France is facing increasing economic and financial pressures, after official data showed that its economy contracted unexpectedly during the third quarter, coinciding with the acceleration of inflation and the rise in borrowing costs to record levels in more than two decades, at a time when popular protests are escalating over the rising costs of living, and the government’s efforts are faltering to approve a budget that limits the public finance deficit.
On Friday, the French 10-year bond yield rose by 6 basis points to 4.944 percent, lagging the performance of the rest of the euro zone markets. In contrast, Italian 10-year bond yields rose by two basis points, while German yields fell by one basis point. Returns move inversely with prices.
The rise in borrowing costs pushed the spread between French and German bond yields, a measure of the risk premium associated with French bonds, to 160 basis points, after it reached 177 basis points last week, recording its highest levels since the 2011 euro zone crisis.
France has come under more pressure than others during a global sell-off in government bond markets, driven by rising energy prices and concerns about public debt levels. Last week, French 10-year bond yields recorded their highest levels since 2002, exceeding 5.14 percent, with investors focusing on the widening deficit and the difficulty of approving the budget, amid escalating political and social tensions.
Data from the National Institute of Statistics and Economic Studies (INSI) showed a contraction in GDP by 0.1 percent during the three months ending in September, after the economy recorded a recession in the second quarter, and contracted by 0.2 percent during the first quarter. Thus, the French economy has not achieved any growth since the beginning of the year.
Meanwhile, inflation accelerated to 3.4 percent year-on-year in October, compared to 3.1 percent in September, recording the fastest pace since January 2024.
French Finance Minister Roland Lescure said that the economy may be “headed towards the wall” if the government is unable to approve a budget that reduces the deficit soon.
He added, in statements to France Info radio, that “if we fail to achieve the transformation specified by the budget, we are heading straight to the wall,” noting that the country has not witnessed any growth during 3 consecutive quarters, and that the economy is in a state of stagnation during the year 2026.
These indicators make it more difficult for the government to achieve its expectations of economic growth of 0.5 percent during the current year, or even reach more conservative estimates of 0.4 percent, according to the National Institute of Statistics and the Bank of France.
It also raises doubts about the government's ability to reduce the budget deficit to 5.0 percent of GDP in 2027, after the expected deficit for 2026 reached about 5.4 percent.
Klaus Vestesen, chief euro zone economist at Pantheon Macroeconomics, said that the data “are not reassuring, and will increase pressure to accelerate and expand the pace of fiscal consolidation.”
For his part, Maxime Darmet, an economist at Allianz Trade, said that France will start in 2027 from a very weak starting point in terms of growth, adding that this raises questions about the credibility of deficit reduction efforts.
He warned that the country could enter a "vicious circle", as weak growth prompts investors to demand a higher risk premium on French bonds, which in turn increases borrowing costs and pressures economic activity.
Sylvain Persinger, of the consulting firm Persingico, agreed that the outlook is quite bleak, warning that a prolonged political and financial crisis, especially if the upcoming elections do not result in a clear political direction, could exacerbate the public debt crisis and push the country into a more severe economic and political crisis.
These challenges coincide with the escalation of popular protests due to the high costs of living and social inequality, as student groups and others prepare to organize new movements over the weekend, amid official warnings of the dangers of widespread security unrest.
French Interior Minister Laurent Nunez said on Thursday that Saturday appeared to be “very high risk” in terms of public security, announcing the redeployment of 70,000 members of the security forces, after protests two weeks ago witnessed some of the worst riots the country has known in years.
Popular demands to increase government spending make it more difficult to adopt austerity measures and reduce the deficit, at a time when the country is preparing for the presidential elections scheduled for the spring of next year, amid investors’ fears of the continued expansion of public spending.
On the monetary policy front, financial markets were expecting, on Friday, a probability of approximately 90 percent to raise European interest rates during December, after the European Central Bank kept borrowing costs unchanged at 2.5 percent, on Thursday, but hinted at the possibility of increasing them next month.
Traders are also monitoring news regarding the person who might succeed European Central Bank President Christine Lagarde, after she announced her intention to step down in February 2027. Dutchman Klaas Knot and Spaniard Pablo Hernandez de Cos are widely seen as the most prominent candidates for the position.
In energy markets, prices rose on Friday after an attack on an oil tanker in the Strait of Hormuz highlighted the risks to supplies, and Brent crude rose by 2 percent to $117 a barrel, approaching its highest levels since April.
On the other hand, US Treasury bonds, and to a lesser extent German bonds, benefited from a new wave of selling in technology stocks, after the results of major companies in the field of artificial intelligence raised investors’ concerns about high spending. US 10-year Treasury bond yields fell by 6 basis points, as investors turned to safe assets.
As for the two-year German bond yield, which is most affected by the European Central Bank's interest rate expectations, there was no significant change, settling at 3.052 percent.
Data from the European Statistical Office (Eurostat) showed, on Friday, that the euro zone economy grew at a faster pace than expected during the third quarter, maintaining its ability to withstand the pressures resulting from rising energy prices, supported by continued investment and consumption.
Economic growth slowed to 0.4 percent during the third quarter, compared to strong growth of 0.6 percent during the second quarter, but it exceeded the 0.2 percent expectations of economists polled by Reuters.
On an annual basis, the euro zone economy expanded by 1.3 percent, exceeding expectations of 1.1 percent, and approaching the level of potential growth, which is the rate that the economy can achieve without the need for stimulus.
Among the largest Eurozone economies, the German economy recorded growth of 0.2 percent on a quarterly basis, while the Spanish and Dutch economies grew by 0.6 percent each, while the Italian economy recorded no growth, and the French economy contracted by 0.1 percent.
Although the euro zone's growth rate is less than half that of the US economy, the data is still much better than the pessimistic expectations that prevailed following the outbreak of war with Iran earlier in the year.
Europe is a net importer of energy, which makes the rise in oil prices quickly reflect a decline in growth, put pressure on companies’ profit margins, and lead to a deterioration in the region’s terms of trade.
But the euro zone performed better than expected in light of the uncertainty, as large spending on artificial intelligence, defense and infrastructure contributed to boosting investment, and strong external demand helped support the industrial sector, while families continued to spend, which led to a decline in their saving rate, which was already high.
This led to a series of upward revisions to growth expectations during the year, as most analysts now expect the economy to expand by more than 1 percent during the current year, with growth accelerating in 2027.
However, Friday's data was somewhat influenced by the Irish economy's exceptional growth of 5.5 percent quarter-on-quarter, a rate large enough to raise the euro zone's overall growth reading significantly.
Ireland's GDP is characterized by exceptional fluctuations, due to the presence of a large number of multinational companies, especially pharmaceutical companies, which have chosen the country as their headquarters for tax reasons.
Despite the ability of the eurozone economy to withstand this year, some parties, including the European Central Bank, fear that these favorable conditions will end soon.
Borrowing costs have risen sharply globally over the past two months, which will slow economic growth inside and outside the region.
In addition, renewed rising energy costs will put pressure on economic output, and household confidence may even fade as natural gas prices jump to their highest levels since the outbreak of the Russian war in Ukraine in early 2022.
This new jump in energy prices is likely to prompt the European Central Bank to raise interest rates again, perhaps as early as December, which will slow growth further.
