French businesses blame political uncertainty for the drop in orders

French businesses blame political uncertainty for the drop in orders

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French companies blamed political uncertainty from the snap election for a drop in orders that contributed to a sharp slowdown in economic activity in the euro zone, according to a closely watched survey of businesses.

S&P Global said French companies reported the biggest drop in new orders since the start of the year as the country’s purchasing managers’ index – a measure of business activity – fell from 48.9 to 48.2, below the threshold of 50 that separates growth from contraction.

The decline in France contributed to an overall drop in new orders for eurozone businesses for the first time in four months, a setback to hopes that the bloc’s economy will recover steadily this year.

Some of the French purchasing managers surveyed by S&P Global said the drop in business activity they experienced in June was caused by worries about the election, which polls suggest could be won by the far-right party right Marine Le Pen’s Rassemblement National.

“The uncertainty of the upcoming election is causing French businesses to sit back and fear tougher times ahead,” said Norman Liebke, economist at Hamburg Commercial Bank, which sponsors the survey. “According to anecdotal evidence, some panelists linked the lower levels of activity to the upcoming election.”

President Emmanuel Macron’s decision to call early parliamentary elections after losing this month’s EU election to Le Pen’s party has fueled investor fears about the outcome, led to a sell-off in French share prices and raised government borrowing costs.

French businesses are worried about the unfunded tax cuts and anti-immigration policies of Le Pen’s party, but they are even more worried about the radical tax-and-spend agenda of the rival left-wing alliance, which ranks second in recent polls.

The flash composite PMI for the euro zone, watched by policymakers as an early indicator of economic fortunes, fell to a three-month low of 50.8, down from 52.2 a month earlier.

Eurozone PMI line chart showing tentative recovery in eurozone economic activity fading

S&P Global said the euro zone economy “suffered a setback” at the end of the second quarter as companies reported falling orders and a slowdown in activity and hiring, which hurt confidence in their outlook for the rest of this year .

“Demand weakness in export markets was particularly widespread as new export orders fell much faster than total new business,” S&P said, adding that foreign demand for eurozone companies fell at the strongest pace in February.

Survey results for Germany were also weaker than estimates, but remained slightly in growth territory after the PMI reading fell from 52.4 to 50.6.

Price pressures on eurozone companies continued to ease, the survey showed, as sales prices rose at their slowest pace in three years in the services sector and manufacturers continued to cut prices, albeit at a slower pace Slower.

This will be welcomed by the European Central Bank, which this month began cutting interest rates in anticipation of further declines in inflation.

Melanie Debono, economist at consultants Pantheon Macroeconomics, said: “We remain confident that inflation in the euro area will moderate further in the coming months, allowing the ECB to cut policy rates further.”

The eurozone economy showed tentative signs of recovery, growing 0.3% in the first quarter after stagnating for much of last year.

But Vincent Stamer, economist at German lender Commerzbank, said the PMI reading “reinforces our view that the economic recovery in the euro area will not be as strong this year as most economists and the ECB expect”.