France lowers growth forecast, will miss deficit target

PARIS, Sept 11 (Reuters) - France's economy will grow less than expected this year and the government will miss its budget deficit target, Finance Minister Roland Lescure said on Friday.

The downgraded outlook complicates the government's ‌task of getting its 2027 budget passed in the coming months in a deeply divided parliament, where parties have ‌hardened their positions before an April-May two-round presidential election.

Lescure told journalists he was lowering the government's 2026 economic growth forecast to 0.5% from 0.7% previously, but stuck ​with a projection of 1.0% for next year.

"This year has been marked by extreme crises involving four different types of shocks," Lescure told reporters, citing domestic political uncertainty, surging energy prices, extreme summer weather and a jump in borrowing costs on bond markets.

Slower growth will make it more difficult for the government to trim its fiscal budget deficit as planned to 5.0% of economic output ‌this year.

"The reality is that the budget ⁠was built on a 5% assumption. And the reality is that, today, 5% is no longer an option," Lescure said.

The minister did not give a new deficit target, adding that the government was still ⁠making final tweaks to its budget bill, which it is due to present to parliament at the end of the month.

As the government's deficit target has slipped out of reach, France has seen the risk premium it must pay to borrow for 10 years versus the German government ​widen ​to the most since 2012.

With polls suggesting next year's presidential election could ​see a run-off between far-right candidate Marine Le ‌Pen and the hard left's Jean-Luc Melenchon, investors say there is still scope for more intense bond market tensions.

"I think we are at the foothills of something more concerning for France," James Athey, fixed income manager at Marlborough in London, told Reuters. "The spread at the moment is not pricing all the risks. It is not pricing a Le Pen or Melenchon presidency."

The economic fallout from the war in the Middle East and summer heatwaves and drought that hit agriculture output have dragged down growth and ‌put the government's fiscal targets out of reach.

"I think it is reasonable ​to say that economic uncertainty has never been greater than it is today," ​Lescure said. "We are operating under tight budgetary constraints; there is ​no more fat to trim."

Further complicating the picture, French borrowing rates have surged in recent weeks as ‌investors have identified France as one of the weaker ​links in a global bond ​selloff due to its weak public finances and serial slippage on its deficit-reduction plans.