A la recherche de colle

Bien que le classement des trois blocs au dernier tour des élections françaises ait été une surprise par rapport au premier tour et aux sondages (le RN d'extrême droite est arrivé en troisième position), le scénario le plus probable que nous envisagions depuis l'annonce, à savoir qu'aucun des principaux groupes n'obtiendrait la majorité absolue, s'est concrétisé. Autre surprise, les factions les plus extrêmes ne seront pas assez nombreuses pour adopter une motion de censure visant à empêcher une "coalition centrale" de gouverner. C'est un point positif en termes de stabilité politique pour la France, mais la formation d'une telle coalition risque de s'avérer difficile. Numériquement, les composantes de la gauche, à l'exception de la gauche dure LFI, et les centristes pourraient - de justesse - atteindre la majorité absolue, mais la recherche d'un accord politique serait délicate, car la gauche part d'une position assez exigeante sur l'économie. La "colle institutionnelle" est rare dans le système politique traditionnellement antagoniste de la France. Un gouvernement technique minoritaire est envisageable pour sortir de l'impasse, mais il ne s'attacherait vraisemblablement qu'à mettre en œuvre des politiques "minimalistes", même si l'essentiel est un budget pour 2025.

Avec l'incertitude qui persiste en France et un flux de données loin d'être brillant en Allemagne, la poursuite de la suppression des restrictions monétaires par la BCE serait utile. Les chiffres de juin de l'IPC de la zone euro ne sont pas inquiétants - la dynamique des prix des services s'est améliorée - mais l'inflation se trouve sur un plateau toujours visiblement supérieur à 2 %, qui devrait se poursuivre jusqu'à l'automne. Dans un contexte de résilience du marché du travail (un point souligné par Christine Lagarde dans son discours à Sintra), il est peu probable que le Conseil des gouverneurs accélère les réductions de taux (nous les attendons toujours pour septembre et décembre).

Conformément à ce que nous avons souligné la semaine dernière, les données américaines continuent de plaider en faveur d'une réduction des taux de la Fed en septembre, la hausse du taux de chômage s'approchant de manière déconcertante du seuil de la "règle de Sahm". Il n'y a toujours pas de sentiment d'urgence - le président de la Fed de New York, M. Williams, l'a clairement indiqué la semaine dernière - mais une trop longue hésitation pourrait s'avérer coûteuse.

Vous pouvez lire l'analyse de Gilles Moëc ci-dessous.

French elections Round 2

In contrast with the first round for which polls had been quite accurate, the second round came with a major surprise: while expected to emerge with the highest number of deputies – albeit probably short of an absolute majority – far-right Rassemblement National (RN) came out in the third position, behind the left alliance and a more resilient than expected Macronist “Ensemble” group as a close second. Centre-Right les Republicains (LR) also fared better than expected. Still, the likeliest scenario after the first round – that no block would gain an absolute majority of 289 seats– has materialised.

The French ministry of Interior published the results in the 577 constituencies. RN and its allies secured 143 seats, the left alliance NFP 182, Ensemble 168 and LR, together with other centre-right candidates who had not allied themselves to RN, 60 seats. Even when adding the 6 “other centrists”, the most often discussed potential coalition (Ensemble + the centre right) would be far away from the threshold with 234 seats. So, we know now that the most radical policy proposals will not be implemented, but it remains unclear how France will be governed. However, another key difference with the projections before the second round is that the far-left (LFI) and RN are also, when taken together, very far away from the absolute majority needed to prevent a “central coalition” from governing by voting a motion of no confidence. This removes a crucial risk. Yet, forging such coalition could prove difficult.

