France Outlook Lowered to Negative from Stable by S&P

On Feb. 28, 2025, S&P Global Ratings revised to negative from stable its outlook on the unsolicited sovereign credit ratings on France. At the same time, we affirmed our 'AA-/A-1+' unsolicited long- and short-term foreign and local currency sovereign credit ratings.

Outlook

The negative outlook on France reflects rising government debt amid weak political consensus for tackling France's large underlying budget deficits, against a backdrop of more uncertain economic growth prospects.

Downside scenario

We could lower the ratings on France if the government cannot reduce its large budget deficits further over the next two years, or if economic growth falls below our projections over a protracted period. For example, if the government dilutes the 2023 pension reforms significantly, this could create downward pressure on the ratings by increasing imbalances in France's social security system, a key component of general government finances.

Upside scenario

We could raise the ratings if France's budget deficit narrows much faster than we project and economic growth accelerates, leading to a downward trend in the net general government debt-to-GDP ratio.

Rationale

Institutional and economic profile: France's hung parliament is a barrier to fiscal and economic reform

The outlook for France's open economy is uncertain due to weak business and household confidence, elevated public and private sector debt, and increasing international trade protectionism.
Consequently, we have revised our GDP growth forecast for 2025 to 0.8% from our previous projection of 1.0%.
While France's minority government passed the 2025 budget, the prime minister may lack sufficient parliamentary support to implement more lasting fiscal and economic reforms.
Early parliamentary elections could be scheduled later this year.

With a GDP of $3.2 trillion, France is the seventh-largest economy in the world. Services--including information technology, healthcare, education, transportation, design, arts, real estate, and tourism--are equivalent to more than 80% of gross value added, and they dominate the French economy more than in other large European countries. A relatively smaller manufacturing sector could shield France from some of the corrosive effects of rising global protectionism on growth. Nevertheless, merchandise exports--including pharmaceuticals and aircraft--are important to France's balance of payments. Given the rising risk of U.S. tariffs on French exports, as well as softer global economic growth prospects, we now expect net trade to subtract about 0.3 percentage points (ppts) from headline GDP growth this year (after having been a key contributor to French GDP in 2024). We now project GDP growth of 0.8% in 2025, after 1.1% in 2024.

Despite this, we continue to project resilient public and private consumption, together making up nearly 80% of France's GDP. The government's budgetary consolidation plans are modest, with public spending projected to increase by about 1% in real terms in 2025. In addition, we expect further European Central Bank (ECB) rate cuts and contained energy prices to support household spending, although the outlook for investment activity is significantly weaker.

France's household savings rate at 18% of gross disposable income is among the highest in the OECD. Nevertheless, private sector leverage has been increasing, with the sum of corporate and household debt equivalent to 214% of GDP as of midyear 2024. This is well above the eurozone average, and 27ppts above where it was 10 years ago. A preference to reduce these high debt levels may weigh on private spending, although the ECB's monetary easing cycle will provide some relief.

While France's demographics are aging, they are doing so at a slower pace than most European economies. The overall rate of population growth is positive (+0.3% on average projected over the next half decade). Since 2017, net migration has averaged just under 160,000 per year, which explains 0.2ppts of France's 0.3% population growth trend--with the residual 0.1ppts representing the natural growth rate excluding immigration.

Economic and Monetary Union (EMU) membership provides France with a reserve currency, although it also imposes policy constraints on national policy makers. In particular, EMU membership rules out competitive exchange rate adjustments with France's most important trading partners (eurozone members account for 50% of all French trade). Constraints on France's monetary flexibility also restricts France's fiscal space, given that members of the monetary union do not pool fiscal risks. Instead, they operate national budgets, where spending and revenues are determined by nationally elected governments, and financing occurs via the issuance of national debt.

In February 2025, the minority government activated Article 49:3 of the constitution in order to pass the budget. Subsequently, the government survived two votes of no confidence, thanks to several key parties abstaining.

As part of his agreement with parliamentarians, prime minister Francois Bayrou said he is willing to reopen tripartite talks on the September 2023 pension reform, under the condition that any changes have a neutral impact on public finances. In our view, reversing the hard-won savings achieved via increases in the minimum contribution period and minimum retirement age would further worsen France's medium-term fiscal position. This poses a risk to France's sovereign credit rating.

The current political deadlock in the National Assembly may lead President Emmanuel Macron to call national elections as early as July 13 this year. Under the French Constitution, the president can also organize national referendums on policy proposals from the cabinet or parliament, although only five have taken place since 1969. If, going forward, the current government invokes Article 49:3 to approve legislation, it could trigger further votes of no confidence against Bayrou's government. Macron's term in office ends in spring 2027.

