(Dec 19): The Bank of France raised its growth forecasts as the euro area’s second-largest economy shows resilience to prolonged political turbulence and fiscal uncertainty.
The central bank said production in the transport and aviation sector has helped boost activity and the economy should be supported by a recovery in consumer spending and investment next year. The institution raised growth forecast for 2026 to 1% from 0.9% and for this year to 0.9% from 0.7%.
The improving outlook comes despite a shaky budget situation as divided lawmakers struggle to agree on how to rein in the currency bloc’s widest deficit. With time running out to adopt a fiscal plan for next year, France will probably have to rely on emergency legislation to avoid a shutdown.
The central bank has previously warned that uncertainty from an unstable political situation since snap elections in 2024 takes around 0.2 percentage point off economic growth.
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However, recent indicators have shown business and manufacturing are weathering the upheaval surprisingly well. Statistics agency Insee this week forecast robust expansion through the first half of 2026, and said a budget compromise emerging in parliament could be supportive with fewer spending cuts and tax increases than in earlier plans.
Unlike Insee, the Bank of France didn’t develop a scenario for the outcome of budget negotiations. Instead, it based its projections on the initial bill presented by the government, which targeted a sharper decrease in the fiscal gap — to 4.7% of gross domestic product from 5.4% this year.
But the central bank said less fiscal belt tightening would not boost growth because uncertainty about public finances makes households and consumers more hesitant.
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The Bank of France trimmed its inflation forecast for this year to 0.9% from 1% and kept its 2026 projection unchanged at 1.3%. It revised down the 2027 prediction to 1.3% from 1.8%, taking into account a delay in European carbon pricing rules.
Uploaded by Liza Shireen Koshy