Before briefly discussing the political dynamics, it is worth exploring the pure arithmetic. A key issue is the breakdown within the left alliance across the hard-left left (LFI), the socialists (PS), the Greens (EELV) and the Communists. LFI (40% of the left alliance seats) immediately rejected any compromise outside the left alliance. The other groups expressed – often with a high number of internal nuances, for instance within PS – some willingness to contemplate a form of dialogue. However, even when adding all their forces to the left-wing independent deputies outside the alliance, Ensemble and various centrists, the majority threshold would be hit by only a very small margin (at the point of writing, the precise breakdown within the left was unavailable but we find a figure around 295). To solidify such already tricky potential coalition, adding the centre-right would be helpful (this would bring such block towards roughly 350 seats), but it would be even more difficult to find political agreements across such an even wider coalition, and LR spokespeople have not so far expressed any appetite for wide political arrangements.

Judging by the various statement on TV studios on Sunday night, it seems that the left-wing groups implicitly or explicitly “open to dialogue” – basically the components of the left which historically had direct government experience - want to start from a fairly maximalist position to possibly snatch significant concessions from the centrists on public spending, or on the recent pension reform, presenting the radical platform of the left alliance as the basis for discussion.

A proper minority government, or a technical government, could be another solution to break the deadlock. While LR and significant parts of the left beyond LFI would not have to formally approve bills – in particular, the budget for 2025 – they could accept NOT to table a motion of no confidence and thus allow the legislative process to remain operational. This would however likely require a form of “minimalist” policymaking, avoiding making too big decisions to avoid triggering the opposition of any of the camps. This would minimise disruption, but without providing much clarity on the French macroeconomic trajectory, at a time when fiscal action is called for, as we have already discussed in Macrocast.

A key immediate issue is how France will maintain some government continuity while a political solution is found. Incumbent Prime Minister Gabriel Attal announced on TV on Sunday night that he would tender his resignation to the President on Monday but at the same time expressed his readiness to remain at his post in the current busy context for France with the Olympic games. Technically, in France a “resigning government” continues to operate until a new cabinet is formed, managing “current affairs” although no new significant measures can be implemented. French Courts allow for some leeway to deal with “urgent matters” – especially anything having to do with public order – but they have become increasingly restrictive over time. Still, nothing forces the President to accept the PM’s resignation, and Gabriel Attal could be formally re-appointed. As we explained two weeks ago, a Prime Minister does not need to request a vote of confidence in the National Assembly – which will reconvene on 18 July. We maintain our view that elaborating the budget bill – which needs to be transmitted to parliament in early October at the latest – is the real deadline for a political solution to emerge.

Discussing European inflation

As clarity may not emerge quickly in France, a wait-and-see attitude may continue to hamper growth there (the decline in the PMI survey for June was a first indication of the damage), although the setback for the most extreme policy options may put a limit to uncertainty. Yet, the dataflow has not been kind to the Euro area outside France either. Industrial production fell badly in Germany in May by 2.5% on the month after a paltry gain of 0.1% in April, leaving the carryover for Q2 at -1.1% qoq after +0.4% in Q1. This is getting concerning since a general rebound in the global manufacturing cycle would normally be favourable to the German economy. Given the general commitment to fiscal restraint – albeit now with a question mark on France – this makes the continuation of the reversal of the monetary policy stance even more urgent in the Euro area. There was not much however in the consumer prices print for June to speed up the process.

Headline inflation was in line with market expectations, at 2.5% yoy, receding from May (2.6%). However, core inflation came out slightly above expectations (2.9% yoy against 2.8%), unchanged from May. This confirms that European inflation is currently on a plateau, and because of base effects we do not expect a resumption of a visible decline before this autumn (see Exhibit 1). The picture looks however brighter when looking at the 3-month annualised changes: the crucial services prices decelerated in June (see Exhibit 2), even if they remain on a high pace by historical standards.

Still, disinflation proceeds at too slow a pace to move the dial in favour of an accelerated removal of monetary restriction by the ECB. In her speech at the central bank’s annual conference in Sintra, Christine Lagarde’s main point – from a policy setting point of view – was a specific feature of the current cycle: the combination of a decent real economy, with in particular no marked deterioration of the labour market, with a monetary tightening which initially proceeded at a fast pace. We would highlight this extract: “The strong labour market means that we can take time to gather new information, but we also need to be mindful of the fact that the growth outlook remains uncertain”. This, combined with a disinflation plateau, is in our view indicative of a central bank which is obviously preparing to cut more, but which can afford to do so at a measured pace. This strengthens our view that the next cut will come in September, and then in December.

