France’s Political Chaos Traps Economy in Low Growth Rut
(Bloomberg) -- France’s political and fiscal deadlock has ensnared the economy in low growth, raising the pressure on freshly-appointed premier Francois Bayrou to pick a government and quickly piece together a 2025 budget.
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The euro area’s second largest economy is set to expand by only 0.2% a quarter in the first half of next year with weak domestic demand and a slowdown in the support from unusually strong exports, according to an updated assessment from the country’s statistics agency.
The report adds to signals that the political tumult since snap elections in June is increasingly engulfing the economy. Indicators of business and household confidence have been falling for several months and the Bank of France also cut its growth forecasts on Monday.
“Growth will be modest,” Insee economist Dorian Roucher said at a briefing in Paris. “Public spending will hit the brakes, businesses are in a fog and their investment will be low, trade will normalize, and only the consumer will carry French growth a little.”
Bayrou was appointed last week to patch together a new government and a plan to repair public finances after his predecessor, Michel Barnier, was evicted in a no-confidence vote that also torpedoed the 2025 budget bill.
But the new premier faces the same intractable political challenges with no possible majority in a National Assembly fragmented into three opposing blocs. As Bayrou continues consultations on forming a new cabinet, parliament is set to debate emergency legislation to avoid a state shutdown on Jan. 1.
Answering lawmaker questions on Tuesday, the prime minister said he would seek to propose a new government for President Emmanuel Macron to appoint “in the coming days,” before presenting his policies to parliament. According to Bayrou, he’ll aim to work with lawmakers with different political sensibilities to negotiate a new 2025 budget.
“Maybe it’s unrealistic optimism, but I’m sure the path exists for each side to take steps so we at least have the certitude to get a little closer to the necessary consensus,” he said.
Insee said having a new budget could deliver a boost to the economy by bringing more certainty, but new measures to bring down the deficit could also prove recessive.
“The uncertain political context is susceptible to change the behavior of economic agents, causing a wait-and-see approach from households and businesses,” the statistics agency said in its report.
Business leaders have warned that the political upheaval has already triggered a rapid deterioration in activity and urged clarity on repairing on how the next government will tackling the budget challenge.
Speaking to Bloomberg Television on Tuesday, Publicis Groupe SA’s emeritus chairman Maurice Levy said he doesn’t expect a quick resolution given the divisions at the National Assembly, and maybe not before the end of Macron’s second term in 2027.
“We will be in their stalemate for a short while — when I say short while, I’m afraid until the end of the mandate of Emmanuel Macron,” Levy said on the sidelines of a conference in Paris.
While Insee’s forecasts do not go beyond June, they imply only an exceptionally sharp improvement would be enough to get the economy back on track with the outgoing administration’s forecast for 1.1% growth next year. According to Roucher, it would require a jump to a quarterly growth rate at around 0.8% in the second half of this year.
“In reality to get to 1.1% in 2025, positive risks would have to become reality from the start of the year,” Roucher said. “Our central scenario is growth remaining morose.”
--With assistance from Caroline Connan.
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