OECD Economic Outlook, Volume 2026 Issue 1

Growth is expected to slow to 0.7% in 2026 and remain weak in 2027, at 0.8%. Economic activity strengthened in the second half of 2025, supported by a pick-up in investment and exports, and a modest recovery in household consumption, but slowed in early 2026. Economic momentum has been disrupted by the evolving conflict in the Middle East. The resulting surge in inflation is eroding purchasing power, weighing on private consumption. Heightened uncertainty is set to dampen business investment. Residential investment should prove more resilient, supported by the earlier rise in building permits, although higher interest rates will continue to weigh on the existing‑homes market.

The fiscal deficit fell from 5.8% of GDP in 2024 to 5.1% of GDP in 2025, outperforming the target of 5.4% of GDP due to better-than-expected revenues, notably corporate taxes, and tight expenditure management. It is projected to reach the government objective of 5% of GDP in 2026 and decline further to 4.6% of GDP in 2027. Risks are high, however, as these projections assume no additional broad-based energy support measures and a gradual recovery in energy production and exports in the Middle East from the second half of 2026. While France is relatively less exposed to the disruption in Middle East exports given its energy mix, further electrification of industry and transport would increase resilience. Growth would be strengthened by measures supporting higher employment of young and older workers, and by tackling productivity bottlenecks through stronger skills, R&D and digital investment.

Political uncertainty eased towards the end of 2025 and early 2026, allowing the budget to be adopted in February, supporting confidence and activity. After showing early signs of moderation, momentum weakened further following the outbreak of the evolving conflict in the Middle East. Short‑term indicators deteriorated in March and April: household confidence retreated for two consecutive months from a one‑year high in February, and business confidence has declined since January after returning to its long‑term average at the end of 2025. The unemployment rate also continued to rise. Higher energy prices lifted annual headline inflation to 2.5% in April, from 1.1% in February, although it remained below the euro area average.

Although France is less exposed than most peers – around 95% of electricity generation comes from nuclear and renewables – the economy remains vulnerable to oil price shocks and shortages in fossil‑fuel‑intensive activities. The reduction in the US tariff rate on merchandise imports from France since 20 February could provide a modest offset to the energy price shock. However, the impact on exports is likely to remain limited, as trade‑related uncertainty stays elevated and growth prospects in Germany, France’s main trading partner, remain modest.

Despite elevated fiscal uncertainty, the deficit narrowed from 5.8% of GDP in 2024 to 5.1% of GDP in 2025, outperforming the 5.4% of GDP target driven especially by stronger corporate tax receipts amid more resilient activity and sustained expenditure discipline through careful in‑year budget management. This has led to the largest underlying primary adjustment in a decade. This improves the likelihood of meeting the 5% of GDP objective in 2026, provided consolidation continues and energy support remains contained. The deficit is expected to decline further to 4.6% of GDP in 2027, reflecting continued consolidation. The fiscal stance will continue to tighten, by about 1.5% of GDP over 2026-2027, but this adjustment remains insufficient to stabilise the debt-to-GDP ratio, projected to increase to 121%. Faster fiscal consolidation is constrained by weak growth, rising debt‑servicing costs, the phasing‑out of EU recovery funds and political uncertainty. The 2025 adjustment relied mainly on revenue measures, while the 2026 budget adopts a more balanced mix, combining continued exceptional taxes with a 0.3% of GDP cut in public spending, partly offset by higher defence and security spending. Energy support measures remain state-contingent and tightly targeted, with tax deferrals, loans and a 20/30‑cent‑per‑litre fuel rebate for vulnerable professional users and heavy drivers, currently renewed on a monthly basis.

Monetary policy easing in 2025 supported a rebound in business and residential investment towards the end of 2025 and early 2026, although the pass‑through to long‑term interest rates remains incomplete. Heightened geopolitical uncertainty and inflation have pushed up long-term sovereign rates, reversing part of the earlier decline following the easing of domestic political uncertainty. This rise in bond yields poses fiscal risks, as France’s long-term government borrowing costs are currently among the highest in the euro area.

GDP growth is projected to slow to 0.7% in 2026, with adverse spillovers from the evolving conflict in the Middle East offsetting solid growth momentum at the end of 2025. In 2027, growth will pick up slightly to 0.8%, with easing geopolitical tensions lifting underlying activity, while lingering effects from the oil price shock restrain headline growth. Higher inflation will erode purchasing power and weigh on private consumption in the near term, as wages will adjust only gradually. However, a drawdown of historically high household savings and the indexation of the minimum wage to inflation in the summer are set to provide some offset. Business investment is expected to slow amid heightened uncertainty and higher energy input costs, with the projected rise in euro area policy interest rates in mid-2026 adding a further headwind. In 2027, business investment will gradually strengthen, supported by new technology adoption and higher defence spending. Residential investment should remain more resilient in the near term, supported by a backlog of permits. Net exports will support growth in 2026-27, driven by strong aeronautics and naval exports and sustained wage moderation. Fiscal consolidation will continue to weigh on growth in 2026 and 2027, with tightly targeted energy support providing only limited support to domestic demand.

Risks are tilted to the downside, especially in 2026. A prolonged disruption to oil and gas supply routes, including refined products, would weigh more heavily on activity and add to inflationary pressures. Renewed policy uncertainty due to the absence of a currently clear majority in parliament could further increase long-term interest rates and constrain households’ and firms’ investment decisions, at least until the Presidential and parliamentary elections scheduled in spring 2027. On the other hand, the rise in defence spending in Europe could benefit French producers sooner than expected and support exports.

Despite a more favourable energy mix, the energy shock is significantly affecting households and the most vulnerable sectors – such as agriculture, fishing and road freight – underscoring the need to further accelerate the electrification of production processes and expand the electric vehicle fleet. Continued support for energy‑efficient technologies (notably under the France 2030 plan) and faster deployment of renewable energy would strengthen resilience to future shocks. Raising the employment rate is key to support growth, with the French employment rate still below the OECD average, particularly for older workers and young people. This requires reinforced measures to prevent early labour‑market exit, expand work‑based vocational education and reduce early inequalities in educational outcomes. At the same time, persistent productivity bottlenecks call for further reforms to improve the effectiveness of R&D support, ease financing constraints on digital investment and strengthen lifelong learning. Special focus is needed on low‑skilled and older workers, who participate less and therefore face greater difficulties adapting to technological change. Rising defence spending also offers scope to boost productivity by increasing the share devoted to R&D with civilian and defence applications.