GDP growth is projected to remain subdued at 1.1% in 2024, before easing to 0.9% in 2025 and 1.0% in 2026. For the second consecutive year, external demand is the primary driver of growth in 2024. Domestic demand, which benefited from a temporary boost to private consumption in the third quarter of 2024 from the Olympic Games, is expected to recover from 2025, gaining momentum as disinflation boosts purchasing power. Fiscal consolidation efforts in 2025 and 2026 will weigh on growth, partly counterbalancing the positive impact of monetary policy easing on residential and business investment. Headline inflation is projected to decline, reaching 1.6% in 2025 and 1.8% in 2026.

The fiscal deficit is anticipated to rise to 6.1% of GDP in 2024, up from 5.5% in 2023. Announced fiscal consolidation measures are equivalent to 1.4% of GDP in 2025, but a lower consolidation effort is assumed in the projections, with a structural adjustment of the primary balance of 1% of GDP for 2025 and 0.5% of GDP in 2026. Several consolidation measures are not yet known. General government debt is projected to remain elevated at 120% of GDP in 2026. Fostering stronger potential growth through digital technology adoption and reduced regulatory barriers will enhance productivity and help achieve fiscal goals. Reforms in social benefits and pensions are boosting labour participation, but further efforts are needed to integrate workers and reduce the impact of socio-economic background on educational outcomes.

In early 2024, GDP growth was modest but surpassed expectations, fuelled by strong external demand, and sustained public spending. More recently, private domestic demand is starting to show signs of recovery. Private consumption was weak in the first half of 2024, but spending and output received a third quarter boost from the Olympic Games. Increasing real wages and improving household confidence signal a recovery from 2025. On average, labour shortages have eased and remain lower than in other OECD countries, but tensions remain in specific sectors such as construction, hospitality and agriculture. Demand for housing loans has been rising since the summer with lower interest rates, but investment has yet to follow. Business investment has fallen for three consecutive quarters and confidence has declined. Inflation has stabilised, falling to 1.6% in October on a harmonised basis, the lowest rate since 2021. However, services inflation remains substantially higher.

Solid growth in the United States as well as the continuing easing of supply bottlenecks is supporting a gradual recovery in exports. However, foreign demand has yet to return to its pre-pandemic trend and France has not fully recovered the export market share lost during that period.

The fiscal deficit is projected to rise to 6.1% of GDP in 2024, up from 5.5% in 2023, due to lower-than-expected tax revenues, particularly from VAT, and disappointing returns from the exceptional tax on energy producers. The government aims to reduce the budget deficit to 5% by 2025. Two-thirds of the adjustment would come from tax increases, including levies on high-income earners, large companies, air travel, polluting vehicles, and energy producers. The final third would come from spending cuts, especially from central and local governments, and social security. Certain measures are still not fully specified, including the details about the savings from local government. Therefore, the projection assumes a 1% of GDP structural adjustment of the primary balance in 2025, below government projections of a structural adjustment of 1.4% of GDP. In 2026, a structural primary balance improvement of 0.5 percentage points is projected, in line with the government plans and the European Commission requirements.

The decline in housing credit is gradually slowing as monetary policy is easing. The average interest rate on new housing loans fell to 3.6% in August, down about 60 basis points from its January peak. Consequently, the volume of new housing loans increased by 50% between March and September, to EUR 13.1 billion. Despite this, it remains well below its May 2022 peak of EUR 26.6 billion and total outstanding housing loans continue to decline as new loans have yet to offset maturing loans.

Growth is set to slow from 1.1% in 2024 to 0.9% in 2025, due to weaker carry-over effects and constraints on public spending. While fiscal tightening will be a headwind to growth, its impact is expected to be partly offset by the effects of disinflation and easing area-wide monetary policy. Private consumption is projected to contribute significantly to growth. Real wages will continue to increase for the second consecutive year as inflation moderates, recovering losses incurred between 2020 and 2023. Residential investment is expected to gradually recover, reflecting the rebound in building permits since 2024 spurred by lower interest rates. Despite favourable interest rates, business investment will likely remain subdued in early 2025 due to policy uncertainty, and pick up only from mid-2025 as policy clarity improves. Public investment will receive modest support through the France Relance and France 2030 programmes. The active population is projected to increase as a result of the social assistance (Revenu de Solidarité Active) reform requiring recipients to register in employment services and the increase of the pensionable age. However, slower output growth is likely to dampen job creation, leading to a slight increase in the unemployment rate in 2025. Inflation is expected to ease further as regulated electricity tariffs decline in February 2025, deducting almost 0.3 percentage points from inflation. In 2026, economic growth is projected to be 1.0%, with further interest rate cuts expected to stimulate both housing and business investment, while increased real wages and a lower saving ratio will fuel private consumption.

Risks are skewed to the downside. The sovereign rate spread between France and Germany, stable at 50 basis points in recent months, spiked to 70-80 basis points following the dissolution of the National Assembly. After France's debt rating was downgraded in the spring, it has remained stable through the autumn. This rise in borrowing costs increases debt servicing expenses and risks crowding out private investment, potentially dampening growth. A government budget agreement that reduces policy uncertainty could quickly reassure markets, narrowing the spread, and alleviating fiscal pressures. However, if the budget is not adopted, political uncertainty would bear down on the recovery. Additionally, weaker-than-expected inflation and economic growth could reduce tax revenues, threatening the government's ability to meet its 5% deficit target.

The 2025 government budget, if adopted, represents a positive step forward towards reducing the fiscal deficit, but additional measures are vital to reduce government debt significantly. Consistent adherence to a medium-term fiscal strategy is essential. Fostering stronger potential growth will also help achieve fiscal objectives. A wider adoption of digital technologies and a reduction in regulatory barriers would support productivity gains. The social benefit and pension reforms introduced in 2023 are already boosting labour market participation among older and low-skilled workers. However, further support is needed to support their integration in the labour market, such as encouraging training for people in the middle and end of their careers, particularly in digital skills. Additionally, initiatives aimed at reducing the strong correlation between socio-economic background and educational outcomes are crucial to allow people to reach their full potential in the labour market.