INSEE has cut its short-term outlook and now expects growth of 0.2% in both the first and second quarters of 2026, down from a prior 0.3% projection. The statistics office said inflation would climb above 2% in the spring as oil prices jumped after the Iran conflict. Higher fuel and gas costs are already squeezing household budgets and are set to shave real wages and purchasing power. Ministers and business leaders say the shock is tightening caution in investment and trade.

France’s economy has been hit by a fast-moving energy shock. INSEE linked the hit to higher hydrocarbon prices after the outbreak of wider hostilities in Iran on 28 February. The agency said oil climbed to about $100 a barrel, versus an average near $63 at the end of 2025. That pushed petrol and gas prices up quickly at the pump and fed a pickup in headline inflation.

Growth downgraded, but short-term momentum persists

INSEE trimmed its early-2026 growth forecasts to 0.2% for both Q1 and Q2. That compares with previous estimates of 0.3%. The agency said the downgrade reflects the energy shock and softer external demand for some exports. Yet INSEE noted a short-term uplift from the broader eurozone recovery. Dorian Roucher, head of INSEE’s economic outlook department, said growth is holding up in the very short term thanks to eurozone recovery momentum. Roland Lescure, economy minister, told lawmakers the updated INSEE outlook didn't force a change in the government’s own forecasts.

The immediate message is mixed. Growth is weaker than expected. But it hasn't collapsed. Consumption still supports the economy. Households are using savings to smooth spending for now. INSEE said the main negative effects are more likely to be felt later in the year.

Inflation and the squeeze on households

INSEE now expects inflation to move above 2% in the spring and to reach 2.2% by June. That follows a low of about 1.1% in February. The agency made it clear that the rise is driven largely by fuel and gas costs. Kerosene prices are also lifting airfares, which will add to travel costs for consumers.

The statistics office said real household purchasing power would fall by about 0.5% by mid-year because wages haven't yet adjusted to higher consumer prices. That reverses some of the recovery in real wages seen after the 2022 and 2023 inflation waves. INSEE warned services prices remain relatively contained for now, which limits the breadth of the inflationary pass-through.

Business investment and trade

Companies are also feeling the shock. INSEE expects business investment to be broadly flat early in the year, with firms cautious amid geopolitical uncertainty and weak demand. The office flagged a sharp fall in exports in Q1, in part because deliveries of aircraft and ships were temporarily down.

Mastheads

Public investment is likely to contract further, INSEE said, leaving the economy reliant on an export rebound to offset domestic headwinds.

Higher shipping insurance costs and tanker rerouting have pushed import bills higher, according to commentators who have tracked the knock-on effects of disruptions in the Strait of Hormuz. Firms that depend on energy intensive inputs face higher operating costs. For now, companies appear ready to defer discretionary spending rather than accelerate it.

Security and politics add to economic weight

The economic shock comes alongside a wider security response. French forces have been put on heightened alert in the region after attacks linked to Iran-aligned militias, and Paris has moved assets to protect bases and shipping lanes. That raises defence costs and political pressure at home. Analysts say the combination of a higher import bill, higher energy costs and security spending creates a multi-channel drag on public finances and business confidence.

Political leaders in Paris have also reacted strongly. Jean-Noël Barrot, foreign minister, blamed the Iranian regime for overwhelming responsibility in the escalation. French officials joined partners in condemning the missile and drone strikes. That diplomatic stance has domestic resonance because voters worry about security, migration and the cost of living.

INSEE singled out a few sectors likely to see early impact. Purchases of vehicles and oil products are seen falling in the first quarter. Services spending has held up better, though the agency expects pressure to build in the spring. Airlines look likely to pass higher kerosene costs on to passengers. Household savings are being drawn down to smooth consumption, which makes the short-term fall in spending smaller than it would otherwise be.

The timing of the effects matters. INSEE cautioned that an oil price shock often hits growth with a lag. The agency said the blow to growth would be stronger in 2027 than in 2026. That underlines why policymakers pay attention to both price and activity readings across quarters.

Monetary and fiscal choices will shape how the shock plays out. With inflation rising above 2%, the debate over rate settings and real wage support is likely to intensify. France’s inflation profile remains milder than in some eurozone peers because wage growth has been modest and services prices competitive, INSEE said. Still, a sustained rise in energy costs would widen the inflation spread and squeeze households further.

Ministers have so far not revised official forecasts sharply. Roland Lescure told MPs the INSEE update didn't force an immediate change in government projections. That leaves policy makers watching data and the oil market closely while weighing support measures for vulnerable households and energy-dependent sectors.

Related Articles

INSEE projects 0.2% growth in Q1 and Q2 and warned the oil shock could hit more in 2027.

This article was created with AI assistance.