French consumer confidence hits 3-year low on Iran energy shock

French households grew more pessimistic in May as the war in Iran pushed energy prices higher, dragging consumer confidence to its weakest level in three years.

French consumer confidence fell to a three-year low in May, extending a slide that began after the outbreak of the Iran conflict sent energy costs surging and deepened uncertainty among households. The monthly sentiment gauge from INSEE, France's national statistics office, declined for the third consecutive month, undershooting the median estimate in a Bloomberg survey of economists.

"The persistent rise in energy prices is eroding purchasing power and weighing on sentiment across French households," said Julien Manceaux, senior economist at ING. "The transmission from geopolitical shock to consumer behavior is now fully visible in the data."

The reading fell below levels seen during the peak of the euro-area energy crisis in late 2022, when Russia's war in Ukraine sent natural gas prices to record highs. That episode saw French household spending contract for two consecutive quarters before a government fuel subsidy program helped stabilize sentiment. The current decline has been steeper, with the index falling more rapidly over three months than during the 2022 crisis.

Weaker consumer confidence threatens to slow France's economic recovery, as household spending accounts for roughly 55% of gross domestic product. With energy prices expected to remain elevated as long as the Iran conflict persists, economists at BNP Paribas project French GDP growth could slow by 0.3 percentage points in the second half of 2026.

Energy costs squeeze households

The deterioration in sentiment has been most pronounced among lower-income households, who spend a larger share of their budgets on fuel and heating. French gasoline prices have risen roughly 15% since the start of the year, according to data from the French Ministry of Ecological Transition, as disruptions to crude supply from the Middle East pushed Brent crude above $90 a barrel.

The inflation shock is compounding existing headwinds for the French economy. The European Central Bank's key deposit rate, held at 4% since September 2024, continues to constrain borrowing and investment even as the broader euro-area economy shows tentative signs of recovery. French manufacturing PMI data for May, due later this week, is expected to remain in contraction territory at 47.5, according to a Bloomberg survey of economists.

French government bond yields edged lower Tuesday as the weak sentiment data reinforced expectations that the ECB may need to accelerate rate cuts later this year. The yield on the 10-year OAT fell 4 basis points to 3.12%, while the euro weakened 0.3% against the dollar to $1.0820, as overnight index swaps priced in a 65% probability of a rate cut at the ECB's September meeting, up from 48% a month ago.

Historical parallels and policy response

The last time French consumer confidence was at comparable levels was in November 2022, when the euro area was grappling with natural gas prices above 200 euros per megawatt-hour. In that instance, the French government deployed roughly 45 billion euros in energy subsidies over six months, which helped restore confidence to pre-crisis levels by mid-2023.

The current downturn differs in its cause — supply disruptions from the Middle East rather than a cutoff of Russian pipeline gas — but the economic mechanism is similar. French households face higher costs for transportation, heating and food, as elevated energy prices ripple through supply chains. The consumer price index for energy in France rose 8.2% year-over-year in April, the fastest pace since early 2023.

The trajectory of French consumer confidence will depend heavily on developments in the Iran conflict. If energy prices stabilize or decline, sentiment could recover in the second half of the year. However, any further escalation that pushes oil prices higher risks deepening the downturn. The French government has signaled it may extend fuel subsidies if Brent crude remains above $100 a barrel for an extended period, according to a person familiar with the matter.

This article is for informational purposes only and does not constitute investment advice.