French economy unexpectedly shrinks in third quarter as headwinds strengthen
Inflation nears three-year high as investment continues to decline and exports drop.
France's economy unexpectedly shrank in the third quarter, adding to economic challenges that include rising borrowing costs, violent protests, and political uncertainty. The country's gross domestic product (GDP) fell by 0.1% from the previous quarter, as investment declined and exports dropped, according to French statistics agency Insee.
Analysts had predicted expansion of 0.1%. In contrast, Spain experienced a strong quarter, with GDP up by 0.6% driven by domestic demand and trade. The weak French performance raises concerns for the euro area's second-largest economy, with Germany and Italy also expected to report growth. The European Central Bank remains cautious, with the possibility of raising interest rates for a third time in December despite the broader European economic resilience.
Inflation in France surged to 3.8% in October, the highest level since late 2023, driven by energy costs. Analysts had expected inflation to accelerate to 3.6%. Spain's consumer-price gains slowed to 4.9%, in line with expectations. France's fiscal and political instability, coupled with global bond yield increases, have heightened the region's focus on the country's economic challenges.
Prime Minister Sebastien Lecornu's minority government is grappling with austerity measures amid social and political turmoil ahead of the 2027 presidential election. The near-term outlook for France's economy is uncertain, with Finance Minister Roland Lescure emphasizing the need for a budget to restore confidence and lower interest rates.
Economist Jean Dalbard predicts France is entering the final quarter with little momentum and a high risk of downside. Spain's economy, however, has shown resilience, with a projected growth of 2.6% in 2026 and 2.2% in 2027, surpassing the euro area average. Political instability has not significantly impacted Spain's economy, with Prime Minister Pedro Sanchez's government failing to pass a budget for the current term or present a draft for 2027 due to the upcoming elections.
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