French economic outlook remains downbeat

Business confidence in France edged up only marginally in June, rising by a single point to 94, still well below its long-term average. Most firms responded to the survey before the announcement of a Middle East peace agreement, but in an environment where energy prices on global markets had already started to ease.

Overall, the underlying details paint a rather concerning picture for France’s economic outlook. The modest improvement is largely attributable to retail, where sentiment is slightly less negative than in May (with the sub-index rising from 89 to 90), though still significantly below its normal level of 100. Meanwhile, business sentiment in services remains particularly weak and at its lowest since 2021, with deeply negative expectations across all sub-sectors, both household-facing and business-oriented. Industry, which had been the only real engine of French growth, is also showing signs of softening, with sentiment declining across sectors and returning to its average level. Firms, in particular, report a more pessimistic assessment of past production.

Perhaps most worrying is the continued deterioration in the labour market outlook. In June, the employment climate indicator fell by a further three points to its lowest level since 2013 (excluding the pandemic period). This suggests that job creation will remain insufficient in the coming months, with unemployment likely to continue rising, potentially approaching 8.5% by the end of 2026.

On prices, the survey indicates no further increase in selling price trends in June; if anything, prices edged down slightly in both services and industry.

PMI indicators, also released today, did improve in June but remain weak overall and still point to contracting activity, albeit at a slower pace than in May.

Taken together, today’s data suggests that French growth was likely weak in the second quarter, following the unexpected contraction in the first quarter (-0.1% quarter-on-quarter). Higher oil prices have weighed on household purchasing power and confidence, leaving consumer-facing sectors particularly subdued. External demand remains a key support, especially for industry. Aerospace and shipbuilding, where output is up 20% year-on-year, continue to perform strongly. Significant aircraft deliveries could drive a notable rebound in exports in the second quarter, reducing the risk of another GDP contraction and a technical recession. More broadly, French industry has also benefited in recent months from a pickup in foreign orders, partly due to disruptions affecting some Asian competitors.

That said, this support is likely to prove temporary. As the Strait of Hormuz is expected to reopen, these effects should fade in the coming months. The decline in industrial sentiment in June underscores that France cannot rely on a singular growth engine to sustain its economy over time. Moreover, industrial growth remains relatively job-light, while labour market prospects are deteriorating sharply. Although lower oil prices could offer some support to consumer confidence, weak labour market dynamics and unfavourable real wage trends are set to continue weighing on consumption in the near term.

In short, prospects for a rebound in French activity remain very limited, and the end of the Middle East conflict does not mark the beginning of a strong recovery. Overall, we continue to expect GDP growth of around 0.4% on average in 2026, following 0.9% in 2025.

Growth this weak – and well below the government’s assumptions when drafting the budget – is likely to significantly complicate fiscal consolidation efforts. Achieving a public deficit of 5.0% of GDP in 2026 after 5.1% in 2025, as announced by the government, is becoming increasingly challenging. The European Commission, for its part, expects a deficit of 5.1% in 2026 and 5.7% in 2027, based on relatively optimistic growth assumptions. This is likely to pave the way for renewed and potentially contentious budget discussions against an already complex political backdrop in the run-up to the 2027 presidential election.