Where the sky is clearing maybe faster than the ECB has been fearing over the last few months on the FX side. Indeed, even though the Governing Council proved in June that it could act without waiting for the Federal Reserve (Fed), there could be limits to the magnitude of the removal of restriction on the European side if a persistent standstill on the American side triggered a significant depreciation of the Euro, beyond the effect of a “risk premium” linked to the French elections. Such scenario of lasting divergence in the policy stance of the Fed and the ECB is now looking less likely.

More signs the US is landing – at last

The market is now taking more and more seriously the possibility the Fed cuts its policy rate in September – our baseline - pricing in as of last Friday a 75% probability of such move, against 55% a week before, as the dataflow continues to point to a landing of the US economy which albeit probably soft, would still be consistent with removing some of the current monetary restriction sooner rather than later. The ISM survey was one key input. We have already mentioned in Macrocast the disconcerting gyrations in its services component, but after an unexpected rebound in May, it joined again the manufacturing sector in contraction territory in June. Moreover, the forward-looking “new order” component in services fell in contraction territory for the first time since the post-Covid reopening. Hiring expectations continued to wallow below 50 as they have been doing since the autumn of 2023 (see Exhibit 3).

There has been some disconnect lately between the surveys and actual job creation as reflected in the Establishment survey of the payroll report. In the private sector, job creation, after falling significantly below the pre-Covid trend in the summer of 2023 when measuring it on a 3-month annualised basis, started a recovery in the autumn of last year. This has however been reversing at the end of Q1 2024, with a ​ more significant slowdown in June (see Exhibit 4): true, the headline payroll number came out again above expectations in June (206K versus 190K) but April and May were significantly revised down (111K) and the contribution from government hiring – which is largely disconnected from the fundamental dynamics of the economy – boosted the June print by 70K.

Meanwhile, the unemployment rate ticked higher to 4.1% in June, the highest level since November 2021. It is getting tempting to test this against “Sahm rule”, proposed by Fed economist Claudia Sahm as a way to identify the start of a recession in “almost real time”, i.e., well before it is called by the NBER. It is based on the very simple observation that, in every case over the last 7 recessions, the 3-month average of the unemployment rose by more than 0.5 percentage point above its low of the last 12 months three months after the recession started – which would still give much headway since it takes the NBER between 4 months and nearly 2 years to retroactively identify a recession. The “Sahm threshold” currently stands at 4.07%, which is tantalizingly close to the 4% average observed over April-June (see Exhibit 5).

Now, it may well be that 2024 would be the first year the Sahm rule would fail to be predictive. Indeed, the labour market has been subjected to such massive shocks since 2020 that the ongoing rise in unemployment might be better described as a return to normality rather than heralding a proper contraction in activity. Still, we argued a few weeks ago that “it would not take much” in terms of magnitude of an economic slowdown to bring inflation back to 2%. Using a simple model inspired by Bernanke and Blanchard mixing households’ price expectations and “under-employment rate”, we calculated that a rise in the latter of less than 3 percentage point, so even smaller than what was observed during the mini recession of 2001, would suffice. We are not there, but the slowdown of the US hiring dynamics seems to be already cooling wages down. The 3-month change in pay per hour has been somewhat erratic recently, but it now seems anchored below 4% (see Exhibit 6), which would be consistent with a gradual return to 2% inflation given the recent trend in productivity.

Given past disappointments on the disinflation path, the Fed is likely to maintain a very prudent messaging. New York Fed President Williams set the – balanced - tone last week, stating that “inflation is now around 2-1/2%, so we have seen significant progress in bringing it down. But we still have a way to go to reach our 2% target on a sustained basis”. This is certainly not a central bank which sounds ready to take action – leaving the July meeting as an occasion to gently alter communication – but if the dataflow does not suddenly deviate from the course set over the last few weeks, refusing to cut in September will be difficult to justify.