France Faces Sharp Economic Downturn as PMI Data Reveals Deepest Contraction Since Spring Crisis

France’s economy is experiencing its most severe contraction in five months, with both manufacturing and services sectors declining sharply in September 2025, according to the latest S&P Global Purchasing Managers’ Index (PMI) data released on Tuesday. The deterioration marks a sobering end to what had appeared to be tentative stabilization over the summer months, raising fresh concerns about the eurozone’s second-largest economy amid persistent political uncertainty and weakening global demand.

The HCOB Flash France Composite PMI Output Index plunged to 48.4 in September from 49.8 in August, marking a five-month low and the sharpest rate of contraction since April’s crisis period. A reading below 50 indicates economic contraction, and the September figure represents a significant reversal from the modest recovery signals observed during the summer.

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Manufacturing Sector Bears the Brunt of Economic Weakness

The manufacturing sector experienced the most dramatic decline, with its headline PMI dropping sharply to 48.1 from 50.4 in August – its lowest level in three months. The manufacturing output index suffered an even steeper fall, plunging to 45.9 from 49.8, reaching a seven-month low that underscores the severity of the industrial downturn.

This sharp reversal is particularly concerning given that France’s manufacturing PMI had shown tentative signs of recovery in August 2025, reaching 49.9 – its highest level since January 2023. The rapid deterioration suggests that structural headwinds, including U.S. tariff pressures, supply chain disruptions, and cost inflation, continue to severely impact sector competitiveness.

French manufacturers are grappling with a complex web of challenges. The eurozone’s inflation environment has stabilized at around 2.0%, but services and food inflation remain elevated, creating a dual inflationary burden that squeezes manufacturing margins. Raw material costs continue to pressure producers, while service-sector expenses including logistics and labor have maintained upward momentum.

The sector’s struggles are compounded by ongoing global trade tensions. Earlier analysis of France’s manufacturing challenges highlighted how the sector has been mired in its thirteenth consecutive month of contraction as of June 2025, driven by weak domestic demand, shifting export dynamics, and geopolitical headwinds affecting traditional trade relationships.

Services Sector Joins the Downturn

The services sector, which had shown relative resilience compared to manufacturing throughout much of 2025, also weakened significantly in September. The services PMI slipped to 48.9 from 49.8, marking a two-month low and confirming that economic weakness is now broad-based across France’s economy.

This deterioration is particularly significant because services had been viewed as a potential anchor of stability for the French economy. Previous analysis had identified certain service subsectors – particularly tech-enabled services, logistics, and digital infrastructure – as defying broader economic trends and proving resilient to the manufacturing downturn.

The services decline suggests that the economic malaise has spread beyond traditional manufacturing sectors to impact the broader economy, including consumer-facing businesses and business services providers. This broad-based weakness indicates that the factors driving economic contraction – including political uncertainty and weak demand – are affecting multiple sectors simultaneously.

Persistent Weakness in New Orders Signals Deeper Problems

The underlying driver of France’s economic contraction remains subdued customer demand, with total new orders falling for the sixteenth consecutive month. This extended period of declining orders represents one of the most concerning aspects of the current economic situation, as it suggests that the weakness is not merely cyclical but reflects deeper structural issues affecting French competitiveness and market appeal.

“After signs of stabilization in the French private sector over the summer months, the September data has brought a sobering reality check,” said Jonas Feldhusen, an economist at Hamburg Commercial Bank. “Economic activity in France has weakened more sharply than at any point since April.”

The persistent decline in new orders across both manufacturing and services suggests that French businesses are losing market share both domestically and internationally. This trend is particularly problematic as it indicates that the current economic weakness may be more entrenched than initially anticipated, potentially requiring more substantial policy interventions to address.

Political Uncertainty Weighs Heavily on Business Confidence

France’s economic challenges are being significantly exacerbated by ongoing political uncertainty that has persisted throughout 2025. The country has experienced considerable political turbulence, including the dissolution of the French National Assembly in June, subsequent legislative elections over the summer, and multiple government changes.

The political instability reached a new crescendo in September with Prime Minister François Bayrou’s failed confidence vote on September 8, 2025, leading to the collapse of his minority government. President Emmanuel Macron subsequently appointed Sébastien Lecornu as the new prime minister, but the political situation remains highly fragmented and uncertain.

This political volatility has created a challenging environment for business planning and investment. Companies are hesitant to make significant capital expenditures or expand operations when the policy framework remains unclear and subject to frequent changes. The Bank of France recently trimmed its growth forecasts, warning of downside risks from budget uncertainty following the government collapse.

Business confidence has been further undermined by uncertainty over future budget adjustments, including potential tax increases for both businesses and households. The new government’s goal is to reduce the deficit to 5.4% of GDP in 2025, down from an expected 6.1% in 2024, but achieving this target will be challenging in the context of weak economic growth.

