Moody's Warns France Likely to Miss 2026 Deficit Target Amid Political and Economic Challenges

Moody's rating agency forecasts that France will not meet its government's deficit target of 5% of GDP in 2026, instead predicting a slightly higher shortfall of 5.2%. The agency expressed skepticism about the government's budget projections, emphasizing that deficit reduction largely depends on increased revenues. However, it noted expenditures are expected to grow more than projected while real economic growth is likely to be just below GDP growth for 2026.

Moody's reaffirmed France's sovereign debt rating at Aa3 but maintained a "negative outlook" due to concerns about the tense political climate, which complicates efforts to reduce public spending and could undermine France's credit reliability. The French government faced difficulties passing the 2026 budget in the National Assembly, which lacks a majority, ultimately resorting to article 49.3 to adopt the budget without a vote. The upcoming 2027 budget debate is also expected to be contentious, unfolding less than six months before the spring presidential election, adding further political complexity.

Meanwhile, the broader French economy shows resilience, with 0.9% growth in 2025 and an expected 1% expansion in 2026. Inflation has fallen below 1%, considered a major economic achievement. Despite this, political and international uncertainties—including lingering tariffs from the US and tensions with China—are estimated to reduce growth by 0.5% of GDP. The European Central Bank's recent interest rate cut to 2% aims to stimulate investment, and France's real estate market is experiencing a recovery with a 35% increase in new loans in 2025.

However, the 2026 budget with a projected 5% deficit raises concerns about economic stability and potential European sanctions if fiscal discipline is not improved. Additionally, the rise in savings rates to record levels is currently dampening consumption, though it may support longer-term stability. Social spending priorities that favor seniors over youth also pose questions about sustainability.

In summary, France faces a complex economic situation in 2026 marked by modest growth and subdued inflation but challenged by political strains, rising public spending, and a budget deficit likely to exceed government targets. Moody's warning and economic indicators underscore the need for cautious fiscal management and political cooperation ahead of crucial budget decisions and elections.