We have started the year with plenty of economic action for us to get our teeth into. One subject brings several of my themes into play and that is La Belle France. We can start with this morning’s PMI business survey.
France’s services economy stagnated during December, according to the final HCOB PMI® survey of the year, rounding off a flat fourth quarter (on average) for business activity across the sector. This was also the case for new orders, with demand for services seeing virtually no change since November.
Is stagnation worse than flat? I guess that is for those who somehow manage to believe that this survey is accurate to a decimal point. But the main message here is of no growth and that is reinforced by the new orders update suggesting the same ahead. For those who want the quarterly breakdown it is below.
The seasonally adjusted HCOB France Services PMI Business Activity Index — which measures changes in the volume of business activity compared with one month previously — recorded 50.1 in the final month of 2025. This indicated broadly unchanged output levels across France’s service sector following the first expansion for 15 months in November (51.4). For the fourth quarter as a whole, the headline index averaged 49.8, indicating a broadly flat final three months of the year.
So there was no economic growth in the private-sector and this matters because we know that policymakers at the ECB are keen watchers of this series. For newer readers both ECB President Christine Lagarde and Dr.Isabel Schnabel reference it regularly.
“Business activity in the services sector stalled at year-end. As anticipated, the surprisingly strong November figures now appear to have been a temporary anomaly. Alongside weaker activity, new orders disappointed, particularly export orders, with panellists citing subdued demand from the US market.”
We can stay with the ECB theme because if you add in the pricing power below that means that if the Bank of France had independent control of interest-rates it would cut them.
“The sluggish economy is evident in pricing dynamics. Services firms have little pricing power and, in some cases, are resorting to discounts to support sales. This is squeezing margins, as input costs remain elevated, driven primarily by persistent wage pressures.”
Consumer Inflation
The theme of what would the Bank of France do if it could set interest-rates just for France? Got further reinforcement from the official inflation release earlier.
Year-on-year, the harmonized index of consumer prices is projected to rise by 0.7% in December 2025, following a 0.8% increase in November. Month-on-month, it is expected to rebound slightly by 0.1%, after a 0.2% decrease the previous month.
For those wondering about the name then the HICP is what we call CPI in the UK as we imported it when Gordon Brown was Chancellor. In terms of detail the French have their own CPI which is not the same but as it happens is at similar levels.
Consumer prices are projected to rebound slightly by 0.1% in December 2025, following a 0.2% decrease in November. This price increase is attributed to the seasonal rebound in service prices, particularly transportation, and to a lesser extent, a slight rise in food prices. Conversely, energy prices are expected to fall, as are those of manufactured goods. Tobacco prices are projected to remain stable.
The decline in energy prices is essentially crude oil and looking at the overall picture that remains true. Brent Crude Oil is up a bit more than one dollar since yesterday but whilst that is awkward for the proliferation of new experts that appeared across the media since the weekend the overall strategic position in terms of inflation is similar.
This would have an independent Bank of France flying out of the starting blocks like it was Usain Bolt. Whilst in theory it should be looking 18/24 months ahead in practice we have seen central bankers press the panic button time and time again when confronted by such numbers. In fact if we look at the projections released the day before Christmas Eve their forecasts back it up.
Inflation should remain below 2% over the projection horizon. After the figure of 2.3% recorded for 2024, average annual headline inflation (HICP) is expected to bottom out in 2025 at 0.9%, driven down by the sharp decline in energy prices in the wake of the fall in regulated electricity and oil prices. It should then rise to 1.3% in 2027, and to 1.8% in 2028. Inflation excluding energy and food – mainly caused by services inflation – is expected to remain broadly stable over the projection horizon (i.e. at around 1.6% to 1.7%).
Forecasts below the target are a code for expected interest-rate cuts which is why I have emphasised that sentence. That theme does to some extent continue if we now switch to policy across the Euro area as ECB forecasts are essentially in line with the target. But it is somewhat harder for Bank of France President Francois Villeroy to really press for interest-rate cuts.
Fiscal Problems
Le Figaro published an interview with the Governor of the Bank of France on Friday and we learn a fair bit just from the question in this area.
At this stage of the budget review, Bercy estimates the deficit at 5.3% of GDP next year, which is virtually unchanged from 2025… Do we need a “whatever it takes” budget?
As you can see we are in the arena of what Taylor Swift would describe as “Trouble, Trouble, Trouble”. The reply indulged in some wishful thinking.
We’ve already tried the “whatever it takes” approach! No, it is imperative that the budget helps to get our public finances back in order. We must honour our commitment to reducing the deficit from 5.4% of GDP in 2025 to 3% in 2029: not only for the sake of our European partners, but because this is the level that will finally stabilise the debt-to-GDP ratio.
This is another factor which suggests interest-rate cuts. Because if France did enact such relative austerity then it would have a contractionary effect on the economy.
Plus my theme that politicians in the West have lost control of fiscal policy gets another boost as the Governor confesses he cannot see even a minor trim this year.
To get a quarter of the way towards 3% this year, I argued that the deficit should be reduced to 4.8%. At this stage of the parliamentary debate, that figure unfortunately seems unattainable.
I note that the interview avoids the issue of the National Debt which I am sure was deliberate. According to Insee central government is 94% of GDP and local government 9% with social security at 9.8%.
We did however get some analysis of the running cost of all of this.
Otherwise, our country will succumb to fiscal suffocation: every year, approximately EUR 7 billion more is swallowed up by interest payments on our debt – that’s EUR 70 billion over ten years that we no longer have available to spend on education, our security or the digital economy.
The ten-year yield at 3.57% is rather expensive when you compare to being paid to borrow as France often was back in the Covid pandemic.
Comment
This looks like being a rough 2026 for France and let me remind you that the official 2025 GDP figures pulled a couple of rabbits ( exports and inventories) out of the hat. Even Le Figaro is wondering what is going on?
Dark clouds are gathering, yet the Banque de France has raised its growth forecast for 2025 and 2026. How do you explain this astonishing resilience?
That word resilience again……
On the upside France does at least have its nukes and on a day where wind power has fallen and UK wholesale electricity prices are soaring it will be grateful for them.
