prolong the existing climate of high uncertainty," Barincou said.
For now, there are some signs that the French economy may not be doomed to stagnation. The composite purchasing managers index jumped into expansionary territory for the first time this year in September. Industry has shown some resilience, while France's relatively low dependence on imported fossil fuels has insulated it from some of the energy price shock when compared to other European economies. The country's technology sector also retains pockets of strength, including one of Europe's leading artificial-intelligence developers, Mistral AI.
"Improvement in business confidence during July and August, together with solid consumer spending in July, suggests that growth should be positive in the third quarter," de Montpellier said.
The effects of this summer's extreme temperatures may also prove temporary, with some recovery expected later this year, Schmieding said. He expects France to recover roughly half of the heat-related losses in the fourth quarter.
"Of course, France could also be lifted by external factors," he said, pointing to a complete reopening of the Strait of Hormuz or a recovery in the overall European economy.
"But domestically, I don't see any return to the period of decent French growth before the political uncertainty has been resolved."