French economy unexpectedly shrinks in third quarter as headwinds strengthen

France’s economy unexpectedly contracted and inflation neared a three-year high, adding to headaches that already include surging borrowing costs, violent protests and political and budgetary uncertainty.

Third-quarter gross domestic product (GDP) fell 0.1% from the previous three months as investment continued to decline and exports dropped, statistics agency Insee said on Oct 30. Analysts surveyed by Bloomberg had estimated expansion of 0.1%.

Spain, by contrast, recorded another strong quarter with GDP up 0.6% thanks to domestic demand and trade.

France’s weak performance is a worrying sign for the euro area’s second-largest economy, on a day when Germany and Spain reported growth but Italy stagnated. GDP for the 21-nation bloc grew 0.4%, twice the pace analysts predicted.

That outcome would highlight Europe’s broader sturdiness, not just to the Iran war’s inflationary impact but to the heatwaves and droughts that marred much of the summer. Still, the European Central Bank sees downside risks and could yet hike interest rates for a third time in December after standing pat this week.

Separate data from France showed energy costs drove inflation to 3.8% in October, the highest level since late 2023. Analysts had expected it to quicken to 3.6%. In Spain, consumer-price gains eased a touch to 4.9%, in line with estimates.

The jump in global bond yields is another drag, with France’s shaky fiscal and political position making it the region’s focal point. Its economy was already the euro area’s major laggard, only narrowly avoiding a recession in the first half amid soft domestic demand, falling investment and as hot weather hurt agriculture. 

The near-term outlook offers little reassurance. Prime Minister Sebastien Lecornu’s minority government is in the midst of another parliamentary showdown over austerity measures, against a backdrop of social and political upheaval before a presidential election in 2027, where the far right lead polls.

“France’s economy is at a standstill due to a unprecedented convergence of external and domestic shocks,” Finance Minister Roland Lescure told Franceinfo on Oct 30. “It needs to pick up. We need to restore confidence and for that having a Budget is essential as that is what will allow us to bring down interest rates.”

Jean Dalbard, economist at Bloomberg Economics, said: “France is heading into the final quarter with little momentum and risks firmly tilted to the downside. Its economy unexpectedly contracted 0.1% in the third quarter against expectations for a 0.1% gain.

“Trade volatility explains most of the miss. More worrying is another steep drop in investment – the third in a row – even before the recent tightening in financing conditions had much time to bite.”

Protests over education funding and the rising costs of living boiled over into street violence on Oct 17, with widespread looting and thousands of arrests. Surveys have shown businesses are taking a wait-and-see approach, while a gauge of consumer confidence slumped to a 13-year low.

German GDP rose 0.2% despite factors including low water levels in the River Rhine. A public-spending spree on infrastructure and defence is generating optimism while carmakers may benefit from a European cap on Chinese hybrid-vehicle imports.

At the same time, Chancellor Friedrich Merz has made fresh efforts to perk up growth through social-welfare reforms and attempts to lure private capital.

Italy’s GDP was unchanged but the government forecasts GDP will increase 1% in 2026, helping finance some of the tax cuts Prime Minister Giorgia Meloni has promised before elections next year.

She has also asked Brussels for extra leeway of about €28 billion (S$40 billion) for energy and defence outlays. Any slowdown in growth would complicate other fiscal commitments, including getting the Budget deficit below 3% of output.

Spain’s economy has shown significant resilience, with the central bank listing private consumption, job creation and population growth among drivers. It sees growth of 2.6% this year and 2.2% next year, comfortably above the euro area’s pace.

Political instability appears to have had little impact. Prime Minister Pedro Sanchez’s government has not passed a Budget during this parliamentary term and has not presented a draft for 2027, a timeline now interrupted by elections in November. BLOOMBERG