French output fell 0.1% in the third quarter when economists expected a small gain, and preliminary October inflation on the EU-harmonized measure came in at 3.8%. A day earlier the European Central Bank held rates while weighing an increase, and the euro touched a 17-month low.
The European Central Bank spent Thursday debating whether energy-driven inflation justifies higher rates. On Friday morning, the euro area's second-largest economy showed what that inflation is doing to growth.
France's gross domestic product fell 0.1% in the third quarter from the second, according to the statistics agency Insee, against forecasts of a 0.1% gain. Output was also 0.1% lower than a year earlier. Exports dropped 1.7%, and household consumption rose only 0.2%.
The same release cycle brought a second number pointing the other way. French inflation on the EU-harmonized measure rose to 3.8% in October on a preliminary basis, its highest level since December 2023. The national consumer price index rose 3.4%.
Shrinking and getting more expensive
Put together, the two figures describe the combination central banks like least. Output is contracting while prices accelerate, and energy costs are a likely common thread: they raise what households pay for fuel and heating and leave them less to spend on everything else. Consumption growth of 0.2% in a quarter is close to stalling, and an export decline of 1.7% suggests foreign demand did not make up the gap.
Surveys had warned of this. S&P Global's flash purchasing managers' index for France pointed to contraction earlier this month.
The ECB's dilemma, in one country
The ECB left its deposit rate at 2.50% on Thursday. Its statement said the energy shock was "likely to drive up inflation and lower growth" and that "financing conditions have tightened." At her press conference, President Christine Lagarde said the Governing Council had debated whether a hike was appropriate before deciding to hold.
France's numbers sharpen both sides of that debate. A contraction in a major member argues for caution, because a rate increase would land on an economy that is already shrinking. Inflation of 3.8% argues the opposite, because it suggests the energy shock is still feeding into prices.
Thursday's statement made the case that markets have done some of the tightening already. "Interest rates have broadly moved up," it said, which raises borrowing costs without any move from Frankfurt.
The currency
The euro fell to about $1.110 on Thursday, its lowest in 17 months, before recovering. It was at about $1.120 early Friday. A weaker euro raises the cost of oil and gas priced in dollars, which adds to the inflation pressure the ECB is trying to contain.
Stagflation risk or hiking case?
The caution case: France is contracting, consumption is barely growing, exports are falling, and the ECB itself says financing conditions are already tighter. Raising rates into that would add to the drag.
The hiking case: French inflation is at a three-year high, energy prices have not peaked, and an ECB that debated a hike on Thursday has a December meeting in which to deliver one if the regional data confirm the trend.
What comes next
The euro-area third-quarter GDP flash, due at 11 a.m. Central European Time on Friday, and the euro-area October flash inflation estimate on Nov. 4. After that: the ECB's Dec. 17 decision, the French-German bond spread, and the selection of a successor to Lagarde, who steps down on Feb. 7, 2027.