France inflation cools slightly, economy slips into contraction amid energy shock – Firstpost

France’s inflation eased marginally more than expected in May, but the country’s economy slipped into contraction in the first quarter as rising energy costs linked to the Iran conflict continued to weigh on Europe’s growth outlook.

Preliminary data released on Friday by France’s national statistics agency INSEE showed that the country’s harmonised inflation rate — adjusted for comparison with other euro zone economies — rose 2.8 per cent year-on-year in May, slightly below economists’ expectations of 2.9 per cent.

The increase was largely driven by higher energy prices, especially natural gas, underscoring how the energy shock rippling through Europe is continuing to feed into consumer costs despite broader signs of weakening demand.

Economists surveyed by Reuters had forecast inflation estimates ranging from 2.3 per cent to 3.1 per cent.

At the same time, revised GDP data showed France’s economy contracted 0.1 per cent in the January-March quarter, weaker than the preliminary estimate of flat growth and below market expectations of no growth.

The decline was driven mainly by a sharp fall in exports, which dropped 3.5 per cent after rising 0.9 per cent in the previous quarter. INSEE said weaker aeronautical exports weighed heavily on the economy, reflecting slowing global demand and growing disruptions across European industry.

The weaker-than-expected data adds to concerns that Europe is facing a prolonged period of weak growth and persistent inflation as energy prices surge following escalating tensions involving Iran.

Business activity across the euro zone contracted at its fastest pace in more than two-and-a-half years in May, according to a closely watched survey released on Thursday by S&P Global.

The euro zone composite Purchasing Managers’ Index fell to 47.5 in May from 48.8 in April, its lowest level since October 2023 and firmly below the 50-mark that separates growth from contraction.

France was among the weakest-performing economies in the bloc, with companies citing higher fuel and energy costs, weak demand and broader economic uncertainty as reasons for lower output.

The downturn is complicating the policy path for the European Central Bank (ECB), which is widely expected to raise interest rates again in June even as recession fears intensify.

Input cost inflation across the euro zone accelerated to its highest level in three-and-a-half years in May, while prices charged to customers rose at the fastest pace in 38 months, according to S&P Global data.

Analysts warned that inflation in the euro area could remain close to 4 per cent in the coming months if energy prices continue to rise.

Separately, the International Monetary Fund (IMF) warned that France faces mounting public finance risks as efforts to reduce its fiscal deficit continue to lag.

The IMF said France’s budget deficit narrowed to 5.1 per cent of GDP in 2025 but cautioned that current policies were unlikely to bring it below the European Union’s 3 per cent ceiling by 2029 without additional reforms.

The fund also warned that rising spending pressures linked to an ageing population, defence commitments and the energy transition could leave France more vulnerable to future market shocks.

It called for a credible multi-year fiscal strategy combining spending restraint with structural reforms, including changes to pensions, unemployment benefits and public-sector efficiency.

The warning comes ahead of France’s 2027 presidential election, where pension reform is expected to remain a politically contentious issue after the government suspended parts of a controversial increase in the retirement age last year.

The European Commission has already downgraded its growth outlook for the euro zone, forecasting economic expansion of just 0.9 per cent in 2026, down from an earlier estimate of 1.2 per cent.

Officials warned that if energy prices continue rising into late 2026, growth projections across the bloc could weaken even further, deepening fears of an extended economic slowdown across Europe.