French central bank maintains Q1 growth forecast at 0.2-0.3%, warns outlook could be reduced due to Middle East conflict; Bank of France uncertainty indicator jumps on Iran war

The Bank of France has maintained its first-quarter growth forecast for the French economy at 0.2-0.3%, citing a rebound in industrial, services, and construction activity driven by defense and aerospace demand, as well as improved business confidence according to Reuters. The central bank noted that industrial output has remained above its long-term trend for months, with electronics and machinery sectors leading the recovery. Services and construction also outperformed expectations, though cash-flow conditions in manufacturing remain weak, and supply chain tensions have worsened in aerospace and electronics.

Despite the positive near-term outlook, Bank of France Governor Francois Villeroy de Galhau warned that the Middle East crisis could reduce the growth forecast. He emphasized that France's economy has limited exposure to the conflict but cautioned that global trade tensions and uncertainties could undermine momentum. The central bank's uncertainty indicator rose, reflecting heightened risks, particularly in industry, where trade tensions persist.

Villeroy also reiterated that the European Central Bank should avoid basing interest rate decisions solely on short-term energy price fluctuations, stressing the need for a measured approach to monetary policy. While the French economy remains resilient with low inflation, external shocks from geopolitical instability could test its durability in the coming months.