French Outlook: Economic Resilience Despite Political Tension

2025 was marked by the US tariff regime imposed on both allies and adversaries, set against an ongoing recovery from the Covid-19 pandemic and the economic impact from the war in Ukraine. In our latest webinar Jean-François Robin, Global Head of Research and Hadrien Camatte, Economist for France, Belgium, Eurozone at Natixis CIB sat down with Dorothée Rouzet, Chief Economist of the French Treasury, to discuss how these developments have affected the French economy and how internal and external forces are likely to shape its performance in 2026.

The slate of tariffs announced by the Trump administration on 2nd April, dubbed “Liberation Day”, represents the greatest disruption to the global trade order of the 21st century, with the US accounting for 26% of global GDP. Amid escalating trade tensions, the EU ultimately settled on a 15% base tariff. However, the impact has not been uniform across member states.

Export-dependent states like Italy and Germany saw a stagnant year for GDP growth – with the latter reporting 0.2% – while France maintained steadier GDP growth of close to 1% supported by resilient consumption and business investment.

This divergence reflects differing levels of export dependency: exports to the US account for 3.8% of Germany’s GDP, compared to 1.8% in France. Furthermore, intra-Eurozone trade has contributed to France’s resilience, with more than half of French exports destined for other Eurozone countries. Current tariff levels are expected to cost France around 0.4% of GDP by 2026, below the Eurozone average. Notably, the full effect of the economic shock is yet to materialise, as inventory front-loading ahead of tariff implementation helped keep exports elevated during 2025.

Beyond resilience to negative shocks, France is also benefitting from positive Eurozone-wide developments. In this respect, cuts to the ECB’s base rate and rising defence expenditure are both supportive. The transmission of interest cuts is stimulating investment activity, shown in increased real-estate investments in Q3 of 2025. Meanwhile, Germany’s capital-intensive spending bill on infrastructure and defence is expected to provide a modest boost to economic activity across the EU.

Crucially, Rouzet suggests that investment is likely to remain robust, as economic activity is more sensitive to changing sources of uncertainty rather than the absolute level. This helps explain France’s resilience despite geopolitical turmoil and national political uncertainty in 2025.

Structurally, France’s response to the energy crisis in 2022 relied on costly tools but succeeded in containing inflation below peer countries, preserving wage competitiveness and consumption levels. Compared with much of the Eurozone, France has successfully absorbed external price shocks, however, internal fissures over how to balance the resulting fiscal deficit are complicating efforts to find a stable political footing.

Two sources of internal risk are exerting a drag on investment sentiment. Local elections scheduled for March of this year are expected to influence local investment strategies and construction activity, though the aggregate macroeconomic impact should remain limited. Longer-term, France is set to hold presidential elections in the spring of 2027, a prospect that will affect policy discussions over the coming year.

In the near term, delays on passing the state budget – which accounts for around half of public spending – are constraining government expenditure planning. A special law is currently in place to ensure continuity of the state, with hopes that the budget will pass by the end of January via designated constitutional tools: either through Article 49.3, which allows passage unless a parliamentary majority votes against it, or by governmental decree. Crucially, bringing the budget deficit down to 5% remains a red line to achieve fiscal consolidation.

Meanwhile, high public deficit will continue to dominate budget debates and presidential campaigning. While final figures for the 2025 deficit will be released in March, the Treasury forecasts 5.4% while Natixis CIB predictions strike a more optimistic outcome of 5.2%.

In either case, Rouzet explains, the French government remains committed to the EU framework of consistent, year-on-year reductions, with the aim of stabilising the deficit to below 3% by 2029. Meeting the target requires balancing the already high levels of public spending and taxation, with gradual adjustments designed to protect consumption and competitiveness. Spending reviews are underway to identify efficiency gains in all areas of public spending, while tax measures focused on wealthier households – rather than corporations – complement existing labour-market reforms aimed at improving France’s investment appeal.

Separately, pension reform remains a contested issue going into next year’s presidential elections. Suspended until after the election, the proposal to increase pension age from 62 to 64 would contribute to further deficit reduction. Despite the lack of consensus over pension reform, demand for French government bonds has remained stable, even during periods of heightened political uncertainty following the 2024 snap election.

This stability in bond markets signals investor confidence in France’s fiscal consolidation and the underlying strength of its economy, supported by a diversified sectoral base and skilled workforce. As the world’s second largest weapons exporter, France also stands to benefit from Europe’s growing preference for domestically sourced defence equipment in the face of weakening transatlantic ties.

France is uniquely positioned to benefit from the EU’s ambition to expand defence capacity and lower reliance on US imports. A multi-annual programming law, agreed in 2023, aims to increase defence spending by €3bn each year between 2024-2030, with president Macron having announced the effort will be amplified to €7bn in 2026.

The robust defence supply chain and competitive labour market mean this spending is likely to translate into effective investment. Industrial cooperation within Europe and economies of scale can generate significant spillover effects, with debt-funded defence investment supporting productivity gains across the wider economy.

In parallel, a surge in related research and development activity will further contribute to a pro-investment climate, complementing the ‘France 2030’ investment plan, which designates €54bn for vertical industrial policy in high growth sectors. Business creation data in high-value industries like tech, finance, and business services point to a healthy startup culture in the economy. The Treasury is further enabling investment by facilitating dialogues between investors and industry, and by targeting SME financing to build further supply chain resilience among second and third tier suppliers.

The success of energy policy in curbing inflation, alongside France’s resilience to the trade shocks of 2025, provides clear signals of underlying economic health. This is reflected in France ranking first in the EY’ FDI attractiveness barometer 2025, supported by a diversified skilled workforce, affluent consumers, and a high-quality infrastructure and reliable low-carbon energy supply.

As a leading defence manufacturer, France is strongly positioned to benefit from Europe’s increased defence spending in 2026. Economic risks are likely to remain concentrated on domestic political uncertainty, particularly around the reforms needed to meet the 3% budget deficit target – a challenge that is expected to remain a persistent source of uncertainty as the 2027 presidential election approaches.