(Bloomberg) -- The Bank of France cut its domestic growth outlook just days after President Emmanuel Macron named the country’s fourth prime minister in a year, with the central bank citing the political upheaval as a drag on household and business confidence.
The central bank now expects only a 0.9% expansion in 2025 instead of 1.2% it predicted in September. Bank officials also cut its 2026 forecast by 0.2 points to 1.3%.
France’s deteriorating outlook adds to signals of the economic damage from a political crisis that began with snap elections in June and escalated this month to the collapse of the government and its plans to plug widening holes in public finances.
“Uncertainty has increased in the national and international environment,” Bank of France Governor Francois Villeroy de Galhau said Tuesday on RTL radio. “It’s not the recovery we hoped for and it’s true it’s a bit delayed to 2026, but neither is it the recession.”
Macron appointed centrist Francois Bayrou as prime minister on Friday to pick up the pieces of the 2025 budget plan and try to form a government that can bridge bitter divides at the National Assembly.
The new premier met with opposition parties for talks on Monday, including leftists and far-right leader Marine Le Pen who voted together to evict the previous administration from office. Le Pen said after the meetings that she was satisfied with the initial discussions, while Socialists said they were open to compromise.
Still, there is no clear path forward for Bayrou as he is far short of a majority in the fractured National Assembly to push through unpopular budget cuts that are required to rebuild investor confidence and pare a rising debt burden. In a sign of the country’s deteriorating fiscal situation, Moody’s Ratings downgraded France over the weekend in an unscheduled decision.
The Bank of France’s forecasts were finalized before the government collapse and the dismissal of a budget that was designed to bring the deficit to 5% of economic output next year from an estimated 6.1% in 2024. The country will rely on emergency legislation currently being debated in parliament to continue to function with taxes remaining unchanged and minimal spending from Jan. 1.
The central bank said that its analysis shows that relying on the emergency legislation would significantly increase the deficit in 2025, as well as increase income taxes by around €4 billion ($4.2 billion) euros. However, it said its working hypothesis is for a full budget early next year that could bring the shortfall to somewhere between 5% and 5.5% of economic output next year.
Villeroy said political parties must overcome their partisan interests to avert the risk of further relegation of France after its borrowing costs already slipped closer to Italy’s than Germany’s.
“For the credibility of France, to avoid this risk of gradual breakdown, is to have a budget that rounds to 5%,” Villeroy said.
The central banker warned that warned that even with less spending cuts and tax increases after political compromise, the economy would not necessarily get a boost given the acute doubts about finances.
“If we made less effort on the budget, usually we’d say that would stimulate the economy, but in fact it won’t because it will affect uncertainty with businesses that invest less and households that spend less,” Villeroy said. “Debt uncertainty is enemy number one for growth.”
The ongoing political upheaval in France has pushed investors to sell the country’s assets, driving up borrowing costs on 10-year sovereign debt over German equivalents. The closely-watched yield spread between the two countries rose to a 12-year high of 90 basis points in November, although it has since eased to around 80 basis points.
Business leaders are also sounding the alarm, warning that the real economy is already hurting with orders falling and investment and hiring projects on ice.
“This situation impacts business confidence,” Engie Chairman Jean-Pierre Clamadieu said in an interview with Francine Lacqua on Bloomberg Television Monday. “I hope that we will have in the next few weeks more certainties, and this will allow the business cycle to restart.”
--With assistance from Francois de Beaupuy.
(Adds comments from Bank of France’s Villeroy de Galhau from fourth paragraph.)
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