French businesses blame political uncertainty for drop in orders

French companies blamed political uncertainty over snap elections for a drop in orders that helped drive a sharp slowdown in Eurozone economic activity, 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 gauge of business activity — fell from 48.9 to 48.2, taking it further below the 50 mark 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, dealing a setback to hopes that the bloc’s economy will steadily recover 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 concern over the elections, which polls suggest could be won by Marine Le Pen’s far-right Rassemblement National party.

���The uncertainty of the upcoming elections has French businesses stalling and fearing tougher times,” said Norman Liebke, an economist at Hamburg Commercial Bank, which sponsors the survey. “According to anecdotal evidence, some panel members linked lower activity levels to the upcoming elections.”

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

French businesses worry about the unfunded tax cuts and anti-immigration policies of Le Pen’s party but they fret even more about the radical tax-and-spend agenda of the rival leftwing alliance that is running second in recent polls.

The flash composite PMI for the Eurozone, tracked by policymakers as an early gauge of economic fortunes, dropped to a three-month low of 50.8, down from 52.2 a month earlier.

S&P Global said the Eurozone economy “suffered a setback” at the end of the second quarter as businesses reported falling orders and a slowdown in business activity and hiring, which sapped confidence about their prospects for the rest of this year.

“Demand weakness in export markets was particularly prevalent as new export orders decreased much more quickly than total new business,” S&P said, adding that foreign demand for Eurozone companies fell at the sharpest pace since February.

The survey’s results for Germany were also weaker than forecast, but remained slightly in growth territory, after its PMI reading fell from 52.4 to 50.6.

Price pressures on Eurozone companies continued to ease, the survey found, as selling prices rose at the slowest rate for three years in the services sector and manufacturers continued to cut their prices, albeit at a slower pace.

This will be welcomed by the European Central Bank, which this month started to cut interest rates in anticipation of further falls in inflation.

Melanie Debono, an economist at consultants Pantheon Macroeconomics, said: “We remain confident that Eurozone inflation will ease a little further over the coming months, allowing the ECB to cut policy rates further.”

The Eurozone economy has shown tentative signs of recovering, with growth of 0.3 per cent in the first quarter, following stagnation for much of last year.

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