French Business Activity Plunges to Lowest Level Since 2023 Amid Political Uncertainty
Paris, France - Business activity in France's private sector has unexpectedly plummeted to its lowest point since 2023, as an extended political crisis weighs heavily on the euro zone's second-largest economy.
The S&P Global Composite Purchasing Managers' Index (PMI) sank to 44.5 in February from 47.6 in January, remaining significantly below the 50 threshold that separates expansion from contraction. Analysts had predicted an improvement to 48, and none of the 15 surveyed anticipated such a sharp decline.
"This latest setback for the French economy comes as a surprise, particularly given the recent easing of some political uncertainty in the country," said Tariq Kamal Chaudhry, an economist at Hamburg Commercial Bank. He expressed concern over a "recession with no end in sight."
The economic weakness in France has prompted investors to increase their bets on interest rate cuts by the European Central Bank (ECB). Money markets are now pricing in approximately 80 basis points of easing, compared to 74 basis points on Thursday. The euro extended its decline, falling 0.3% to $1.0472. Bond prices rose, with the German 10-year yield dropping as much as five basis points to 2.48%.
France is bearing the brunt of a government crisis centered around addressing a widening fiscal deficit, which has shaken business confidence. While the country has adopted a budget for 2025, it entailed raising corporate taxes to bolster revenues.
Business leaders have cautioned that the turmoil has put investment and hiring on hold, contributing to the first quarterly decline in gross domestic product in nearly two years. Furthermore, Prime Minister Francois Bayrou's government remains vulnerable due to its lack of a clear majority in parliament. Tensions with opposition parties are likely to resurface in the coming months as lawmakers debate potential changes to the pension system and the controversial 2023 law that raised the minimum retirement age.
"The economy appears to view Bayrou's achievement as more of a temporary reprieve than long-term stability," Chaudhry said, adding that "the opposition could oust him at any moment."
PMIs are closely monitored by markets as they are released early in the month and provide valuable insights into economic trends and potential turning points. However, it's important to note that business surveys measure the breadth rather than the depth of output changes and may not directly correlate with quarterly GDP figures.
Data scheduled for release later on Friday is expected to indicate continued private-sector expansion in Germany, the eurozone, the UK, and the US.