French central bank sees growth outlook clouded by politics

PARIS (Reuters) -France's political instability could hold back growth in the euro zone's second-biggest economy by pushing consumers and businesses into retrenchment mode, the central bank said on Monday in a quarterly outlook.

This year the economy is on course to grow slightly better than expected a few months ago, but only because companies built up inventories in the first half and exports are expected to pick up in the third quarter.

The Bank of France forecast the economy would therefore grow 0.7% this year, raising its estimate from 0.6% in June. The INSEE statistics agency forecast 0.8% last week.

But after this year, the economy would regain momentum more slowly than expected in June as the re-emergence of political turmoil in recent weeks makes the outlook for spending cuts and tax increases highly uncertain.

The economy was now seen growing 0.9% in 2026 and 1.1% in 2027, the central bank said, trimming its forecasts from 1% and 1.2% respectively, due not only to political uncertainty but also less favourable international conditions, including a stronger euro and higher oil prices.

"The risks surrounding our growth forecast are tilted to the downside after 2025. Uncertainty about fiscal policy in 2026 could reinforce wait-and-see behaviour among businesses and households," the Bank of France said.

French inflation is expected to remain below 2% through 2027, among the lowest in the euro zone. It is seen averaging only 1% this year, before edging up to 1.3% in 2026 and 1.8% in 2027.

The unemployment rate is expected to hover close to its current level of 7.5%.

(Reporting by Leigh Thomas; Editing by Emelia Sithole-Matarise)