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France Set for Modest Year-End Growth Despite Political Turmoil

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France’s economy is poised to grow 0.2% in the fourth quarter of 2025, supported mainly by strong industrial activity, according to the Bank of France’s latest business sentiment survey. Although slower than the 0.5% recorded in the previous quarter, the country remains on track to meet or potentially exceed the government’s full-year growth target of 0.8%, showing resilience despite ongoing political instability.

The central bank’s survey of around 8,500 companies between Nov. 26 and Dec. 3 revealed that industrial performance continues to surpass expectations for the sixth straight month. Production of computer, electronic and optical goods led the surge, while automotive and agro-food sectors also showed renewed strength, broadening the industrial recovery.

In contrast, services and construction have remained mostly flat heading into December. Businesses expect industrial activity to continue growing, though at a slower rate, while services and building activity are forecast to show little change. Despite the political challenges facing minority governments in passing budgets, the industrial sector remains the backbone of France’s near-term economic momentum.

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Eurozone cuts interest rate for first time in 5 years

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The European Union has become the second major economy this week to reduce its lending rate, indicating progress in addressing inflation. The European Central Bank (ECB) cut its main interest rate from a record high of 4% to 3.75%, following Canada’s decision to lower its official rate on Wednesday. This decision coincides with EU-wide elections, reflecting public discontent over living costs.

ECB President Christine Lagarde stated that the inflation outlook has significantly improved, allowing for the rate cut. However, she cautioned that inflation would likely remain above the 2% target “well into next year,” averaging 2.5% in 2024 and 2.2% in 2025. Lagarde emphasized that the ECB would maintain a restrictive interest rate policy as needed to achieve the 2% target, without committing to a specific rate trajectory.

Lindsay James, investment strategist at Quilter Investors, noted that the rate cut was anticipated but still a relief for European consumers and businesses. She mentioned that the ECB’s move precedes potential cuts by the Bank of England and the US Federal Reserve, providing needed economic stimulus.

Despite a slight increase in inflation in May to 2.6% from 2.4% in April, the ECB decided to reduce rates. This follows Canada’s reduction from 5% to 4.75% after their inflation fell to 2.7%. Sweden and Switzerland have also made similar rate cuts.

Lagarde provided a positive economic outlook for the eurozone but warned of challenges such as geopolitical tensions and climate-related risks that could impact growth. Katherine Neiss, chief European economist at PGIM, expressed confidence in further ECB rate cuts over the summer or autumn, potentially lowering eurozone rates to 3.5% or less by year-end. She cited sluggish economic recovery, slowing inflation, and easing wage growth as justification for additional cuts.

In the UK, speculation exists that the Bank of England might reduce rates as early as this month, with inflation down to 2.3% from its peak over 11% in late 2022. The International Monetary Fund recommended cutting UK rates from 5.25% to 3.5% by year-end. However, George Godber from Polar Capital suggested that the upcoming UK election could complicate the Bank’s rate decision on June 20, as political considerations might influence the outcome.

The US Federal Reserve is also expected to reduce rates soon, with the current US inflation rate at 3.4%. Godber predicted that the Fed would act before the November election.

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