After a very poor end to 2024, the French economy is not off to a good start this year. In January, France’s business climate index for January stayed relatively constant at 95, which was below its long-term average. Except for real estate activity, business confidence remained steady in the services sector. But it fell short of its long-term average in practically every service subsector. Business executives in the services industry claim that perceived uncertainty is increasing once more.
Although order books (records of pending sales or purchase orders in a business) are declining, business confidence is likewise steady in the retail and construction industries. Due to a steep decline in order books, which are at their lowest level since 2014, the business environment in the industry is getting worse. The business environment in wholesale trade is once again getting worse. All of these indicators suggest a poor start to 2025.
Uncertainties in the 2025 budget of France
Fourth-quarter growth was negative due to budgetary and political uncertainties, the aftermath of the Olympic Games, and a less positive global climate. Domestic demand is still being impacted by the uncertainty surrounding the 2025 budget. This trend is probably going to continue in the months to come. Household consumption in particular is probably going to stay extremely low. The household savings rate is expected to continue to climb despite declining inflation and growing real income. The reason is growing concerns about unemployment and uncertainty.
Household and company investment will continue to be below average in 2025 due to uncertainty and the limited possibility of a decline in long-term interest rates. There is every reason to think that industrial activity in France will be extremely low during the next few months. The exports are likely to be negatively impacted by resurgent trade tensions. While a slowdown is anticipated, the service sector should continue to perform better than the industry. The construction industry is still seeing a decline in order books and is probably going to have another challenging year.
How will the GDP of France be affected in 2025?
The business climate data supports the prediction that the first quarter’s growth would be extremely modest. At about 0.1% quarter over quarter, as opposed to -0.1% in the fourth quarter of 2024. Due to this poor start to the year, GDP growth in 2025 is probably only going to be 0.6%, down. It is caused by the government’s projected 0.9% increase in 2024 and 2023, which was 1.1%. In 2026, there should be a rebound, but given the challenging global climate and the stringent French budgetary policies, it might only reach 1%.
France’s economic development is expected to stagnate and the unemployment rate to increase. This is happening at a time when disinflation-related increases in buying power are ending and political unpredictability is probably going to be a major concern. A recovery in aircraft production may provide some respite at this challenging time. There is also a chance that negative risks will materialize and impact trade prospects between the US and Germany. When the recovery takes root, one of France’s problems will be to achieve fiscal austerity without compromising its appeal. Especially its labor market’s capacity to generate jobs.
Rising unemployment in the country
Therefore, both France and the US would suffer from protectionist policies that limit trade in this sector. Because it already faces supply difficulties due to the relative paucity of competition in a high-tech industry and the incapacity of its subcontractors to increase production. The lack of a recovery in demand in France and the eurozone, which includes Germany, was linked to it. The same will be true for market services, whose expansion has slowed. The labor market, the business environment, and the expansion of services are the three pillars that have sustained French growth in the last ten years. Budgetary unpredictability must not compromise it.
Even though France’s macroeconomic performance in recent years has contrasted favorably with the other major industrial or EU countries in other ways, the country’s high unemployment rate has remained. Since 1987, growth has followed the norms of the EU and major industrialized nations, while inflation has lagged behind both. Recent trade surpluses and increased competitiveness have been facilitated by low inflation. Even during periods of rapid expansion, employment creation was underwhelming, and the most recent recession has caused a precipitous decline in employment.
