French Resilience to War Fallout Wilts in Blow to Budget Efforts

j){8[306v([(jw8f1)p4)tza_media_dl_1.png S&P Global

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(Bloomberg) — France’s economic sturdiness in the face of the Iran war shock is crumbling, jeopardizing plans to rein in the budget deficit as the country gears up for a pivotal election.

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The most alarming sign that the euro zone’s No. 2 economy is succumbing to surging energy inflation and waning confidence came Thursday when S&P Global’s Composite Purchasing Managers’ Index revealed the steepest plunge in business activity in more than five years.

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It comes on the back of data showing output stagnated at the start of 2026 as consumers pared back spending and investment, with unemployment also hitting its highest level in half a decade. A drop in gross domestic product this quarter is now a major risk. 

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“All in all, these figures are very weak and raise the likelihood of a contraction in French activity in the second quarter,” ING analyst Charlotte de Montpellier said. “In this context, the government’s 2026 growth forecast of 0.9% now appears out of reach, significantly complicating the fiscal adjustment.”

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The grim backdrop is undermining the government’s bet that France can weather the fallout from the Middle East better than peers thanks to a greater share of nuclear power in its energy mix and automatic stabilizers that benefit households during crises.

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A materially weaker economy would pull the rug out from efforts to shore up public finances. Even the modest target to narrow this year’s fiscal gap to 5% from 5.1% in 2025 may prove unachievable without fresh measures to control spending. 

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That raises the prospect of renewed bond-market pressure and political volatility just as campaigning gets underway for next year’s presidential ballot, when Emmanuel Macron can’t run and the far-right is hoping to capitalize on outrage at the rising cost of living. 

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French Prime Minister Sebastien Lecornu is due to unveil tweaks later Thursday to support for firms and households most affected by rising energy bills.

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Until now, France has been careful to target aid and ensure it’s temporary, in sharp contrast with 2022 when broad-based measures after Russia attacked Ukraine cost tens of billions of euros and blew a hole in public finances.

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Government spokeswoman and Energy Minister Maud Bregeon said Wednesday that the fiscally prudent approach won’t change as a delicate balance is sought between helping consumers and reaching the 5% deficit goal.

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Without broader support, there’s a risk that caution among consumers and businesses will persist. 

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“Clearly, demand and confidence would have benefited from stronger public finances, which would have allowed for more substantial support,” de Montpellier said. “But this is not the case.” 

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—With assistance from James Regan.

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