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Pricing Pressures Reflect Competitive Challenges

The PMI data revealed that French companies reduced their charges for the first time since May, despite experiencing a softer rise in operating costs. This pricing dynamic reflects the intense competitive pressures facing French businesses and weak underlying demand conditions that prevent companies from passing through cost increases to customers.

The inability to maintain pricing power indicates that French companies are struggling to differentiate their products and services in competitive markets. This trend is particularly concerning as it suggests that margin pressures will continue to build, potentially leading to further business failures and employment reductions if demand conditions do not improve.

The combination of rising input costs and falling output prices creates a particularly challenging environment for French businesses, potentially leading to reduced profitability and constraints on future investment and hiring decisions.

Employment Market Shows Mixed Signals

Despite the broader economic contraction, employment in the private sector rose for the second consecutive month, albeit marginally. This seemingly contradictory trend suggests that labor market adjustments may be lagging the broader economic downturn, a pattern that could indicate more significant employment impacts in coming months if economic conditions continue to deteriorate.

The European Commission’s forecasts suggest that employment is expected to decline by 0.2% in 2025 before bouncing back in 2026. The unemployment rate is projected to increase to 7.9% in 2025 and decline only marginally in 2026, reflecting the challenges facing the French labor market.

The modest employment growth in September may reflect businesses’ reluctance to make immediate staffing cuts in the face of uncertain conditions, but it also suggests that labor market conditions could deteriorate more sharply if economic weakness persists or deepens.

Broader Economic Context and Fiscal Challenges

France’s current economic challenges are unfolding against the backdrop of serious fiscal constraints. The government deficit is expected to have reached 6.1% of GDP in 2024, significantly higher than earlier forecasts, while public debt is projected to increase to 118.4% of GDP by 2026 from 113% in 2023.

These fiscal pressures limit the government’s ability to provide economic stimulus to counteract the current downturn. Instead, the focus has been on fiscal consolidation measures that, while necessary for long-term sustainability, may contribute to near-term economic weakness by reducing public spending and potentially increasing taxes.

The European Commission projects that French economic activity will decelerate strongly to 0.6% growth in 2025, held back by fiscal adjustment and trade-related uncertainty, before picking up to 1.3% in 2026 as investment recovers and higher real wages support private consumption expansion.

Financial Market Reactions and European Context

The political and economic uncertainty has already manifested in financial markets. French 10-year bond yields surged to 3.508%, widening the spread over Germany’s Bund to 76 basis points – levels not seen since the 2012 eurozone debt crisis. Credit default swaps on French debt now trade at 120-150 basis points, signaling heightened default risk perceptions among investors.

The OAT-Bund spread – which tracks the yield gap between French and German 10-year government bonds – has become a key barometer of political risk in France, with strategists expecting continued volatility until political stability is restored.

As the eurozone’s second-largest economy, France’s political paralysis risks deepening the core-periphery divide within the European Union. The implications extend beyond French borders, with potential spillover effects on other eurozone members and broader European economic confidence.

Policy Response and Central Bank Considerations

The European Central Bank faces a challenging balancing act as it considers monetary policy responses to economic weakness while managing inflation concerns. The ECB decided on October 17 to lower the deposit facility rate by 25 basis points to 3.25%, marking the third rate cut, with indications that further reductions may follow.

Bank of France Governor François Villeroy de Galhau emphasized that monetary easing creates favorable conditions for the fiscal consolidation needed in countries including France, but acknowledged that economies are “navigating increasingly uncertain waters” in what he termed a more “Knightian” world of unmeasurable uncertainty.

The ECB retains significant firepower to address excessive widening of eurozone government bond spreads through tools such as the Transmission Protection Instrument (TPI), though activation would require careful consideration of fiscal compliance and broader eurozone stability implications.

Outlook and Strategic Implications

The September PMI data suggests that France’s economic challenges are deepening rather than stabilizing, with both cyclical and structural factors contributing to the downturn. The combination of political uncertainty, fiscal constraints, and global economic headwinds creates a particularly challenging environment for recovery.

ING economists expect GDP growth to reach just 0.6% in 2025, down from 1.1% in 2024, as political instability continues to cloud the economic outlook. The modest expansion earlier in 2025 was driven almost entirely by inventory accumulation, masking underlying stagnation in private consumption and contractions in investment and net exports.

The path forward requires addressing both immediate stabilization needs and longer-term structural challenges. While the existence of European support mechanisms should help prevent a full-blown crisis, the current trajectory suggests that France faces a prolonged period of economic weakness unless political stability can be restored and structural reforms implemented to enhance competitiveness and restore business confidence.

The September PMI data serves as a stark reminder that France’s economic challenges cannot be addressed through monetary policy alone and will require coordinated political and fiscal responses to restore growth momentum and stability to the eurozone’s second-largest economy.

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By: Montel Kamau

Serrari Financial Analyst

23rd September, 2025