French economic growth will underperform in 2026, partly due to a number of exceptional setbacks. In 2027, it is expected to rebound to 1% (compared with 0.5% in 2026), supported by rising external demand (particularly from Europe). So far, businesses and households appear to be weathering the rise in inflation relatively well, although it is expected to continue (we are forecasting 2.3% inflation in 2027, following 2.4% in 2026). Fiscal consolidation remains challenging, complicated by the weak growth seen in 2026, and is expected to be implemented gradually. As a result, public debt is expected to rise, with a moderate upside risk due to the rise in sovereign-bond yields.
Growth: heading toward a recovery?
France narrowly avoided a recession in H1 2026 due to exceptional factors: a decline in public investment (which is typical in the run-up to municipal elections), a drop in agricultural production, and energy inflation.
The slowdown in public spending (investment and consumption) is significant. Its contribution to growth has been declining since 2025 (0.3 pp, down from 0.6 pp in 2024), a trend that is expected to continue in 2026 and 2027 (0.2 pp). The decrease is particularly pronounced for public investment (+5.2% in 2024, +2.7% in 2025 and forecast of -1.6% in 2026), for which the outlook remains negative.
Growth and inflation
Business investment is expected to recover after a decline in H1. Order books are filling up again, particularly for exports (see below), and investment intentions are rebounding, according to the INSEE. After being affected during the early months of the conflict in Iran, in August 2026, the business climate returned to a level close to its pre-dissolution level (as it had already done between December 2025 and February 2026). Unlike in 2022, the energy-price shock has, for the time being, had little impact on electricity prices. As a result, profit margins remained stable in Q2 2026, standing at 31.5% (they had fallen by 1 pp during the same period in 2022).
The business climate has absorbed the rise in inflation wellHouseholds have also weathered the inflationary shock better than had been feared, with consumption rebounding in Q2. Consumption growth is expected to remain fairly stable between 2025 and 2027 (+0.5% annually), thanks in particular to the favourable momentum in electric-car sales. Conversely, household investment (which declined in H1) is expected to continue to decline, adversely affected by the moderate rise in interest rates.
Manufacturing output limited by supply-side constraints
Manufacturing output has rebounded since mid-2025, driven by the aeronautics sector (where output rose 15.5% over the following 12 months). This rebound has been more moderate in other sectors, but is significant in electrical (+2.5%) and electronic (+4.2%) capital goods, as well as in several inputs (metals: +1.8%).
This rebound is driven by exports, particularly exports to Europe. It is fuelled by investment plans in defence (see our analysis), infrastructure in Germany and demand linked to electrification (AI, energy and electric vehicles).
However, this rebound in industrial output has lost momentum in recent months (-1.2% in July, 3m/3m), despite improving order books. Supply-side constraints increased in H1, while, at the same time, business investment contracted (back down to its Q2 2024 level in Q2 2026).
Demand for financing from businesses remains strong, while outstanding loans to households are stable
In June, investment loans to companies (+4.5% y/y) were driven by housing loans (+5.1% y/y), while loans for equipment were less buoyant (+4.1% y/y). Market-based financing was also robust year on year (+4.8%) but declined month on month. With a new phase of rising interest rates appearing to have begun, growth in financing to NFCs could slow. Political uncertainty is also likely to weigh on the outlook, but investment is expected to continue to be bolstered by spending on technology, the energy transition and defence.
Household investment could be held back by the rising cost of new housing loans, which is expected to increase more significantly in the second half of 2026, following an initial rise observed in June–July from 3.1% to 3.17%. It should be noted that the average interest rate remained stable at 3.1% until May, despite the rise in short- and long-term market rates. Indeed, the increase in these rates stems from the rise in the sovereign-bond yield, which has no direct influence on the cost of bank funding (within certain limits). Our scenario of continued rate rises suggests that the rate on new housing loans is likely to increase. New lending was at a low level in July (EUR 11 bn, compared with around EUR 12.5 bn between March 2025 and March 2026). Outstanding amounts would continue to rise only slightly (less than 0.3% y/y in June 2026) due to persistently high repayment flows, linked to the high volume of new lending during the period of low interest rates. The deterioration in households’ property purchasing capacity would weigh on transaction volumes and, ultimately, on house prices.
