Both investment and exports drag down growth! France's GDP unexpectedly contracts in Q3, making fiscal consolidation even harder.

Title context: Both investment and exports drag down growth! France's GDP unexpectedly contracts in Q3, making fiscal consolidation even harder. Text: Amid multiple headwinds including soaring borrowing costs, violent protests, and political and budgetary uncertainty, the French economy unexpectedly contracted in the third quarter. Insee said GDP fell 0.1% quarter-on-quarter in Q3, worse than economists' expectations of 0.1% growth, due to continued declines in investment and a drop in exports. Q3 GDP also fell 0.1% year-on-year, worse than economists' expectations of 0.3% growth. French Economy Unexpectedly Contracts in Q3 The weak performance of the French economy revealed by the latest data is concerning. Previously, France was already the weakest major economy in the eurozone. In the first half, the French economy barely avoided recession amid weak domestic demand, declining investment, and heat waves that hit agriculture. And as fiscal risks and political instability make France the focus of attention across Europe, the sharp rise in global bond yields brings new challenges. A report released Friday showed that household consumption picked up slightly in Q3, growing 0.2%. But investment declined and exports fell 1.7%, causing trade to contribute negative 0.6 percentage points to GDP growth. Business investment has fallen every quarter this year. A separate monthly data release showed that for September alone, consumer spending unexpectedly fell 0.5%, after a similar decline in August. Economists had expected consumer spending to grow 0.1% in September. Protests over education funding and rising living costs escalated into street violence on October 17, with widespread looting and thousands arrested. Surveys show businesses are broadly adopting a wait-and-see approach, while a consumer confidence indicator fell to its lowest level in 13 years. This means weak consumer spending may persist. French Consumer Confidence Falls to Lowest Since 2013 The short-term outlook is also hardly reassuring. The minority government led by French Prime Minister Sbastien Lecornu is once again heading into a parliamentary standoff over austerity measures. Meanwhile, France's social and political situation remains turbulent, with next year's presidential election approaching and the far-right currently leading in the polls. French Finance Minister Roland Lescure said in an interview on Friday: "In 2026, the French economy will stall as unprecedented external and internal shocks converge. The economy must be restarted. We need to restore confidence, and to do that, passing a budget is essential, because it will allow us to lower interest rates." Insee officials said the French economy needs to grow 0.9% in Q4 to achieve the government's full-year growth forecast of 0.5%. To reach the statistics agency's own forecast of 0.4% growth for 2026, Q4 would need 0.5% growth. Economist Jean Dalbard said: "The French economy enters the final quarter without growth momentum, and the risks to the economy are clearly skewed to the downside. The French economy unexpectedly contracted 0.1% in Q3, while the market had expected 0.1% growth. Trade volatility explains why actual performance fell far short of expectations. More worrying is that investment has again fallen sharply, the third consecutive quarterly decline, and the impact of recently tightened financing conditions has not even had enough time to fully materialize." More critically, France's economic weakness will further increase the difficulty for the government to control the budget deficit. After lowering its GDP growth forecast to 0.5%, the French government has already abandoned its goal of slightly narrowing the budget deficit this year. Insee data shows that if the economy stalls in Q4, France's full-year economic output in 2026 will grow by only 0.2%. If controlling the budget deficit becomes more difficult, heightened concerns about France's debt problem may continue to push up French bond yields. This year, France's fiscal deficit ratio (the gap between fiscal spending and revenue as a share of GDP) is expected to reach 5.4%, far exceeding the EU's 3% cap. Meanwhile, the French government must not only finance the huge deficit but also bear an increasingly heavy debt interest burden, further pushing up the debt ratio. Earlier this month, the selloff in French government bonds reflected market concerns about its fiscal position. The root of France's debt problem lies in long-term fiscal deficits. For years, the French government has been accustomed to responding to economic and social crises by expanding public spending, but the massive welfare system makes spending cuts face enormous resistance, forcing two prime ministers to step down. For decades, France's fiscal spending has consistently exceeded revenue, and 2024 failed to reverse this situation. According to the 2027 budget draft published on October 1, the French government plans to implement about EUR54 billion in fiscal consolidation measures, involving pensions, healthcare, public spending and other areas, with the goal of reducing the fiscal deficit ratio to 5%. However, Intesa Sanpaolo economist Riccardo Bellesia noted: "Even if France achieves its 5% fiscal deficit target, its debt scale will continue to rise. Its weak point is who will fund this debt."