The French economy officially shrank by 0.1% in the first quarter of the year, from the fourth quarter of the last year. The new figure from the National Institute of Statistics and Economic Studies (INSEE) is less than the preliminary estimate, which had indicated no economic growth.

This unanticipated economic downturn is largely due to a huge decline in consumer spending. Fuel purchases were significantly cut due to soaring global energy prices, fuelled by the current war in the Middle East. Overall household spending therefore decreased by 0.2% in the quarter, undoing a 0.3% growth in the previous period.

Navigating Deficit Pressures and Sovereign Credit Reviews

The new economic figures are weighing heavily on the Government of France. Now, officials are trying to reduce billions of euros in government spending in order to shrink the state budget deficit. The national debt last year amounted to 5.1% of the gross domestic product (GDP), well above the Eurozone’s strict 3% ceiling imposed by Eurostat.

In response to this growing economic imbalance, the Ministry of the Economy, Finance, and Industrial and Digital Sovereignty is keenly pursuing new fiscal approaches. On top of that, France is waiting for a major review of its sovereign credit rating from the credit ratings firm S&P Global Ratings. The agency has already cut France’s credit to A+ last October, due to persistent threats posed by its high levels of public spending.

So far, despite the economy’s tightening up and the ongoing Middle East war, which has now been running for months, almost all economists believe the credit agency will retain its current rating of A+ for the time being.

The short-term economic forecast is very difficult. Additional data from the statistics office showed that consumer spending was continuing downwards, falling an extra 0.5% in April compared to the month before. At the same time, inflation climbed back to 2.4% in May from 2.2% in April, putting pressure on French households’ wallets.