French central bank cuts economic growth outlook as energy prices bite

PARIS, June 16 (Reuters) - France's economy is growing more slowly than expected after a sluggish start to the year with the Middle East conflict weighing on activity, the central bank said on Tuesday, warning the outlook was hostage to geopolitical developments.

The euro zone's second-biggest economy is set to grow 0.5% this year, the Bank of France said in its quarterly outlook, cutting its forecast from 0.9% previously. 

The downgrade reflects an unexpected 0.1% contraction in the first quarter and a spike in global energy prices since the outbreak of the Iran war at the end of February.

The central bank said its forecasts were based on oil futures as of May 21 and therefore did not take into account the latest developments in the Middle East, including a deal to halt the conflict, which has helped push oil prices to three-month lows.

After the first-quarter pullback in GDP, economic growth is expected to stall in the current quarter, although executives reported signs of a pickup in June compared with May, according to the Bank of France's monthly business sentiment survey of 8,500 firms.

Looking ahead, growth was expected to accelerate to 0.9% in 2027, revised up from 0.8% previously, and then reach 1.2% in 2028 as consumer spending and business investment recover.

Inflation is now expected to average 2.5% in 2026 before easing to 1.7% in both 2027 and 2028 on expectations that energy prices normalise. In March, the central bank had forecast inflation of 1.7% in 2026, 1.4% in 2027 and 1.6% in 2028. 

High inflation is eroding households' purchasing power this year and weighing on consumption, which is expected to recover next year as price pressures ease.

Given heightened geopolitical uncertainty, the central bank also outlined alternative, less favourable scenarios, which pointed to weaker growth and higher inflation than its baseline. 

(Reporting by Leigh Thomas; Editing by Hugh Lawson)