French Economy Contracts in June: Disappointing PMI Data Alongside Stable Inflation Expectations

Private sector activity in France continued to contract in June, as reported by S&P Global on Monday. These figures, indicating weakness in both the manufacturing and dominant services sectors, signal a slowdown in the Eurozone’s second-largest economy. The flash Purchasing Managers’ Index (PMI) for France’s services sector in June stood at 48.7 points, down from 48.9 points in May, and below a Reuters poll forecast of 49.2 points. Any figure below 50 points indicates a contraction in activity, while above 50 points shows an expansion. The June flash manufacturing PMI also presented a similar picture, coming in at 47.8 points, down from 49.8 in May and below a Reuters poll which had forecast 50.0 points. The June flash composite PMI – which comprises both the services and manufacturing sectors – stood at 48.5 points, down from 49.3 in May and also below a Reuters poll forecast of 49.3 points. The manufacturing sector was impacted by excess stocks among clients, challenging market conditions, and order postponements. New orders fell for the thirteenth consecutive month, with factory orders experiencing the fastest decline since February.

Geopolitical tensions, such as uncertainty over tariffs and the conflict between Israel and Iran, further pressured business activity. Jonas Feldhusen, a junior economist at Hamburg Commercial Bank, stated that “the outlook is certainly clouded, as domestic demand for goods has weakened, as indicated by the decline in new orders.” He added that “while the ECB’s interest rate cuts, deregulation efforts at the EU level, and planned defense investments are likely to continue providing support to the manufacturing sector, uncertainties surrounding global trade and geopolitics – now further exacerbated by escalations in the Middle East – as well as global competition, are dampening the outlook.”

Inflation Expectations in France: Stability Looking Forward

Despite the signs of economic slowdown, French business leaders’ inflation expectations, both for one year ahead and three to five years ahead, remained anchored at 2%. This figure aligns with the central bank’s price stability objective. According to a quarterly survey of inflation expectations (defined as the increase in the consumer price index – CPI), conducted by the Banque de France between May 27 and June 4, the median perception of inflation among business leaders reached 2.0% in the second quarter of 2025, while the Consumer Price Index (CPI) rose by 0.7% in May, and the Harmonized Index of Consumer Prices (HICP) was at 0.6% in May.

In the second quarter of 2025, the median inflation as perceived by business leaders remained stable compared with the previous quarter, as did one-year-ahead expectations. Medium-term inflation expectations – three to five years ahead – have remained anchored at 2% for five consecutive quarters. The distribution of responses shifted towards lower inflation expectations than in the previous quarter: expectations of 1% or less rose by 4 percentage points (to 13% in the second quarter of 2025), while the “2%” category accounted for 43% of business leaders’ responses (up 5 percentage points compared with the first quarter). These data suggest that despite the current weakness in economic activity, business players maintain stability and confidence in the central bank’s ability to keep inflation managed in the long term.

Wage Expectations and Future Outlook

Beyond inflation expectations, business leaders in France anticipate that base wages within their firms will grow by less than 2% over the next year. The median wage expectation stood at 2%, similar to the three preceding quarters. However, here too, the distribution of responses leaned towards lower expectations: accordingly, expectations for base wages to grow by less than or equal to 1% increased by 8 percentage points (to 29% compared with 21% in the previous quarter). This figure, combined with anchored inflation expectations, indicates a moderating environment for inflationary pressures from a wage cost perspective.

In conclusion, the French economy faces clear challenges reflected in the contraction of private sector activity in June, driven by weakness in manufacturing and services and also impacted by geopolitical tensions. However, despite these challenges, business leaders’ inflation expectations remain stable and anchored at the 2% target for the short and medium term, which could provide the central bank with some flexibility in its interest rate policy. The complex picture of slowing demand on one hand and stable inflation expectations on the other will require careful economic management to navigate the French economy toward recovery amidst global uncertainties.