(Bloomberg) — The French economy is expected to grow steadily this year, easing fiscal challenges for the next government after snap elections left parliament deadlocked and uncertainty about future fiscal policy high.
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Gross domestic product will grow 1.1% in 2024, matching last year’s pace, according to forecasts published by Insee, which predicts a boost from the Summer Olympics in Paris. Growth in consumer spending will accelerate, helping to offset a contraction in business and household investment.
However, the statistics agency warned on Tuesday that much of the analysis is largely based on indicators from before President Emmanuel Macron dissolved parliament on June 9, and does not take into account the potential impact of various budgetary measures.
The resilience of the French economy is a crucial asset for any new government, which will immediately face negotiations with the European Union over how to reduce the budget deficit. The current government’s plans are based on 1% growth, a forecast previously seen as optimistic compared with the 0.8% forecast by the International Monetary Fund.
How to manage France’s finances was a central theme of a short, turbulent election campaign in which the left proposed a massive increase in spending and even Macron’s party promised more spending. The noise over fiscal policy and the possibility of Marine Le Pen’s far-right Rassemblement National winning power rattled investors, who dumped French assets. A survey of voting intentions conducted after polls closed on Sunday showed Le Pen would come out on top in the first round of the next presidential election in 2027.
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Spending Promises
With a hung parliament, it is unclear how many of the pledges will hold up. The left-wing New Popular Front alliance holds the largest group of seats in the lower house and is demanding that its programme be implemented, but it will likely have to make huge compromises to form a coalition capable of governing.
“Backtracking on supply-side policies to return to demand-stimulating policies would be an irreversible economic mistake,” Finance Minister Bruno Le Maire warned in a briefing with reporters. “We must stop any return to the past or any doubt about these supply-side policies by a relative majority in the National Assembly.”
Insee said that in addition to budgetary uncertainties, the next political context is likely to change the behavior of households and companies. Movements in financial markets that have pushed up borrowing costs could mean that companies are taking a “wait and see” approach to investment, it added. French shares fell for a third straight day on Tuesday as investors awaited clues about the next government.
“The development of the political situation in France poses a significant risk” to the growth scenario, Insee said.
Moody’s Investors Service warned in a separate report that if political disputes cause France’s budget and government debt figures to deteriorate significantly, the creditworthiness of the euro zone’s second-largest economy could also be at risk.
(Corrects 4Q 2023 and 1Q 2024 figures in chart after second paragraph)
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