French Economy Shows First Signs of Shock from Iran-U.S. Conflict

The Bank of France’s monthly business survey of roughly 8,500 firms (April 28-May 6) shows that the Iran-U.S. war is eroding France’s post-pandemic resilience. Industrial and construction output slowed in April and may fall in May, while services stagnated and anticipate contraction.

Bloomberg

France entered 2026 with modest growth and inflation near 2 %, a narrative of “remarkable resilience.” The sudden escalation of Middle-East hostilities lifted oil prices, raised raw-material costs and heightened uncertainty.

Reuters

Survey respondents reported a deceleration in industrial and construction activity, with 13 % of industrial firms citing supply difficulties. Price-increase expectations rose to their highest level since June 2022. Unemployment reached 8.1 % in Q1, the highest in five years, while underlying inflation stayed near 2 %.

Bloomberg

Chief economist Xavier Debrun said the economy’s resilience is being tested, noting the first signs of the shock. Governor Francois Villeroy de Galhau stressed that underlying inflation remains around 2 % and that the bank is monitoring propagation risk. The Bank of France also said uncertainty was so high it could not issue a growth forecast. Service firms, especially transport and logistics, reported squeezed margins due to fuel costs. The European Central Bank kept rates unchanged at its last meeting, while signaling a June hike.

Bloomberg

Economists surveyed by Bloomberg noted that the 8.1 % unemployment rate exceeds their forecast of a modest decline to 7.8 %, suggesting official optimism may understate labor-market stress.

Bloomberg

The main discrepancy lies between projected and actual unemployment. The survey also lacks detailed data on how energy-intensive services will cope with sustained higher fuel costs.

Reuters

• “The French economy’s resilience is starting to be put to the test,” — Xavier Debrun, Chief Economist, Bank of France

Bloomberg

• “From the start of this year our message was that France’s economy was remarkably resilient. Today we are seeing the first signs of the shock.” — Xavier Debrun, Chief Economist, Bank of France

Bloomberg

• “Today, underlying inflation is extremely well controlled, around 2% in France as in Europe, but we are watching the risks of propagation and that is where the central bank can act to guarantee inflation under control,” — Francois Villeroy de Galhau, Governor, Bank of France

Bloomberg

• “The Bank of France said there was so much uncertainty over the outlook that it could not provide its usual growth estimate for the quarter.” — Bank of France (Reuters)

Reuters

The ECB’s pending rate decision in June, upcoming French inflation and employment data, and the evolution of the Iran-U.S. conflict will shape policy responses. The June meeting will test whether the ECB raises rates as price expectations remain elevated.

Bloomberg