The deterioration in the labour market remains moderate
The rising unemployment rate over the past two years (+0.9 pp to 8.3% in Q2 2026) reflects the gradual deterioration of the labor market. This is due to sluggish growth in private-sector payroll employment (101,000 net job losses over the period), which was not offset by the creation of 20,000 public-sector jobs. This slowdown stems primarily from the construction sector (nearly 50,000 net job losses). Despite a rebound in order books, the manufacturing sector lost jobs (-26,000), as sectors with strong order books struggled to recruit. At the same time, self-employment (204,000 net new jobs over the past two years) continued to drive total employment (103,000 net new jobs). The coming months are expected to follow the same trends. The unemployment rate is projected to reach 8.5% by the end of 2026 and peak at 8.7% in mid-2027.
A moderate increase in inflation
France entered the conflict in Iran with low harmonised inflation: 1.1% y/y in February 2026, 0.8 pp below the Eurozone average – a gap that has persisted since then. While French inflation reached 2.7% in August, its core component remains below 2%, whereas it is above in the Eurozone.
Nevertheless, household purchasing power is expected to contract by 0.5% in 2026, before stabilising in 2027. Wage growth has not accelerated so far (excluding the minimum wage, which rose +2.4% in June) and fell below inflation in Q2 2026 for the first time in two years. In addition, unlike in 2022, government aid has done little to offset this inflation, due to a milder shock and more limited fiscal leeway than at that time.
According to our forecasts, inflation is expected to peak between late 2026 and early 2027, at 3.4% y/y, before easing as energy inflation moderates. It is expected to remain below the Eurozone average, particularly if electricity production and prices continue to be only slightly dependent on natural gas (as has been the case so far in 2026, unlike in 2022).
Time is playing against France's public finance
France still enjoys an effective interest rate (the average rate paid on the total public debt) of just over 2%. With an average maturity of nearly 8.5 years, a portion of the debt continues to carry a rate close to zero. As a result, the debt burden is projected to account for “only” 2.5% of GDP in 2026 (2.1% in 2025). However, with 10-year market rates currently above 4%, an increase in the debt servicing is only a matter of time (we project it to reach 4% of GDP in 2030).
This increase, combined with additional defence spending, will total nearly 0.5 pp per year between now and the end of the decade, which will complicate efforts to reduce the fiscal deficit. After a decline in 2025 (from 5.8% to 5.1% of GDP), 2026 is expected, according to our forecasts, to see a moderate deterioration in the fiscal deficit (to 5.4% of GDP), due to the additional increase in the debt servicing linked to inflation (because of inflation-indexed bonds) and lower-than-expected growth.
In its draft budget for 2027, the government plans to reduce the deficit to 5% of GDP, with the adjustement spread more evenly than in previous years (for the first time, retirees would be asked to contribute EUR 6 billion). However, with no majority in the National Assembly, fiscal consolidation is expected to remain moderate. The public debt-to-GDP ratio should reach 121% of GDP in 2027 (after 115.7% in 2025 and a forecasted 119% in 2026).
The rise in interest payments will put pressure on the public deficitThe next government formed following the 2027 elections could amend this budget. The impact on the public deficit would, however, be moderated by the implementation date for these measures (not before July). Beyond that, most presidential candidates are promising a return to a deficit of 3% of GDP by 2032 (which we had projected for 2030). Under this scenario, the public debt-to-GDP ratio would then reach nearly 124%.
With the current rise in long-term rates, there is a risk that debt service will increase further, just like the public debt ratio. Standing at 4.5% on 14 September, the 10-year yield is 50 bp higher than in our end-Q3 scenario. If this 50-bp increase was to be permanent, the additional debt servicing would be 0.05 pp in 2027 and 0.25 pp in 2030, for a total of 4.25% of GDP. The public debt-to-GDP ratio would rise by 0.8 pp (and by 1 pp in 2032). In order to avoid this increase in the deficit and debt, additional efforts would be required on the primary balance (equivalent to the additional debt service – for example, 0.25 pp in 2030).
