Bank of France Flags Economic Doubts After Olympic Boost

(Bloomberg) -- French business uncertainty rose in September amid concerns over domestic politics and geopolitical risks, dampening the outlook for the economy after the Olympic Games drove strong third-quarter growth, the central bank’s monthly survey showed.

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The level of doubt increased in manufacturing, services and construction, according to the Bank of France poll of 8,500 business leaders, who cited concerns over fiscal policy as the new government debates broad spending cuts and tax increases.

The gloomier mood follows a solid economic performance in the third quarter, supported by a 0.25 percentage point boost to the growth rate from the Paris Olympics. The central bank raised its underlying growth estimate slightly to 0.2% from a previous range of 0.1% to 0.2%.

“The French economy is resilient, without being brilliant, and there is indeed a bedrock of growth,” Bank of France Governor Francois Villeroy de Galhau said on Franceinfo radio on Wednesday.

The results of the survey highlight the risk of France’s political difficulties having a material impact on the economy. Separate private-sector business surveys have shown that a plunge in services and manufacturing activity already began last month.

The new government appointed in September after weeks of negotiations has no majority in parliament and is running behind schedule on presenting a budget for next year.

Prime Minister Michel Barnier has said tough measures are needed as France’s swelling debt burden is pushing the country toward a precipice. Ministers have pledged around €60 billion ($65.9 billion) of savings in next year’s budget, with around a third coming from tax increases on companies and the wealthy.

‘Right Direction’

Villeroy told Franceinfo the budget plans are “going in the right direction” in reversing a trend of rising debt and debt-servicing costs.

“We’re in the situation of a family that lives above its means and so it has to lower how much it spends and boost its revenues a bit,” he said.

France has the same social and public-service model as other European countries but it costs the equivalent of €260 billion more, he said, adding that this “efficiency gap” must be dealt with.

“Most of our European neighbors — even the Italians — have succeeded in straightening out their situation,” Villeroy said. “We must succeed in doing it together.”

French businesses have acknowledged a one-off contribution to repairing public finances may be necessary but warned that the state should prioritize cutting expenditure.

“There is quite strong uncertainty about the fourth quarter,” Bank of France Chief Economist Olivier Garnier said. “Also bear in mind that the one-off boost to growth of around a quarter of a percentage point will disappear.”

Still, the central bank said there was better news on inflation pressures as the share of services and industrial companies raising prices is near pre-Covid levels.

Villeroy said easing inflation means it’s “very probable” the European Central Bank will cut interest rates at its policy meeting next week. There may be highs and lows in the coming months, but he said the rate of price increases will be at 2% durably at the start of 2025 in France and in Europe later in the year.

(Updates with comments from Bank of France governor starting in fourth paragraph.)

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