(Bloomberg) -- Private-sector business activity in France unexpectedly slumped to its lowest level since 2023 as a prolonged political crisis weighs on the euro zone’s No. 2 economy.
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S&P Global’s Composite Purchasing Managers’ Index plunged to 44.5. from 47. 6, remaining lodged well below the 50 threshold separating growth from contraction, data Friday showed. Analysts had anticipated an improvement to 48 and none of the 15 polled foresaw such a low reading.
“This fresh setback for the French economy perhaps comes as a surprise, given the recent allaying of some political uncertainty in the country,” said Tariq Kamal Chaudhry, an economist at Hamburg Commercial Bank, bemoaning a “recession with no end in sight.”
The weakness in France prompted investors to add to bets on European Central Bank interest-rate cuts. Money markets are pricing about 80 basis points easing compared with 74 basis points on Thursday.
The euro extended a drop, falling 0.3% to $1.0472. Bonds jumped, sending the German 10-year yield as much as five basis points lower to 2.48%.
France is feeling the effects of a government crisis over how to address a gaping fiscal deficit, rattling business confidence. While the country now has a budget for 2025, the getting there involved raising taxes on companies to help boost revenue.
Corporate leaders have warned that the upheaval put hiring and investment on hold, contributing to the first quarterly contraction in gross domestic product in almost two years.
What’s more, Prime Minister Francois Bayrou’s government remains vulnerable with no clear majority in parliament. Tensions with opposition parties are likely to return in the coming months when lawmakers debate potential changes to the pension system and the contested 2023 law that raised the minimum retirement age.
“The economy seems to view Bayrou’s achievement more as a temporary success rather than long-term stability,” Chaudhry said, adding that he “could be ousted by the opposition at any time.”
PMIs are closely watched by markets as they arrive early in the month and are good at revealing trends and turning points in an economy. A measure of breadth of changes in output rather than depth, business surveys can sometimes be difficult to map directly to quarterly GDP.