France's economy shrinks in the third quarter as inflation climbs back to its highest since late 2023

Two sets of figures landed on France on Friday morning, and both pointed the wrong way. The statistics office INSEE said gross domestic product fell 0.1 percent in the third quarter. Analysts polled by Reuters had expected a rise of 0.1 percent. The second quarter was flat, and the first quarter contracted by 0.2 percent, which leaves the euro zone's second largest economy one bad quarter from a technical recession.

Exports did the damage. They fell 1.7 percent in the quarter, a swing of 4.5 percentage points, driven by a 9.1 percent decline in transport equipment exports after a 20.8 percent jump the quarter before. Aerospace was the main negative driver. Investment fell 0.6 percent, extending a 0.5 percent decline in the second quarter, as construction and transport equipment spending dragged. Households kept spending. Consumption rose 0.4 percent, helped by electric vehicle purchases, and energy consumption rebounded 1.2 percent after a 2.0 percent fall. Consumption in September alone, though, dropped 0.5 percent, a month that ended in expanding protests.

Inflation accelerated at the same time. The harmonized rate, adjusted for comparison across the euro zone, reached 3.8 percent in October, as of October 30, the highest since late 2023 and above the 3.6 percent analysts had forecast. The national measure rose to 3.4 percent from 3.1 percent in September. INSEE pointed to energy prices, up 24.1 percent on the year, and to higher prices for accommodation and transport services. Food inflation eased slightly to 1.2 percent while services inflation rose to 2.7 percent.

Economy Minister Roland Lescure did not dress it up. The conclusion is that by 2026 the French economy is at a standstill, he told franceinfo, because of an unprecedented combination of external and internal shocks. He also said France is not heading for a crisis. The growth carryover at the end of the third quarter stood at 0.2 percent, which means GDP would have to rise 0.9 percent in the fourth quarter to reach the Finance Ministry's 0.5 percent target for the year. Borrowing costs rose again after the figures. The 10 year yield climbed 6 basis points to 4.944 percent, underperforming the rest of the euro zone.

The European Central Bank held rates on Thursday and hinted at a possible increase in December, with energy costs from the Iran war feeding inflation across the bloc. France enters that decision with a shrinking economy, the bloc's problem inflation reading, and a third consecutive Saturday of protests scheduled for October 31. Revised GDP figures arrive at the end of November.