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France’s Economy Contracts as Political Uncertainty Persists

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France’s economy shrank 0.1% in the fourth quarter, according to preliminary data from INSEE on Thursday. The contraction follows 0.4% growth in the third quarter of 2024 and underscores the challenges facing the country amid ongoing political and fiscal uncertainty.

Economic Growth Stalls Amid Budget Deadlock

Economists had expected the economy to remain flat, but the slight downturn highlights France’s struggle to recover following the temporary boost from the Paris Olympic Games last summer. Political turmoil has since stalled key fiscal decisions, leaving the country without a finalized 2025 budget.

The government’s failure to pass a deficit-reducing budget led to a no-confidence vote in December that ousted then-Prime Minister Michel Barnier. His successor, François Bayrou, has yet to secure parliamentary approval for a new budget plan.

Challenges in Passing a 2025 Budget

Bayrou’s government has made financial concessions to secure Socialist Party support, including reopening pension reform discussions and pledging additional spending on health and education. However, budget negotiations remain tense, with the Socialists briefly suspending talks over immigration policy disagreements.

Analysts at Eurasia Group believe Bayrou is in a stronger position to pass a budget, but compromises may prevent the government from achieving its 5.4% deficit target. The Finance Ministry currently expects the deficit to reach 6.1% of GDP in 2024.

Bleak Growth Prospects for 2025

France’s political instability and economic headwinds are expected to dampen growth in 2025. J.P. Morgan economist Raphael Brun-Aguerre warned that political uncertainty and trade disruptions could weigh on business sentiment.

ING economist Charlotte de Montpellier noted that ending 2024 with a contraction sets a weak starting point for 2025, making the government’s forecast of 0.9% GDP growth difficult to achieve. She expects domestic demand to remain under pressure in the coming months due to ongoing budget uncertainty.

France’s economic downturn adds urgency to the need for a 2025 budget. However, political divisions and fiscal constraints make a swift resolution uncertain. While Bayrou’s government may succeed in passing a budget, analysts warn that growth will likely remain sluggish amid efforts to reduce the public deficit.

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