Citi Research says France risks a drawn-out phase of weak domestic spending, subdued inflation and a difficult fiscal adjustment as structural changes in its labour market increase the economy's sensitivity to higher interest rates relative to other euro area countries.
In its note, the bank argues that the country's current fragility is not merely cyclical. Rather, it reflects deeper shifts that have left France notably "underpressurised" compared with peers in the currency bloc. While headline GDP growth has broadly tracked recent euro zone trends, the underlying domestic spending picture is weaker and inflation has persistently fallen short of the bloc average.
Inflation excluding tobacco has run about 1.2 percentage points below the euro area average over the past year, Citi notes, with the gap most pronounced in services - a sector closely tied to labour market dynamics.
Citi economist Michel Nies attributes much of this weakness to improvements in French labour-market functioning over the last decade. Reforms and structural changes appear to have lowered the economy's equilibrium unemployment rate, creating more spare capacity than commonly recognised. The result: unemployment declined markedly both before and after the pandemic without producing the wage inflation normally associated with tight labour markets.
That muted wage reaction has important implications for monetary policy transmission. When the European Central Bank began raising policy rates in 2022, France's lower inflation meant households and businesses were effectively facing higher real borrowing costs than counterparts elsewhere in the monetary union. Those relatively higher real rates have weighed on consumer spending and corporate investment.
Household deleveraging has reinforced this dynamic. Citi highlights that annual household credit flows averaged 2.4% of GDP between 2013 and 2019 but slowed to just 0.4% between 2023 and 2025. At the same time, savings rates in France have risen more sharply than in other parts of the euro area. Together, these patterns help explain why Citi estimates the contribution of domestic demand to growth has roughly halved since before the pandemic, driven in large part by weaker consumer spending and a slowdown in housing investment.
The bank frames the ongoing adjustment as a kind of internal devaluation: competitiveness improves through lower wage and price growth relative to trading partners rather than through a weaker currency. While such a shift can boost external balances and competitiveness over time, it typically does so at the cost of years of subdued domestic activity.
Complicating any policy response is France's fiscal position. Public debt remains elevated and financial markets have grown more reactive to the country's budget path. Citi warns that weaker nominal growth could make stabilising debt levels much harder. If subdued growth persists while borrowing costs rise, France would need materially tighter fiscal policy to prevent public debt from increasing further.
Yet the bank notes some tentative positives. Net exports have improved, productivity growth has shown signs of recovery, and headline GDP has held up better than the weakness in domestic demand alone would suggest. Additionally, rising European spending on defence, aerospace and strategic technologies could play to France's competitive strengths, providing sectoral support as the broader adjustment continues.
Despite these pockets of resilience, Citi cautions that the rebalancing process is likely to be protracted. The bank points to past instances of large-scale labour-market and structural adjustments elsewhere in Europe, noting that similar rebalancing efforts have historically taken years to deliver their full benefits.
Implications for markets and sectors
- Household balance sheets, consumer discretionary demand and residential real estate are likely to feel continued pressure as credit flows and spending remain subdued.
- Financial markets and sovereign spreads may be sensitive to fiscal trajectories given already elevated public debt and market scrutiny.
- Defence, aerospace and strategic technology sectors could see relative strength as European spending shifts toward those areas.
Overall, Citi's assessment presents a view of France that combines a structural labour-market reconfiguration, persistent low inflation and constrained fiscal space, producing an economic environment that will require extended adjustment and careful policy management.