OECD Economic Outlook, Volume 2025 Issue 1

France

After growing below potential in 2023-24, at 1.1%, GDP growth is set to slow further to 0.6% in 2025 due to heightened economic policy uncertainty, before gradually recovering to 0.9% in 2026. Private consumption will become the main growth engine in 2025, as exports will suffer from increased trade tensions and investment will be held back by increased uncertainty. The recovery in 2026 is set to be supported by stronger investment and steady consumer spending. Inflation is expected to fall to 1.2% in 2025, driven by cuts in electricity tariffs, before edging up to 1.7% in 2026.

The fiscal deficit is expected to narrow gradually to 5.4% and 5% in 2025 and 2026, respectively, from 5.8% of GDP in 2024. As the associated fiscal effort, of 1% of GDP in 2025, would be the largest in over a decade, there is a significant risk of fiscal slippages. Weaker-than-expected growth and rising defence spending would also make it harder to reach fiscal targets. Public debt is projected to remain high at nearly 120% of GDP in 2026. Stabilisation will require continued deficit reduction and growth-enhancing reforms. To unlock greater investment, structural reforms should prioritise digital uptake, simplifying regulations in the services sector and better targeting of innovation support towards innovative small and medium-sized enterprises.

Activity has slowed amidst rising policy uncertainty

Economic activity grew by 1.1% in 2024, reflecting a degree of resilience amid a challenging policy environment, heightened uncertainty after a government no-confidence vote, and a mild output fall in the fourth quarter that reduced the 2025 carry-over. GDP rebounded moderately in the first quarter of 2025, driven primarily by inventory accumulation, while private consumption stagnated and both investment and net exports both declined. However, business investment has stabilised since two quarters, after nearly five consecutive quarters of decline. Indicators remain gloomy though. Business confidence has remained below its long-term average since August 2024, while household confidence hit its lowest since the Russia’s war of aggression against Ukraine began. The labour market has worsened, with employment falling by 0.3% in the fourth quarter of 2024. Inflation decreased faster than expected at the end of 2024 and early 2025, reaching 0.9% year-on-year in April, helped by lower regulated tariffs on electricity in February. Core inflation continues to be higher than headline inflation.

Business uncertainty has risen due to the lack of clarity around the tariffs imposed by the United States and potential retaliation by other major economies. France’s direct exposure to higher US tariffs on EU goods is relatively limited, with the US accounting for 5% of exports and 5.3% of imports of goods. However, France remains highly vulnerable to a broader slowdown in global demand, especially in Europe, which is the destination for 55% of its exports.

France 1

Source: www.policyuncertainty.com; and Banque de France.

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France: Demand, output and prices

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France 2

1. Year-on-year growth rates.

Source: OECD Economic Outlook 117 database.

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Credit conditions will improve while fiscal policy will tighten

The fiscal deficit is projected to have been 5.8% of GDP in 2024, slightly lower than earlier expectations. The government is targeting a reduction to 5.4% of GDP in 2025, requiring a 1% improvement in the structural primary balance, with additional measures beyond the current Budget. If fully implemented, this would be the strongest improvement since 2010. A consolidation effort in line with the government’s announcements is incorporated in the projections. Most of the consolidation will come from higher taxes, including exceptional taxes on high-income earners and large profitable firms, as well as on air travel and high-emitting vehicles. On the spending side, measures include a slowdown in municipal spending, cuts in central government spending, lower subsidies for low-wage workers, reductions in sick leave benefits and a tightening of unemployment benefits. No detailed consolidation plan has been set for 2026; an effort of 0.7% of GDP is assumed, though rising defence spending may hinder this.

Since mid-2024, European Central Bank policy interest rate cuts have eased lending conditions, gradually supporting business and housing investment. However, private sector debt repayments remain high because of fixed-rate loans from the earlier high-interest period. The interest rate on new housing loans (excluding renegotiations) declined to 3.2% in March, the lowest level since May 2023, while new loan rates to businesses fell to 3.76%, 95 basis points lower than a year ago. The sovereign spread between France and Germany also narrowed to 68 basis points in May, almost 20 basis points below its December 2024 peak amid political turmoil. Nevertheless, it remains elevated relative to its long-term average, reflecting ongoing concerns over debt and economic policy uncertainty.

High economic policy uncertainty will delay the rebound in growth

Economic growth is expected to slow significantly in 2025, with the output gap widening throughout the next two years, driven by heightened uncertainty and rising trade tensions. The contribution of exports to growth will weaken. Private consumption will be supported by disinflation, transfers indexed on past inflation and a lower saving rate—though real income gains will be tempered by a slowing in wage catch-up compared to 2024 and higher taxes on income. Unemployment is expected to rise with the slowdown in growth. The social assistance (RSA) reform requiring beneficiaries to register with public employment services and actively search for a job will add upward pressure on the unemployment rate while tighter low-wage subsidies may also reduce the employability of this group. Business investment will remain subdued over 2025 and will only gradually recover towards the end of the year, given weak trade prospects and policy uncertainty. Residential investment is expected to turn positive from mid‑2025, following a progressive rise in building permits since the last quarter of 2024. Ahead of municipal elections, public investment is expected to rise in 2025, albeit at a slower pace. Inflation is expected to ease further in 2025, as economic activity slows and tariffs on US imports only have a limited impact due to France’s low exposure to the US market. The gap between headline and core inflation is expected to narrow as energy prices stabilise and services inflation eases.

Risks are tilted to the downside. Higher tariffs on French exports and those of its key partners, especially in Europe, could weaken growth further. Retaliatory trade measures could push inflation higher. A softer stance on fiscal consolidation would support growth but push up the public debt ratio, raising bond yields and crowding out private investment. The risk of renewed policy turmoil later this year – due to the absence of a clear majority in the National Assembly – and the resulting uncertainty over fiscal policy may further constrain firms’ investment decisions.

Stabilising debt and raising potential output call for broad-based reforms

Sticking to fiscal consolidation plans is essential for France to stabilise and reduce public debt. While efforts so far have focused on tax increases, achieving medium-term fiscal targets will require a broader strategy, including spending cuts, shifting the tax structure toward less distortive taxes and implementing structural reforms to boost potential growth. Greater support for the labour market participation of older workers should focus on lifelong learning, especially investment in digital skills. Accelerating investment in digital technologies, especially among SMEs, requires boosting fibre adoption by clarifying tariffs and service offers, and by lowering installation costs. The innovation ecosystem is strong and dynamic but incentives for research and development should be more directed towards SMEs with high potential for breakthrough innovation. Further streamlining administrative procedures, easing regulatory barriers to market entry and simplifying regulations in key service sectors would stimulate competition and attract new capital.