France Faces Long Road to Economic Rebalancing as Weak Demand and High Rates Weigh, Says Citi

France may remain stuck in a prolonged period of weak domestic demand, low inflation, and fiscal challenges as structural shifts in its labor market make the economy more vulnerable to high interest rates than other eurozone countries, according to a recent Citi Research report.

Citi argues that France’s economic difficulties are not merely cyclical but reflect deeper structural changes that have left the economy operating below potential compared to its eurozone peers. Although overall GDP growth has broadly matched trends across the currency bloc, domestic demand has been significantly weaker, while inflation has consistently remained below the eurozone average.

Over the past year, France’s inflation rate excluding tobacco has averaged around 1.2 percentage points below the eurozone average. The gap has been particularly noticeable in the services sector, which is closely linked to labor market dynamics. Citi economist Michel Nies noted that labor market reforms implemented over the past decade have likely reduced France’s equilibrium unemployment rate, creating greater economic slack than many analysts recognize.

As unemployment declined before and after the pandemic, wage growth remained relatively subdued, preventing the inflationary pressures typically associated with a tight labor market. This dynamic became more pronounced after the European Central Bank began raising interest rates in 2022. Because inflation has remained lower in France than elsewhere in the eurozone, households and businesses have faced higher real borrowing costs, dampening spending and investment activity.

Household deleveraging has further contributed to the slowdown. Annual household credit flows, which averaged 2.4% of GDP between 2013 and 2019, dropped to just 0.4% between 2023 and 2025. At the same time, savings rates increased more rapidly than in many neighboring economies.

Citi estimates that domestic demand’s contribution to economic growth has fallen by roughly half since before the pandemic, driven largely by weaker consumer spending and reduced housing investment. The bank describes this process as a form of “internal devaluation,” where competitiveness improves through slower wage and price growth rather than currency depreciation.

While France’s fiscal constraints limit policymakers’ ability to stimulate growth, Citi sees encouraging signs emerging. Net exports have improved, productivity growth has strengthened, and overall economic growth has proven more resilient than weak domestic demand alone would suggest. France could also benefit from rising European investment in defense, aerospace, and strategic technology sectors where it maintains strong competitive advantages.

However, Citi cautions that the adjustment process is likely to take years. Drawing comparisons with Germany’s labor market reforms and southern Europe’s post-financial-crisis recoveries, the bank believes France’s economic rebalancing will be gradual, with long-term benefits potentially offset by an extended period of subdued domestic activity.