France's Manufacturing Rebound Offers Some Relief, But No Turning Point Yet

(MENAFN- ING) Manufacturing output returns to its June level

There is finally some better news from the French economy. Manufacturing output increased by 0.5% in September, following a 0.3% rise in August, bringing production back to its June level. The improvement was relatively broad-based. Food production rebounded by 1.0%, while output of electrical, electronic and computer equipment rose by 2.6%, reaching its highest level since November 2023. Transport equipment production also increased by 2.7%, largely thanks to a 7.5% rebound in the automotive sector.

However, September's figures look more like a welcome recovery from previous weakness than the start of a sustained industrial upturn. Manufacturing output was still 0.9% below its level a year earlier. Transport equipment remained one of the main areas of weakness, with production down 3.8% year-on-year. Despite September's strong monthly increase, automotive production was still 9.3% lower than a year ago.

The broader industrial picture was also less encouraging than the manufacturing data alone suggest. Total industrial production fell by 0.5% in September because of lower electricity output and remained 0.6% below its level a year earlier.

Construction remains deeply depressed

Construction did not see a similar improvement. Output declined by a further 0.2% in September and was 4.5% lower than a year earlier. The downturn continues to affect every major segment of the sector. Civil engineering output dropped by 6.6% year-on-year, while building construction fell by 4.8% and specialised construction activities by 4.2%.

These figures confirm that construction remains a big drag on the French economy. Elevated financing costs, weak demand and the postponement of investment projects are likely to keep the sector under pressure in the coming months.

Industry should outperform the rest of the economy

October's business surveys were relatively encouraging for industry, particularly compared with the deterioration in other sectors. Combined with a favourable statistical carry-over from the third quarter, this suggests that manufacturing could support activity in the final months of the year.

Still, the surveys predate the social unrest of 17 October, while order books remain weak, especially for exports, and tighter financing conditions are weighing on investment and inventories. Industry should therefore outperform services and construction in the fourth quarter, but not by enough to generate a broader recovery. After GDP contracted by 0.1% in the third quarter, growth is likely to remain close to zero.

Domestic demand is unlikely to provide much support

The outlook outside industry is weak. The rebound in household consumption in the third quarter is unlikely to last, given the sharp fall in consumer confidence, growing concerns about unemployment and renewed pressure on real incomes. Investment is also likely to remain subdued. Weak demand, elevated borrowing costs and uncertainty surrounding taxes and public spending are encouraging both companies and households to delay projects. Credit conditions have tightened particularly sharply in France, with a net 27% of banks reporting stricter lending standards for businesses in the third quarter.

As a result, the modest support provided by manufacturing will probably be outweighed by continued weakness in consumption, investment and construction. We expect French GDP growth of only 0.3% in 2026 and 0.5% in 2027, with risks still tilted to the downside.

Weak growth leaves even less room for fiscal manoeuvre

The budget process has since reached a new impasse. After 11 days of debate, the National Assembly unanimously rejected the revenue side of the 2027 budget on Wednesday evening, by 458 votes. The amendments adopted during the debate would have widened the deficit to an estimated 5.9% of GDP, well above the government's 5% target.

The government's initial draft will now go to the right-leaning Senate, which is expected to rewrite the budget by shifting more of the adjustment from tax increases to spending cuts while seeking to preserve the 5% deficit target. An agreement between the two chambers remains highly unlikely, paving the way for the bill to return to the National Assembly, where the government could resort to Article 49.3. Alternatively, if parliament has not decided within the 70-day constitutional deadline, the government could implement the budget by ordinance.

This political deadlock comes on top of an increasingly difficult fiscal outlook. Under our forecasts, even the government's initial budget would leave the deficit at around 5.5% of GDP in 2027, above its 5% target. Yet the latest demonstrations are increasing pressure for measures to support wages and purchasing power, leaving the government little room to respond without further widening the deficit, as discussed in our recent article on France's social and fiscal pressures.

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