Navigating France's Economic Crossroads: Strategic Allocation in a Divergent Landscape

The French economy in 2025 presents a paradox: modest growth coexists with structural fragility, while sectoral divergence creates both risks and opportunities for investors. With GDP expanding at 0.3% quarter-over-quarter in Q2 2025, driven by inventory adjustments and a rebound in household consumption, the nation's economic trajectory remains uneven. Meanwhile, inflation continues its decline, now at 0.6% year-on-year, but core inflation lingers at 1.5%, reflecting persistent services-sector pressures. For investors, the challenge lies in balancing exposure to resilient sectors—such as public infrastructure and services—while hedging against underperforming industries like real estate and trade-exposed manufacturing.

Macroeconomic Context: Stagnation with Sectoral Nuance

France's 2025 growth story is one of cautious optimism. The 0.7% annual GDP expansion in Q2 2025 masks a fragile foundation: domestic demand remains flat, and net trade continues to drag on growth. The government's fiscal austerity measures, aimed at reducing the deficit from 5.8% of GDP in 2024 to 5.6% in 2025, have been partially offset by rising interest payments and lower-than-expected tax revenues. Public debt is projected to climb to 118.4% of GDP by 2026, a trajectory that underscores the limits of fiscal flexibility.

Inflation, though declining, remains a double-edged sword. Energy price drops have cushioned headline inflation, but services inflation—driven by healthcare and recreational spending—remains stubbornly high. This divergence creates a unique environment where consumers benefit from lower energy costs, while businesses face margin pressures in labor-intensive sectors.

Sectoral Divergence: Resilience in Services, Weakness in Real Estate

The services sector, which accounts for 75% of GDP, is a cornerstone of France's economic resilience. The Composite PMI for services stood at 49.7 in August 2025, signaling stabilization. Key drivers include post-Olympics tourism in Île-de-France, pent-up demand in luxury hospitality, and digital services benefiting from the France 2030 agenda. Public investment in fiber-optic networks and green energy projects further amplifies this sector's potential.

Conversely, the real estate sector—particularly SMEs—faces headwinds. High corporate borrowing costs, exacerbated by France's fixed-rate loan system, and sensitivity to long-term interest rates have left this segment vulnerable. Similarly, industrial sectors like aerospace and pharmaceuticals, while financially robust, are exposed to U.S. trade policy uncertainties. The looming threat of U.S. tariffs has induced a wait-and-see stance among businesses, dampening global growth prospects.

Strategic Asset Allocation: Defensive Positioning in a Low-Growth Environment

In this context, strategic asset allocation must prioritize defensive positioning in resilient sectors while avoiding overexposure to underperforming industries. Here's how investors can navigate the landscape:

1. Overweight Resilient Services and Infrastructure
2. Services Sector: Allocate to firms in travel, luxury hospitality, and digital services, which are benefiting from post-pandemic demand and policy tailwinds. The France 2030 plan's focus on green and digital transformation creates opportunities for private equity and infrastructure funds targeting fiber-optic networks and renewable energy projects.

3. Public Infrastructure: France's public investment in green energy and digital infrastructure, supported by EU grants, offers long-term value. Consider ETFs or sovereign bonds linked to infrastructure projects, which provide stable cash flows and inflation hedging.

4. Underweight Vulnerable Sectors

5. Real Estate SMEs: Avoid overexposure to real estate firms, particularly those reliant on fixed-rate loans. High borrowing costs and interest rate sensitivity make this sector a drag on returns.

6. Trade-Exposed Manufacturing: While aerospace and automotive industries are leveraging EU green subsidies, their exposure to U.S. trade policy risks warrants caution. Hedge with German manufacturing plays, which benefit from stronger export demand and a more diversified trade portfolio.

7. Hedge with Core Inflation-Linked Assets

8. Services inflation is expected to remain elevated through 2026. Invest in inflation-linked bonds or equities in healthcare and education services, which are less sensitive to macroeconomic cycles.

Conclusion: Balancing Caution and Opportunity

France's economic landscape in 2025 is defined by a delicate balance between stagnation and sectoral divergence. While the government's fiscal austerity and public infrastructure investments provide a floor for growth, structural challenges—including high debt and trade uncertainties—demand a disciplined approach to asset allocation. Investors should prioritize defensive positions in services and infrastructure, while avoiding overexposure to underperforming sectors. By aligning portfolios with policy-driven opportunities and hedging against macroeconomic risks, investors can navigate France's economic crossroads with resilience.