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Investing.com -- S&P Global Ratings has revised its outlook on France’s ’AA-/A-1+’ credit ratings from stable to negative, citing concerns over the country’s weakening public finances. The decision was announced on February 28, 2025, following the approval of the 2025 budget by France’s minority government on February 5.
The 2025 budget relies heavily on temporary tax measures to achieve a deficit reduction of approximately 0.4% of GDP this year. However, the fiscal strategy beyond 2025 remains unclear. S&P Global Ratings has also predicted that France’s GDP growth will fall below 1% this year, which will further strain the fiscal outlook.
By 2028, the average cost of France’s debt is expected to equal nominal GDP growth. In order to reduce the debt to GDP ratio, France will need to operate a primary budget surplus, something it has not achieved since 2001. Due to these financial pressures and limited political support for reforms, the outlook on France’s unsolicited sovereign ratings has been revised to negative.
The negative outlook reflects the rising government debt amid a weak political consensus to tackle France’s large underlying budget deficits, set against the backdrop of uncertain economic growth prospects. S&P Global Ratings warned that the ratings could be lowered if the government fails to further reduce its large budget deficits over the next two years, or if economic growth falls below projections for an extended period.
On the other hand, the ratings could be raised if France’s budget deficit narrows faster than projected and economic growth accelerates, leading to a downward trend in the net general government debt-to-GDP ratio.
Despite the challenges, France’s economy, with a GDP of $3.2 trillion, remains the seventh-largest in the world. The services sector, including areas such as information technology, healthcare, education, transportation, design, arts, real estate, and tourism, make up more than 80% of gross value added. A relatively smaller manufacturing sector could potentially protect France from some of the negative impacts of increasing global protectionism on growth.
However, France’s minority government may lack the necessary parliamentary support to implement more lasting fiscal and economic reforms. Early parliamentary elections could be scheduled later this year.
The country’s public and private consumption, which together make up nearly 80% of France’s GDP, is projected to remain resilient. However, private sector leverage has been increasing, with the sum of corporate and household debt equivalent to 214% of GDP as of mid-2024. This is well above the eurozone average, and 27 percentage points higher than it was a decade ago.
The political deadlock in the National Assembly may lead President Emmanuel Macron to call national elections as early as July 13 this year. Macron’s term in office ends in spring 2027.
The 2025 budget, passed without a parliamentary vote, relies primarily on revenue increases to deliver budgetary consolidation of an estimated 0.4 percentage points 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 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, progress on reducing spending is likely to be slow.
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 due to declining new loan volumes.
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