Four consecutive quarters of falling corporate investment in France, declining profitability—its 2024 peak is now a memory—and households tightening their belts… yet we expect an economic rebound in 2026. The upturn should be driven by reduced trade uncertainty, a cyclical recovery in Germany, a (modest but real) pickup in construction, and a gradual normalization of household saving rates—i.e., stronger consumption. Exporters: despite everything, France remains a target market.
What does the failed confidence vote mean for exporters to France?
We do not expect a demand shock. In fact, even amid political turbulence, we see a steady improvement in 2026, reflected in GDP growth accelerating from 0.6% this year to 1.1% in 2026, aided by firmer domestic consumption.
A dose of realism: to stabilize the debt-to-GDP ratio without fiscal consolidation, France would need growth of about +2.3% to +2.4%—which is unlikely.
Political backdrop and budget path
The “rentrée” on the political stage began with another confidence vote after a budget impasse on the 2026 plans. Prime Minister Bayrou’s government did not survive, making the most likely scenario by year-end a weaker budget (EUR 20bn of savings versus the originally planned EUR 44bn).
Even so, we still expect a continuation of targeted spending reviews across public agencies, tighter control of healthcare outlays, lower transfers to local governments, and limits or removal of inefficient tax loopholes.
OAT spreads (French government bonds, 2–50 year maturities) will likely stabilize around 80–90 bps, and the 2026 budget deficit is set to be about –5% of GDP, even if the next government opts for a special law instead of a formal budget.
The worst case—new snap elections—has an estimated 15% probability. That could weigh on growth via tighter financing conditions (OAT spreads around 100–110 bps) and keep the deficit near –5.4% next year.
If French spreads were to rise to 100–120 bps, the ECB would likely slow or pause quantitative tightening (QT). A move toward 120–150 bps could trigger the Transmission Protection Instrument (TPI), pushing spreads back to the 80–90 bps range.
Growth so far: weak, but improving later
French GDP growth has been slow, held back by soft domestic and external demand. We estimate political uncertainty and tighter financing conditions (versus a “no dissolution of Parliament in 2024” baseline) shaved 0.2 pp off growth over the past year and added EUR 4bn to the deficit via lower growth and higher rates.
The U.S.–EU trade dispute and higher U.S. tariffs—from 1.3% to 13%—will further trim French exports by about EUR 5bn (–0.2% of GDP).
Looking ahead, we expect quarter-on-quarter GDP growth of +0.1% in Q3 and +0.2% in Q4 2025, with moderate domestic demand as the key driver. Households have been cutting goods consumption and raising savings. Corporate investment fell again in Q2 2025—the fourth straight quarterly decline—likely reflecting political uncertainty and higher business taxes. Corporate margins have dropped 1.4 pp from their 2024 peak to 31.4% of gross value added.
Allianz Trade forecasts
Allianz Trade projects GDP growth of +0.6% in 2025 and +1.1% in 2026. The 2026 recovery should be supported by reduced trade uncertainty, Germany’s rebound, a modest construction upturn, and a gradual normalization of household saving (i.e., stronger consumption). Risks to the 2026 outlook are skewed to the downside due to persistent political gridlock. Again, without fiscal consolidation, growth of +2.3% to +2.4% would be required to stabilize debt—a stretch.
Bayrou’s failed confidence vote: macro implications
PM Bayrou scheduled a confidence vote for 8 September to secure backing for an ambitious fiscal package totaling EUR 44bn (1.4% of GDP), intended to reduce the deficit from 5.8% in 2024 to 4.6% in 2026 (with 5.4% in 2025). Because almost half the package relied on tax hikes, it would have lowered 2026 growth by 0.6 pp and likely missed fiscal targets due to (1) overly optimistic assumptions for healthcare savings and tax collection and (2) a lack of a clear strategy for structural spending cuts needed to reach a –2.8% deficit by 2029.
Market reaction: long-term fiscal risk in focus
The 10-year OAT–Bund spread at ~80 bps is near fair value and in line with Allianz Trade’s forecast, at the upper end of the range since snap elections were announced in June 2024. More concerning is the absolute yield level, now the highest since 2009 at the very long end of the curve. Markets increasingly see France as a “non-core” issuer, closer to Italy; the spread could widen further depending on political developments.
Upcoming sovereign rating reviews include Fitch (AA-, negative outlook) on 12 September, Moody’s (Aa3, stable) on 24 October, and S&P (AA-, negative outlook) on 28 November.
Scenario table (pre-vote assumptions)
- Weakened budget (50% probability): Deficit 5.0% of GDP; GDP growth 1.1%
- Caretaker government, special law (30%): Deficit 5.1%; GDP growth 1.0%
- Snap elections (15%): Deficit 5.4%; GDP growth 0.6%
- Bayrou victory (5%): Deficit 4.9%; GDP growth 0.9%
Base case for 2026
Bayrou ultimately failed to win the confidence vote, as expected. The most likely outcome is a limited-scope budget, with OAT spreads around 80–90 bps and potential postponement of a full budget to early 2026 amid tough party negotiations. We expect about EUR 20bn of fiscal consolidation—roughly half of Bayrou’s plan. The drag on 2026 growth should be small; with easing financial conditions as market sentiment improves, private spending should hold up reasonably well.
The 2026 fiscal deficit should be about 5% of GDP (down from 5.5% this year). Public debt is likely to rise to 117% of GDP in 2025 and 119% in 2026. Interest costs should reach 2.5% of GDP in 2026 (EUR 77bn), up from 2.3% in 2025 (EUR 68bn). A softened budget would keep parts of Bayrou’s plan—at least partially—such as streamlining public institutions (spending reviews), tighter healthcare spending control, lower transfers to local governments, and curbs on inefficient tax breaks. It would likely exclude a blanket freeze of social benefits, the elimination of two public holidays, and a freeze of personal income tax brackets.
Alternative: special law (30% probability)
Opting for a special law (rather than a formal budget) would push OAT spreads to 90–100 bps. Even without a confidence vote, President Macron could ask Bayrou to remain as caretaker PM. Political deadlock would keep financial conditions somewhat tighter than under the weakened-budget scenario, but macro and fiscal outcomes would be broadly similar. Roughly half of Bayrou’s fiscal plan (EUR 20bn) could still be implemented. Growth would be slightly lower (+1.0%) and the deficit slightly higher (–5.1%) in 2026. This path would increase pressure for snap elections in 2026.
Low-probability stress: snap elections (15%)
Snap polls and acute political crisis would widen OAT spreads to 100–110 bps. Growth would slow to +0.6% in 2026 due to tighter financing and fragmentation. A caretaker government would likely rely on a special law (EUR 20bn consolidation). The deficit would remain around –5.4% of GDP amid weak growth and softer tax receipts. A Bayrou confidence-vote victory was the least likely outcome (5%), so the vote’s result is not a surprise.
ECB backdrop
TPI activation would require a much larger widening of French spreads. The ECB is unlikely to trigger TPI—which would amount to a return to QE. ECB Executive Board member Isabel Schnabel has stated that the recent widening in French spreads reflects country-specific issues, with markets rightly pricing higher risk premia given weaker fiscal fundamentals. Still, the “ECB put” implicitly caps spreads. If contagion spreads to other countries or market dynamics turn “disorderly” (TPI criteria), the ECB would not hesitate to act. In our view, a sharp move to 100–120 bps would likely prompt the ECB to slow or pause QT; 120–150 bps could lead to TPI activation, returning spreads toward 80–90 bps.
Sources: LSEG Datastream, Allianz Research (as cited in the original article).
