The French government has cut its economic growth forecast for this year to 0.5%, halving its original projection of 1.0% as surging energy prices from the war in Iran combined with chronic fiscal instability and extreme weather including heat waves.
Finance and Economy Minister Roland Lescure said the French economy would expand just 0.5% this year, according to Reuters and other outlets on the 12th. He put next year's growth forecast at 1.0%.
As recently as early this year, the government had expected 1.0% growth. But it repeatedly lowered the figure after the war in Iran broke out in late February, driving up international oil prices and deepening geopolitical uncertainty. The government cut the forecast to 0.7% in July, then trimmed another 0.2 percentage point just two months later.
The National Institute of Statistics and Economic Studies (INSEE) is more pessimistic than the government. On the 10th, INSEE lowered its growth forecast for this year to 0.4% from 0.7%, a cut of 0.3 percentage point.
Lescure said the French economy is facing four adverse shocks at once: domestic political uncertainty, surging energy prices, extreme summer weather and rising borrowing costs. "This year is an acute crisis in which four different types of shocks have overlapped," he said.
Extreme weather — heat waves, wildfires and drought — is weighing directly on the economy. The Ministry of Ecological Transition estimated the economic cost of this summer's extreme weather at 10 billion to 15 billion euros (about 15.6 trillion to 23.4 trillion won), equivalent to 0.3% to 0.5% of France's gross domestic product.
Heavy public debt and political uncertainty are also holding back the economy. With a presidential election set for April next year, growing political uncertainty has made investors more wary of French government bonds.
The yield on France's 10-year government bond climbed to 4.448% on the same day from the low 3% range in February, the highest level since 2008. The gap with the yield on Germany's 10-year bond, Europe's benchmark safe asset, widened to 94.5 basis points (one basis point equals 0.01 percentage point). The spread between French and German bonds is already wider than those of southern European countries such as Spain, Italy and Greece.
The fiscal picture is no easier. As of the first quarter of this year, France's public debt stood at 117.6% of GDP, far above the eurozone average of 88.9%. Last year's budget deficit reached 5.1% of GDP.
Analysts say the government's goal of narrowing this year's deficit to 5% of GDP has become effectively unattainable. Lescure signaled the target could be revised, saying "5% is no longer an option."
