France's Confidence Rebound Is Already Running Out Of Steam

(MENAFN- ING) Confidence is fading across the economy

The summer improvement in French confidence proved short-lived. In September, the overall business climate fell to 96, moving further below its long-term average, while employment sentiment weakened and consumer confidence remained exceptionally low. Together, these indicators point to subdued domestic demand, cautious hiring and little momentum heading into the autumn.

The sectoral breakdown confirms this broad loss of momentum. Retail and services reported softer demand and activity expectations, construction remained under pressure, and the wholesale trade outlook deteriorated amid elevated uncertainty. Industry was comparatively resilient, but weaker order books, rising inventories and more cautious recruitment plans suggest that it will not be strong enough to offset the slowdown across the rest of the economy.

This weakness on the business side is compounded by persistently low household confidence. The consumer confidence indicator remained at 86 in September, 14 points below its long-term average, while households' assessment of past changes in living standards fell to -81, versus a historical average of -49. Expectations improved slightly but remained deeply depressed, and unemployment concerns were still unusually high. Persistent economic and political uncertainty is therefore encouraging precautionary saving rather than stronger consumption.

Taken together, the business and consumer surveys leave France's outlook looking more depressed than that of many other European economies. This means that the French economy is likely to continue underperforming the rest of the eurozone over the near term.

The bond sell-off deepens the squeeze

The sharp rise in French long-term rates adds a new headwind to an already weak outlook. After climbing by around 15 basis points on Wednesday, the 10-year OAT yield rose further this morning, briefly reaching 4.70%, its highest level since 2008. This is roughly half a percentage point above its level at the start of September and reflects both the broader sell-off in eurozone bonds and a growing risk premium on France's fiscal and political outlook.

This increase will gradually feed into the public finances, which are already in a very difficult position. As discussed in our latest article on France's fiscal outlook, the deficit is expected to reach 5.4% of GDP in 2026, after 5.1% in 2025, and could rise to 6.5% in 2027 without corrective measures. Higher yields will not affect the entire debt stock immediately, given its relatively long average maturity, but they will steadily raise the interest bill as debt is refinanced.

The impact will not be confined to the budget. Higher borrowing costs will further constrain household housing investment and the construction sector, while making business investment less attractive. At the same time, a rising interest burden will leave the government with even less room to support activity and increase the scale of the fiscal adjustment required. Against a backdrop of low confidence, this combination is likely to reinforce households' precautionary saving and companies' wait-and-see behaviour.

These tighter financial and fiscal conditions will therefore make the recovery even more sluggish. We currently expect French GDP growth to average just 0.4% in 2026 before edging up to 0.9% in 2027, supported by somewhat stronger European demand and a gradual improvement in industry and investment. Even then, growth would remain constrained by weak household confidence, a softer labour market and the need for fiscal consolidation.

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