After the Olympic momentum, political uncertainty risks weighing on French growth

The central bank said it anticipated a "significant increase" in gross domestic product (GDP) between July and September, in its monthly economic report, which confirmed an initial estimate published at the beginning of August.

"The middle of the [forecast] range is around 0,4%," said the chief economist of the Banque de France, Olivier Garnier.

After a growth of 0,2% in the second quarter, GDP would record an increase of 0,1% to 0,2% excluding the Olympic Games, to which would be added the temporary impact of around 0,25% generated by the biggest sporting event in the world – hosted in Paris from July 26 to August 11 – and by the Paralympics from August 28 to September 11.

This forecast is however surrounded by uncertainties, both on the upside – possible knock-on effects of the Olympic Games – and on the downside – political uncertainty resulting from early legislative elections. "An increase in uncertainty has a negative effect on activity, which in particular creates wait-and-see behavior (...) This increases the uncertainty of this quarter," warned Mr. Garnier.

Tight schedule

This wait-and-see attitude from businesses remains in place as the new Prime Minister Michel Barnier, appointed on Thursday by President Emmanuel Macron, has set about forming a government, more than two months after the election which did not result in any clear majority.

Time is running out in the face of an increasingly tight schedule to present the draft budget for 2025, a particularly heavy text supposed to be submitted to Parliament by October 1 at the latest, then voted on and published by December 31.

The task looks complicated: the public deficit forecasts for this year (5,1% of GDP) and 2025 (4,1%) are threatened with slippage, according to the Treasury, due to the sharp deterioration in public finances which has already earned France an excessive deficit procedure from the European Commission.

On Monday, the resigning Minister of Economy and Finance Bruno Le Maire assured that France could meet its objectives, notably that of reducing the deficit to 3% in 2027. But the latter is increasingly considered out of reach, notably by the deputy Charles de Courson, general rapporteur of the budget, who judged it "impossible" on Tuesday "in the current political situation".

"Flat EEG"

For its part, the National Institute of Statistics (INSEE) lowered its GDP growth forecast for the third quarter from 0,5% to 0,4% on Monday, estimating that political uncertainty and the high cost of credit would weigh on business investment.

The following months could prove even more difficult. In the last quarter of the year, GDP would contract by 0,1%, according to the statistical institute. However, the latter kept its forecast for 1,1 unchanged at 2024%, slightly better than that of the outgoing government (1%).

For the month of August alone, the approximately 8.500 companies surveyed by the Banque de France between August 28 and September 4 reported an increase in activity, moderate in industry and stronger in services thanks to the Olympic Games and milder weather.

The increase expected for September is lighter, with possibly "a backlash" in services, according to Olivier Garnier.

In industry, however, order books are considered to be degraded, with only the aeronautics sector holding its own. "It's a fairly flat EEG," commented the chief economist, also mentioning "a certain wait-and-see attitude in investment decisions."

In the construction sector, activity fell slightly in August, due to more holidays than in previous years, and is unlikely to change much in September.

Regarding sales prices, they have become normalized in industry and construction, and are in the process of becoming so in services.

Supply chain difficulties are relatively low (mentioned by 9% of companies), except in the automotive and aeronautics sectors, while recruitment difficulties have increased slightly (36%).