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The French economy risks becoming stuck in a prolonged period of weak domestic demand,
low inflation, and challenging fiscal consolidation. Structural changes in the labor market make the country more vulnerable to high interest rates than other eurozone members, according to Citi Research analysts.
In a research note published on Friday, Citi argues that France's economic weakness is not simply cyclical, but reflects a deeper structural shift that has left the country's economy underheated compared to other eurozone members.
While overall growth has been broadly in line with recent eurozone trends, domestic demand has lagged, and inflation has consistently remained below the eurozone average.
Excluding tobacco, inflation has been approximately 1.2 percentage points below the eurozone average over the past year, with the gap particularly noticeable in the services sector, which is closely linked to the labor market.
Citi economist Michel Nys noted that the weakness is partly explained by the improvement in the French labor market over the past decade. Reforms and other structural changes appear to have reduced the equilibrium unemployment rate in the economy, creating greater slack than is commonly believed.
As a result, unemployment fell sharply before and after the pandemic, without causing the kind of wage pressure typically associated with a tight labor market.
This made France particularly vulnerable when the European Central Bank began raising interest rates in 2022.
Because inflation in France was lower than in other countries in the monetary union, French households and businesses faced comparatively higher real borrowing costs, putting pressure on consumer spending and investment.
The process of household deleveraging reinforced this trend. Annual household credit flows averaged 2.4% of GDP from 2013 to 2019, but slowed to just 0.4% from 2023 to 2025, while the savings rate rose more sharply than in other eurozone countries.
Citi estimates that the contribution of domestic demand to economic growth has roughly halved compared to the pre-pandemic period, primarily due to weakening consumer spending and residential investment.
The bank describes this process as a form of "internal devaluation," in which competitiveness is enhanced through lower wage and price growth relative to trading partners, rather than through currency depreciation.
Such adjustments have historically helped economies improve competitiveness and external balances, but often at the cost of years of suppressed domestic activity.
France's fiscal position leaves policymakers with limited room to compensate for this weakness. Public debt remains high, and markets are becoming increasingly sensitive to the country's fiscal trajectory.
According to Citi, weak nominal growth could significantly complicate debt stabilization efforts. If growth remains subdued and borrowing costs rise, France will need a significantly tighter fiscal policy to prevent further debt growth.
Despite short-term challenges, Citi sees some signs that the adjustment is beginning to bear fruit. Net exports have improved, productivity growth has recovered, and overall GDP growth has proven more resilient than would have been expected based on weak domestic demand alone.