The French economy stagnated once again in the final quarter of 2024, after only 0.4% growth in the third quarter, despite hosting the Olympic Games. Inflation has declined markedly, and we expect it to remain moderate in 2025. We expect ongoing political uncertainty in France, the prospect of increasing trade tensions, very subdued activity levels and easing inflationary pressures to keep the euro under pressure during the first quarter of 2025.

We then expect the euro to appreciate gradually from the second quarter onward, reaching US$1.05 by the end of 2025. Falling inflation and weakening activity levels are expected to allow the European Central Bank to cut rates further.

We project the ECB to cut rates by 125 basis points in 2025, with the deposit rate reaching a terminal rate of 1.75% by the end of 2025. The prospect of tariffs on goods exports to the US, and potential retaliatory measures by the EU, is a key downward risk to our forecast.

Public spending constraints

Real total construction spending in France has been falling since 2022 and in 2024 fell by an estimated 3.9%, signaling the weakest annual growth since 2009, excluding 2020. This reflects unfavorable economic and financing conditions that will continue to weigh on growth during 2025, with spending forecast to rise by only 0.2%. Expectations of a muted recovery are further reinforced by a weak pipeline of new work, while ongoing political and trade policy uncertainty will further dampen consumer and corporate confidence. A tighter fiscal stance will also likely constrain public spending on construction projects. These headwinds will add to ongoing challenges relating to the availability and cost of labor and materials, as well as stringent environmental regulations for new building projects.

Leading indicators such as the Hamburg Commercial Bank (HCOB) Purchasing Managers鈥� Index (PMI) compiled by S&P Global showed that the downward trend in construction activity continued at the start of 2025, although the pace of contraction eased to its weakest in 14 months. This was due to slower reductions in housing and commercial work, while civil engineering activity rose for a second successive month and at the quickest pace since May 2024.

As has been the case for the past three years, housing remained the worst-performing segment. The January survey showed that new orders continued to fall sharply amid fewer calls for tender, client hesitancy, and high borrowing costs, while input cost inflation quickened to a 16-month high. As such, French construction firms turned more pessimistic toward the outlook for the next 12 months.

Double-digit decrease

Residential building permit approvals were down by double digits in 2024, and this should lead to a further drop of 0.5% in residential construction spending during 2025. The termination of the Pinel rental investment program on Dec. 31, 2024, and a cut in the 2025 budget for the MaPrimeR茅nov鈥� program, dedicated to improving the energy efficiency of homes, will also weigh on housing demand and renovation activity. Although interest rates will continue to fall gradually over the year, this is unlikely to provide a significant boost to housing market activity until 2026, when growth is projected to improve to 2.4%.

In nonresidential structures, construction spending is estimated to have fallen by 2.2% in 2024 and a further decline of 0.3% is anticipated in 2025, as investors and developers remain cautious amid weak economic growth, tight financial conditions, high construction costs and a gradual increase in unemployment. Political uncertainty will also likely impact public-sector project delivery, while the prospect of trade tensions may further hinder investor confidence. An improvement in economic and financing conditions should then drive a rebound in growth to 1.9% in 2026.

The downturn expected in nonresidential structures during 2025 is also underpinned by a weak pipeline of new work. Recent data from INSEE showed that building permits (in terms of floor area measured in square meters) stagnated (0.0%) in France during 2024, while nonresidential construction starts in terms of floor area fell by 10.6% for the year compared with 2023. Manufacturing alone offers positive growth, driven by electrical equipment in the near term and chemicals and transportation equipment in the medium term.

Fiscal pressures

The French industrial construction segment is relatively small compared to office, commercial and institutional structures, which are weighing on the forecast. These segments experienced post-COVID recoveries in 2022 and 2023, but significantly retrenched in 2024. Weak consumer income growth deters investment in retail and hospitality, while fiscal pressures are inhibiting institutional growth. Health and social services may see some recovery by late 2025, but educational structures appear weak well into 2027.

Infrastructure construction spending likely fell 1.0% in 2024 amid constrained public finances. Spending growth should improve to 2.5% in 2025 and 3.0% in 2026, despite ongoing political uncertainty and tighter fiscal policy. The transportation infrastructure subsegment will post the highest growth in the near term, driven by road projects, as well as renovation and upgrades to rail infrastructure. The segment will additionally be supported by the 鈧�100 billion 鈥淔rance Relance鈥� recovery plan, announced in September 2020 to stimulate post-pandemic economic recovery. Of the total, 鈧�40.3 billion will be financed by the European Union for the country鈥檚 National Recovery and Resilience Plan (NRRP). The NRRP, which covers the 2021鈥�26 period, includes 鈧�4.4 billion for modernizing the railway network.

The segment will benefit from several railway projects, including the 鈧�25.0 billion Turin-Lyon high-speed link between France and Italy. The line will be 270 kilometres long and include the 57.5-kilometre Mont Cenis Base Tunnel, which will be the longest rail tunnel in the world. Construction is underway with the line expected to be operational by 2032. In addition, the Grand Paris Express project, which includes building 68 new stations and adding four lines with a total length of 200 kilometres around the French capital by 2031, will also provide a stream of work.

A few major contracts have been awarded since the start of 2024: a 鈧�700 million contract to upgrade more than 700 km of railway track and ballast throughout France by the end of 2030, as well as two contracts worth around 鈧�415 million to replace the track equipment for the Atlantique, Nord and Sud-Est high-speed lines and renovate 524 km of track across the entire French rail network.

Several transport projects, however, risk being scaled back or even cancelled after the Ecologist and Social group submitted a bill to the National Assembly to establish a moratorium on French road and motorway infrastructure projects to cut carbon emissions.