Economics and trade war risk slowing French growth in the first quarter

France's gross domestic product (GDP) is expected to grow by 0,1% between January and March compared to the previous three months, compared to the 0,2% increase previously expected, the INSEE (French National Institute of Statistics and Economic Studies) announced Tuesday in its latest economic report. It is still forecasting growth of 0,2% in the second quarter, the timeframe of its projections.

In 2024, "the turnaround in investment (...) was offset by the acceleration of public spending. However, this supporting factor reverses in 2025 because France begins, later than its European neighbors, its budgetary consolidation," Dorian Roucher, head of the economic situation department, explained to the press.

In the 2025 budget, adopted after a laborious process, the government plans an effort of around 50 billion euros, mainly by cutting state spending and increasing taxes on large companies and the wealthiest households.

He maintains his ambition to reduce the public deficit to 5,4% of GDP, compared to around 6% in 2024, despite the possibility of weaker annual growth than anticipated and the announced increase in military spending, made necessary by the reversal of geopolitical alliances, particularly the rapprochement between Washington and Moscow.

"Growth reservoir"

According to the INSEE, household consumption would drive growth in the first half of the year (+0,4% in the first quarter and +0,2% in the second).

Relatively spared by the budgetary tightening, they would gain purchasing power thanks to wage and pension increases, as well as the marked fall in inflation (0,8% over one year in February and expected at 1,1% in June).

However, somewhat slowing this momentum, many households would still prefer to save rather than spend, in a context marked by numerous uncertainties, both in France and abroad. The savings rate would only decline slightly, to 18,2% compared to 18,4% at the end of 2024, well above its pre-Covid level.

"The household savings rate represents an obvious source of growth if confidence is restored, but conversely, the deterioration of the labor market could encourage them to further increase their precautionary savings," Dorian Roucher emphasized. The unemployment rate is expected to reach 7,6% at the end of June, compared to 7,3% a year earlier.

Business investment is expected to remain sluggish (+0,2% in the first quarter, then -0,4%). Hardest hit by cost-cutting measures, some of which are temporary, businesses are also facing difficult financing conditions and the unpredictability of US economic policy, particularly President Donald Trump's threats to raise tariffs.

These customs duties, which target the United States' main trading partners, could reduce global trade growth by 0,1 to 0,6% in the first quarter, and by 0,4 to 0,3% in the second, warned Clément Bortoli, head of the economic synthesis division at INSEE.

Retaliatory measures could accentuate this effect, he added, stressing that Germany and Italy are more exposed than France.

Brake

Unlike businesses, household investments, particularly in the construction of new housing, would cease to penalize growth by stabilizing in the second quarter, after -0,3% in the first.

The contribution of foreign trade, which had supported growth in 2024, would be zero, with exports suffering from unfavorable energy prices and Chinese competition.

Finally, public spending would slow down (0,0% then +0,2%) due to the special law, intended to compensate for the lack of a budget, which limited it at the start of 2025.

The French National Institute of Statistics and Economic Studies (INSEE) has not provided a growth forecast for 2025 as a whole. After a growth rate of 1,1% last year, the Banque de France has lowered its forecast to 0,7%.

The government is counting on 0,9%, a scenario which, according to the institute, would require the rapid materialization of "positive hazards", such as lower than expected customs duties, lower oil prices or a more marked drop in the household savings rate.

Illustrative image of the article via Depositphotos.com.