France's Economic Growth Faces Headwinds from Trade War
Published: March 12, 2025
France's economic outlook has dimmed as the anticipated impact of a global trade war exacerbates an already sluggish start to the year, according to the country's central bank.
Growth Forecast Slashed
The Bank of France has revised its 2025 growth forecast downward to 0.7% from the 0.9% projected in December. This signals the weakest annual expansion since the COVID-19 pandemic. The 2026 forecast was also slightly trimmed from 1.3% to 1.2%.
Key Factors Influencing the Downgrade
- Global Demand: Reduced estimates for global demand.
- US Tariffs: Heightened uncertainty due to escalating tariff threats from US President Donald Trump.
- Domestic Issues: A more sluggish French economy in recent months, compounded by a political crisis over the budget, which has undermined business confidence.
Uncertainty on the Rise
Bank of France Chief Economist Olivier Garnier emphasized the prevailing uncertainty: “The key word that sums up the situation is uncertainty. In December, uncertainty was mainly about the national situation as we were in peak uncertainty on the French budget. Today, uncertainty is firstly on an international level linked to what is happening with US tariffs.”
Trump's Trade Policies
The gloomier outlook comes as President Trump aims to overhaul the US economic model through punitive measures. The 25% tariffs on steel and aluminum imports, now in effect, have sparked concern in export-oriented Asian economies and immediate retaliation from the European Union and Canada.
Potential for Further Impact
Trading partners like France could face even greater challenges if Trump implements broader levies on the EU.
Limited Scope of Current Estimates
The Bank of France's estimates only account for the direct consequences of known measures at the time of forecasting, also calculating indirect effects from threats against Mexico, Canada, and the EU.
Garnier noted, “There is an indisputable impact if measures are indeed applied, but the size will depend on targeting and duration. As we’ve seen, sometimes measures are taken then withdrawn within 24 hours.”
Risks and Potential Upsides
The Bank of France highlighted several risks to its forecasts, particularly concerning trade tensions and the EU's potential responses. However, there are potential upsides for France, including increased defense spending proposed by the European Commission and Germany.
Fiscal Targets
Garnier also suggested that the lower growth forecast for the year may not necessarily compromise the government’s fiscal targets, as domestic consumer spending, a significant source of tax revenues, is expected to remain stable.
Inflation Forecast
The central bank has also adjusted its inflation forecast downward for the year, citing softer services and a reduction in regulated power tariffs. It now projects annual price increases of 1.3% in 2025 and 1.6% in 2026, down from previous estimates of 1.6% and 1.7%.
Key Takeaways
- France's economic growth forecast for 2025 has been cut to 0.7% due to global trade war concerns.
- Uncertainty surrounding US tariff policies is a major contributing factor.
- The Bank of France has also reduced its inflation forecast for the coming years.