Did Macron’s Snap Call Snap Growth?

Is political uncertainty hurting business? Some think so, based on some financial headlines we read, since the latest purchasing managers’ indexes (PMIs) reported that some French firms attributed June’s dip in activity to recently called snap elections. Perhaps that is the case. But in our view, what matters more is PMIs’ broader trend—and June data don’t deviate much from it.

As Exhibit 1 shows, Western Europe’s PMIs mostly weakened from May to June. (Readings above 50 imply expansion; below 50 contraction.)

Exhibit 1: Recent PMIs for Major Western Nations

Source: FactSet, as of 21/6/2024.

France’s PMIs drew the most attention amongst commentators we follow, as some survey respondents linked lower business activity to the surprising snap vote—a news story eclipsing all others in Europe lately, based on our coverage of financial publications. That connection sounds intuitive, though we think investors benefit from keeping a few things in mind. One, PMIs are monthly surveys that provide a timely snapshot of recent business conditions, but they indicate growth’s (or contraction’s) breadth only—not the magnitude. Hence, readings just under 50 can obscure growth, if the minority that grew outpaced the majority that contracted.

As for political uncertainty’s impact, survey respondents are relaying what they hear from customers, and it wouldn’t surprise us if some have adopted a wait-and-see approach. For instance, a company may think it prudent to delay spending for a few weeks in exchange for some clarity on politics. Perhaps they are emotionally reacting to feared outcomes—business leaders are people, too. But we reckon political uncertainty can also serve as a convenient scapegoat, giving companies an external boogeyman to blame. Based on our studies of corporations’ earnings calls and releases, Corporate America has cited tariffs and currency fluctuations as reasons to manage earnings expectations; we have also found UK businesses do something similar with Brexit.

Political uncertainty also tends to be a commonly cited headwind whenever an election comes up, based on our review of past financial headlines. Like their French peers, some UK firms mentioned 4 July’s vote weighed on their plans, and a few US manufacturers reported November’s presidential election stirred uncertainty, too.^[i] Granted, we think there was more of a surprise factor with France’s election, not to mention less clarity on what the next government will look like (contrast that with the expectations here in the UK, where Labour is expected to win and Keir Starmer is a well-known quantity). But in our view, the blame in France seems like a function of survey timing above all else. Data aggregator and PMI collector S&P Global gathered responses from 12 – 19 June, when the election news was fresh and fearful headlines were near-ubiquitous in the financial publications we follow.

But perhaps most importantly, in our view, whilst the political angle is new, France’s June weakness isn’t. The readings are in line with their longer-running trends. Consider, France, Germany and the eurozone composite PMIs (which aggregate responses about both manufacturing and services output) have spent much of the past 12 months in contraction. (Exhibit 2)

Exhibit 2: Eurozone, Germany and France’s Composite PMI Since June 2023

Source: FactSet, as of 21/6/2024.

We don’t dismiss how political uncertainty can deter action, as we have found that when businesses lack visibility about what lies ahead, they may be less keen to invest. But when placed against a longer-term backdrop, France’s snap vote didn’t appear to roil business activity suddenly. Rather, France’s June flash PMI is in line with mostly sub-50 readings over the past 12 months.

Just as eurozone PMIs extended their weak streak, other areas’ strength continued. For example, the US composite PMI registered a 26-month high in June.^[ii] American economic expansion has been powering the global economy for a while, pulling along other regions where growth isn’t as strong.^[iii] Yes, the global economy features pockets of strength and weakness, but that isn’t abnormal, and global stocks can do just fine in this kind of economic environment, based on our research.