FX.co ★ Paris fixes labor market, but domestic economy gets trapped in weak demand

France’s economy risks becoming stuck for a long time in a phase of weak domestic demand, low inflation, and strict fiscal austerity. Analysts conclude that the current downturn is not cyclical but a deep structural one, leaving the French economy critically “under‑heated” relative to the rest of the eurozone.

Although France’s overall GDP growth broadly matches the European average, domestic consumption is lagging considerably. Over the past year, core inflation excluding tobacco was 1.2 percentage points below the eurozone’s average. Citi economist Michel Nis explains this paradox as a long‑term effect of structural reforms. Labor market improvement drove a sharp fall in unemployment but did not trigger the usual wage growth. As a result, when the European Central Bank began raising interest rates in 2022, French firms and households faced the highest real borrowing costs because of their low inflation.

Expensive credit quickly pushed households into a belt‑tightening mode. Annual household credit flows plunged from pre‑pandemic 2.4% of GDP to a negligible 0.4% in 2023–2025, while the savings rate rose sharply. Citi calls this process an “internal devaluation”: the country restores competitiveness by suppressing prices and wages rather than by weakening the currency. As a result, the contribution of domestic demand to growth has been halved.

The situation is compounded by massive public debt. Weak nominal growth and costly borrowing leave policymakers little room to maneuver, forcing them to prepare for even deeper budget cuts to reassure markets.

Despite the gloomy picture, the harsh adjustment is already producing some early benefits: France’s net exports are improving, and productivity is recovering. The country may also gain from a Europe‑wide rise in defense and aerospace spending. However, Citi warns that, as with past structural reforms in Germany and Southern Europe, the rebalancing process will take years.