French GDP shrinks 0.1% as economy nears recession and budget doubts grow

France's economy contracted by 0.1% in the third quarter, bringing it closer to a recession, according to the National Institute of Statistics and Economic Studies (Insee). The decline follows stagnation in the second quarter and a 0.2% drop in the first quarter. The government faces budget doubts as borrowing rates exceed 5% on financial markets, and social tensions persist over high living costs and support for youth demands.

Inflation accelerated to 3.4% year-on-year in October, the highest level since January 2024. Economists predict a technical recession over the next quarters, with Roland Lescure, Economy and Finance Minister, warning that the country "will hit the wall" if the recovery budget isn't adopted. The main risk for the French economy lies not in the absence of a budget, but in the lack of visibility on public finances.

Budget uncertainty can spur companies to delay investments, households to postpone spending, and markets to demand higher risk premiums. Although adopting the budget through ordinances may temporarily reduce uncertainty, it could damage long-term fiscal credibility, as markets value the speed and legitimacy of political decisions over the choice of a particular institution to enact the budget.