Goldman Sachs: France - FJElite

France’s sharply higher borrowing costs and weaker equity market have tightened financial conditions significantly, creating a meaningful headwind for the economy. While the impact of tighter financial conditions is likely to be less severe than elsewhere in Europe because French households and companies have relatively long debt maturities, the renewed rise in political and policy uncertainty adds another drag. At the same time, higher interest payments mean that fiscal policy is likely to remain contractionary next year despite the budget deficit staying above 5% of GDP.

As a result, the outlook is for very weak French growth, with activity expected to remain below trend until after the elections. Growth forecasts have been lowered for 2027, reflecting the combined effects of tighter financial conditions, political uncertainty and fiscal restraint. Incoming financial-market developments and the Q3 GDP release will be important in determining whether the slowdown becomes more pronounced.

However, there are several reasons to expect a slowdown rather than a deep recession. Stronger growth elsewhere in the Eurozone should provide support through external demand, while France lacks the large external imbalances that contributed to severe downturns during the European debt crisis. There is also limited risk of a destabilising sovereign-bank feedback loop because French banks have relatively limited exposure to domestic government debt.