Flexibility and performance profile: Reversing the deterioration in public finances is a challenge for the next decade.

Passed without a parliamentary vote, the 2025 budget relies primarily on revenue increases to deliver budgetary consolidation of an estimated 0.4ppts this year.
In real terms, the 2025 budget implies a 1.1% increase in public consumption, leaving general government spending at just under 57% of GDP, the highest of all rated sovereigns.
France's external accounts are broadly in balance.

France's starting point for budgetary consolidation is weak. Two consecutive years of revenue shortfalls, local government overspending, and higher-than-expected social expenditures explain deviations from the government's fiscal targets in both 2023 and 2024. This fiscal slippage occurred despite the run-off of pandemic and energy-related emergency spending measures, and without any major economic shocks. As a result, the estimated 2024 general government budget deficit is about 6.0% of GDP, or about €174 billion, which is nearly €20 billion or 0.7% of GDP above the original target.

Against this backdrop, the 2025 budget represents a gradual approach to bring France's general government deficits to 3% of GDP by 2029. It relies primarily on a series of temporary tax surcharges on the corporate sector and high-income households. While the government is introducing some cuts to discretionary spending, including scientific research, education, foreign aid, and the Green Fund, these are relative to the baseline and not absolute. Due to increases in social spending (equivalent to 24% of GDP) in real terms, public consumption is set to increase by about 1% this year, with overall primary general government spending remaining roughly flat as a percentage of GDP (although, this also reflects higher expected interest spending as a percentage of GDP). We estimate the primary budget deficit (the overall deficit excluding interest payments) to be 3.3% of GDP this year, or more than twice the eurozone average.

With low clarity on fiscal policies beyond 2025, S&P Global Ratings projects a slow medium-term pace of budgetary consolidation, which is insufficient to result in a downward trend in debt to GDP. This is because France's cost of debt is gradually increasing and will likely equal the growth rate of the French economy plus inflation over the next few years. This implies France would need to operate a primary budget surplus to achieve a downward trend in the debt-to-GDP ratio. But France has not operated a primary surplus since 2001. Consequently, we project general government debt as a share of GDP will increase to 119% of GDP in 2028, from 111% in 2024. Net of liquid assets, general government debt is therefore in line to be just under 113% of GDP by year-end 2028.

France's government has been transparent about its fiscal challenges, conceding that public spending in France is 10% of GDP above the European average, mainly due to high social expenditure. It is setting up new spending control committees to review all government performance levels bimonthly. Nevertheless, without a mandate to adjust social benefits, which make up 44% of total general government spending and approximately 25% of GDP (closer to European averages of just under 20% of GDP), progress on reducing spending is likely to be slow. The next elections for municipalities are scheduled in 2026, which could derail ongoing efforts to curb local government spending.

France's debt profile insulates the budget from any immediate repercussions of higher refinancing costs. The average maturity of total debt (including bills) is 8.5 years, with inflation-linked debt makes up just 11% of the total on an accrued basis, especially since inflation remains low compared to targets. At current market rates, France's general government interest expenditure is projected to be 2.3% of GDP for 2025, increasing to 3.1% of GDP in 2028. If France's cost of new debt rises by a permanent 100 basis points compared to current market rates, interest expenditure as a percentage of GDP is estimated to increase by 0.4ppts after three years. This is due to lower-cost debt issued during the 2015-2021 period of quantitative easing being replaced by more expensive funding.

France's external position remains broadly balanced. In 2024, France's current account deficit narrowed to 0.4% of GDP versus 1.0% of GDP in 2023 on the back of lower energy prices and buoyant service exports. Although France's net international investment position means it is technically a net external debtor of about 25% of GDP, it has consistently earned net profits from this position since 1997. This suggests the economic and mark-to-market value of France's foreign direct investments abroad is significantly greater than their accounting value (which is based on the historical acquisition cost of these assets).

France's financial sector is large, resilient, and profitable, with limited exposure to the state. French banks' earnings should improve in 2025 as higher interest rates feed through, although such gains may be delayed until the second half of the year owing to declining new loan volumes. Large French banks enjoy good business diversity beyond retail and commercial banking, namely in insurance, asset management, investment banking, and specialist finance. Their significant fee income mitigates pressures on net income, typically resulting in stable and recurring earnings throughout business cycles, providing buffers to credit costs that will normalize rather than spike.

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