French election spooks markets – Danske Bank

The economic recovery in the euro area might not be as solid as previously thought. At least that is the impression the June PMI survey gives, and the less upbeat picture was confirmed by German IFO data, Danske Bank’s macro analysts note.

Eurozone recovery may be less solid than expected

“The service sector has lost some momentum and the manufacturing recession reaccelerated after we had seen promising signs of a stabilisation here in recent months. Price pressures moderated a bit in June in the euro area, but by and large, service inflation remains too high.”

“The ECB delivered the widely anticipated first 25bp rate cut but kept its forward-looking guidance vague at its June meeting. We see the move as a roll-back of the September 2023 insurance hike and as we still see a sufficiently growth momentum and sticky inflation, we do not expect the next rate cut from the ECB until December.”

“The possibility of a new French parliament ready to run higher deficits has spooked markets through June. Rassemblement National won the first round of the parliamentary elections with 33% of the votes. This means the most likely scenario is a ‘hung parliament’ and thus limited risk of France going down an increasingly unsustainable fiscal policy path.”