Not optimistic

Against the backdrop of political turmoil in France, the rebound in eurozone business activity appears to be losing momentum.

Recently, the data released by S&P Global and Hamburg Commercial Bank showed that the preliminary manufacturing purchasing managers’ index (PMI) in the eurozone fell to 45.6 in June from 47.3 in the previous month, less than the expected 47.9, and the manufacturing output index fell to 46.0 from 49.3, both hitting a six-month low.

The PMI, compiled from a monthly survey of purchasing managers, is a “barometer” of industry development and reflects future trends in the economy. The index usually takes 50 as the critical point, and if it is higher than 50, it means that a certain field is in an expanding state. Below 50, the field is shrinking.

At the same time, the preliminary services business activity index (services PMI) fell from 53.2 to 52.6, and the preliminary composite PMI output index (composite PMI) fell from 52.2 to 50.8, missing market expectations of 53.5 and 52.5 respectively, both recording the lowest level in three months.

Europe’s economy is still in the early stages of recovery from last year’s mild recession, but the data suggest the recovery may be weakening. Especially after French President Emmanuel Macron announced a surprise snap election, the region’s second-largest economy is facing the prospect of a radical change of government.

“This unexpected turn of events is likely to stir up a great deal of uncertainty about future economic policy, causing many firms to slam the brakes on new investment and orders,” Cyrus de la Rubia, chief economist at Commerzbank, wrote in a report.

Earlier this month, French President Emmanuel Macron announced the dissolution of the National Assembly and a new National Assembly election will be held at the end of this month, as the ruling party’s popularity was far lower than that of the far-right party. This decision caused a huge shock from the political and civil society.

The French manufacturing output index released earlier fell to a five-month low of 45.3, while the preliminary composite PMI fell to a four-month low of 48.2. “France’s poor performance has been a clear contributor to deteriorating conditions in the euro zone,” de la Rubia said, predicting the bloc’s economy would grow by just 0.2 percent in Q2.

Leo Barincou, senior economist at Oxford Economics, said June’s preliminary PMI report showed that growth momentum in the eurozone remained weak and “today’s data did not surprise us that the eurozone economy will expand modestly again in Q2, but if there is no subsequent improvement, there are downside risks for the rest of the year.”

The weaker-than-expected PMI data bolstered bets that the ECB would cut interest rates further this year, with money markets pricing in a rate cut of 44 basis points at the end of the year, compared with 42 basis points before the data.

European Bank officials have generally said recently that there will be no rush to cut interest rates in the future, and the next monetary policy action will depend on economic data. Last week, central Bank Governor Antonio Centeno said further interest rate cuts could be made as long as inflation continued to slow, but that rates would not return to ultra-loose levels.