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Morning Edition · Saturday, October 31, 2026Published at 1:13 AM EDT · New York
France's Economy Shrinks 0.1% in the Third Quarter as Inflation Rises to 3.4%
Investment fell 0.6%, the economy has now contracted in two of the last three quarters, and energy costs are pushing Europe to reconsider the planned closure of refineries.
France's gross domestic product (GDP) fell 0.1% in the third quarter, according to INSEE, the national statistics agency. GDP was flat in the second quarter and fell 0.2% in the first. Economists polled by Reuters had expected growth of 0.1%. A 0.6% drop in capital investment drove the contraction, and household consumption rose 0.4%. Xinhua carried the same figures.
Prices are rising as output falls. Inflation reached 3.4% in October, up from 3.1% in September and the highest since January 2024. INSEE attributed the rise mainly to energy, which has risen for four consecutive months. RT quoted the French finance minister as saying the economy was "headed straight for a wall," and linked the figures to budget pressure and protests against President Emmanuel Macron's spending policies. RT is a Russian state outlet with an interest in presenting European economies as weak, but the INSEE figures it cites match those reported by Euronews and Xinhua.
The energy shock is also changing European industrial policy. OilPrice reported that European governments are seriously reconsidering their plans to phase down refining capacity. Those plans were part of the continent's goal of climate neutrality by 2050, and they left Europe more dependent on imported diesel and jet fuel when Gulf supply became unreliable.
Part of a tracked trend
Energy-Shock Austerity Meets the Street in Europe
As expensive energy pushes up living costs, European governments trying to cut deficits will keep facing mass, sometimes violent protest. The unrest will water down consolidation plans and raise political risk premia on high-deficit sovereigns such as France, a pattern that recurs with each budget round.
What this means
France is facing stagflation with a budget it cannot easily cut. Falling investment means the private sector has stopped committing capital, rising energy prices reduce real incomes, and the government has to reduce its deficit while voters protest. French government bonds and French banks are exposed through the spread over German debt. The European Central Bank cannot cut rates to help while inflation is rising. The precedent is the fall of Michel Barnier's government in December 2024 over its budget, which widened French spreads and left consolidation plans incomplete. The desk's read is that the 2027 budget will be diluted under street and parliamentary pressure within weeks, and that French spreads will widen further over the coming months as rating agencies review the outlook. That read is wrong if energy prices fall quickly after a US-Iran agreement, which would lower inflation and give Paris room to keep its fiscal targets.
What to watch
- The spread between French and German 10-year bonds. A wider spread would show that investors doubt the budget plan.
- Parliamentary votes on the 2027 budget. A forced passage or a censure motion would raise political risk.
- Formal decisions in Europe to delay refinery closures. Delays would show that supply security now outranks climate targets in European policy.
Observations to monitor, not financial advice.
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