(Bloomberg) -- French business confidence slumped to levels not seen since the Covid pandemic as companies reckoned with the turbulence of snap elections that plunged the country toward an uncertain political future.
The monthly gauge dropped five points to 94, while economists surveyed by Bloomberg had forecast the measure would be unchanged at one point below the long term average of 100.
The survey gives an early indicator of how France’s elections impacted the economy as it was conducted between June 27 and July 22, a period that spans the two rounds of voting and the immediate aftermath.
During a frantic election campaign triggered by President Emmanuel Macron’s surprise decision to dissolve the National Assembly, the prospect of a radical shift in economic and fiscal policy spooked financial markets. As investors dumped French assets, the yield spread between the country’s 10-year bonds and safer German peers widened to the most since the sovereign debt crisis.
Businesses were particularly alarmed by the manifesto of New Popular Front alliance, which promised vast increases in taxation and public spending, coupled with price freezes and a sharp hike in the country’s minimum wage. An earlier survey by the Bank of France that was completed before the final round of voting already showed a marked increase in uncertainty as firms reported concerns about investment and a possible increase in labor costs.
While the leftist bloc ultimately won the largest share of seats in the National Assembly, it fell far short of an absolute majority and Macron has since rejected its proposal for a prime minister. That has increased the likelihood of some kind of technocratic or centrist government, which should translate into a rebound in business confidence in August, according to Allianz Trade Senior Economist Maxime Darmet.
“The fall in sentiment is tightly correlated with the political context and the different election programs that scared businesses,” Darmet said. “But that doesn’t necessarily mean a fall in production and we shouldn’t be alarmed or think it’s the start of a recession in France.”
Insee said there was a sharp drop in expected demand in the services sector, while business leaders in industry took a more gloomy view on future foreign orders. In manufacturing, the indicator dropped four points to 95.
Economic sentiment in France may get some reprieve as the Paris Olympics kick off on Friday. PMI readings on Wednesday showed surprisingly strong services, although the overall indicator for private-sector activity remained in contraction.
Yet France’s bond spread relative to Germany has climbed to 72 basis points this week, its widest since early July. While that’s still well below the peak of 86 basis points reached in the aftermath of Macron’s decision to call a snap election, it had been trading around 65 basis points since the second round of voting concluded.
The move reflects a broader souring of risk appetite that’s also sent the Italian bond spread wider at the same time. Still, French bonds are likely to remain particularly volatile as Macron battles to form a government.
“Investors are going to ask higher yields to compensate the political risk,” said Mauro Valle, head of fixed income at Generali Asset Management. “The lack of indications about an agreement on a political majority at French parliament and no news about the name of the prime minister are not positive for OAT spreads.”
--With assistance from Barbara Sladkowska and Joel Rinneby.
(Adds comments from economist and analyst, political context from fourth paragraph)
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