Global Data Pod: Upside growth risks in the Euro area as Le Pen runs

[MUSIC] Welcome to the Western European edition of the Global Data Pod. My name is Greg Fuderti. I'm joined by Raphael Brunaguerre, and we will be discussing the latest on the Euro-Area economy, and we'll also be touching on developments in French politics, which calls some question and which sets up further developments. So down the road in the run up to next year's presidential election. But let's start first of all with what we've learned this week in terms of the growth side. So we went into this year actually with pretty upbeat growth forecast, but then that got interrupted by the Iran War and the energy shock that caused. If I look at our profile on growth, the real pothole was Q2 where we put in a forecast of close to 0% growth. And we have actually already been revising that modestly higher. And if I look at this week's data, the question that comes to my mind is, what extent are the hard activity data that we're getting actually signaling us even further upside risk to the second quarter. So Raphael, you were dealing this week with the German industry reports. How did those make you feel? Well, related to Germany itself, I think it was generally positive because we've seen a bunch of data heading towards something which is better momentum. That's the order data, that's the IP data. And I think we need to look at this in relation to a bigger picture, which is the generally the background in terms of positive news flow in terms of what is coming from the Middle East, the US, Iran conflict. Now this week we had a bit of a flare up, but I think in terms of where we stand in terms of energy prices, much lower than where we've been not long ago. So that matters for the manufacturing sector and Germany, is as well a place where you should be assuming that there is a traction that is related to physical spending. So I think Greg, you looked into that issue in particular in the sense that you, I think expressed of you, that what's coming up from the government has been more positive in terms of willing to move forward with new ideas, new laws. And this is something that overall should get us traction. So I think we're starting point is good. And the data of late have been more positive. What I would stress as well is that beyond Germany, the data have been mixed when we come to industry data. I mean, we have a decline in manufacturing output in France, in Italy as well, we have some increase in Spain. So it's not that everything is looking very positive and unbalanced if we exclude Ireland, because I think we shoot it to a very volatile country. We basically have a manufacturing sector that would basically post something that is very small increase in maize, or we have forecast which is 0.1%. Now that would be basically something that is positive if you look at the big picture of 2, 2, these are significantly, if you take the April May average compared to 1 queue for the year or year level. I think beyond the industry data, you looked at the consumer side and I think this is well a leg that is important in terms of recovery. So let me ask you how you feel about that. Yeah, I can answer that, but I will come back to the industry data very briefly in a second. I mean, on the consumer side, I think that was the area where we were expecting a decent part of the portal because the increase in headlight inflation on a season of just a basis was going to be around 5% annualized in queue 2, which was going to dent consumer reeling comes very significantly. Now if I look at the incoming data, retail sales are tracking close to 1% for in terms of the April May average compared to queue 2. Our registrations are actually more than 10% so far in the quarter and we already have some of the monthly numbers for June. So this actually creates a bit of a very interesting behavioural question because if you've got a big decrease in reeling comes, but the good side is holding up, then you're relying massively on the services side, so spending on services by consumers to be giving you a contraction. If you are going to track our forecast of a pretty modest increase in overall consumer spending in queue 2, which we have already revised up, but if we don't get the decrease on the services spending side, then there could be potentially even more upside to the second quarter. The good side is actually shaping up pretty well. Now if you look historically, I mean outside of the pandemic, when you obviously shut down parts of the services sector for one day to the next, but outside of that period, you've never really had a case where services spending fell while good spending held up. So behaviourally in terms of what we're finding out about your area consumer is odd. Confidence has fallen, starting to come back, but if that's signal from confidence is correct, it's showing up in a very unusual way in terms of the split between goods and services. So if I look at the consumer personally, for me, there is a case for seeing some upside risk there. Now going back to the IP data, so I mean if I look at Germany, Europe, I think 1.5% in terms of April, May versus Q1 in terms of manufacturing, the numbers you suggested, so not up much further, only plus 0.1 month on month X Island in May, that does leave the rest of the region actually outperforming what Germany is tracking at the moment in terms of where our Q2 is shaping up. Would you say that that's correct? Yeah, you generally have some data that have been a bit more positive. Now I wouldn't say that it's the case everywhere, but if you look at Q, I mean there's a sense that the pain has been doing significantly better to some extent, France a little bit because the starting point at the start of the year was modest. So I think that's right. You do have a sense of improvement in Q in some of the countries. Yeah, okay. I mean I think that's important, especially if I then go back to the German data again, and I look at the broader indicators, so you look at factory sales, you look at new orders, so X bulk orders. I mean they have pretty significant gaps have opened up between those indicators and what German IP is doing. German IP on the manufacturing side is tracking this one and half a sudden increase so far in the second quarter, but the signal from the other indicators, orders and factory sales is actually even stronger, which sets you up possibly for firm gains later on in the year, which would be consistent with this fiscal story. Some of those orders starting to come through more strongly. I think on the defense side, the signals are pretty good, so that would reinforce the upside. So let me ask you a question on the political side, because I think an argument that you've made is that things are better clicking together in terms of the government, the impression that the government gives in willing to do reforms and engaging with reforms. And as a result, you could have a positive feedback loop with a private sector in some of the investments. How do you feel about that? Yeah, I mean, I think the signal from the activity data is still somewhat unclear, although I think domestic orders, X bulk, have also picked up. So I think things are moving there as well, but I think on the political side, I mean this is definitely feeling better at the moment. The government is putting together a more coherent set of proposals, narratives, and it's not being overshadowed by internal disagreements and squabbling, which has then in the past often dominated the media reporting of this. So the reception of what they've done over the last three years still feels quite quite constructive. And there is a sense that this is a proper turning point here in terms of the narrative. One of the things that is driving them is the further increase or I guess, or absolute stabilization, if I take polls overall, of the AFD, so the sort of non-mainstream party from the right in Germany, they are now polling close to 30%. And that, I think, is actually forcing the minds of the government to put internal disagreements to the side and really just kind of charge forward and the best line of defense is to get the economy going. So I think that's, you know, it's happening. And I do think that if low-energy prices, I mean, assuming we don't launch back higher again here, if that helps to give you some cyclical recovery in growth, then that would reinforce the narrative that, you know, growth is doing better, then people start to put two and two together and think, well, perhaps it is because government reform efforts are feeling more coherent and the fiscal money is flowing. So, yeah, that is the development, I think, over the last two or three weeks that it built up. Now, talking about AFD, perhaps let's switch to towards France because that's another part of the region where there is a, you know, a political challenge from the non-mainstream if we want to call it that. This week we had the court ruling, is Le Pen in the all clear and is it now fixed that she will be the presidential candidate? Yeah, I think we had a lot of news that I would qualify as important in many respects. The bottom line is that she will be candidates. This has been announced, the court effectively geared the way for her to be candidates in a sense that, up until now, there was a chance that she couldn't run for the election. So, that is all cleared. She can go, there is still a risk and the risk is that she has to do one year, eventually if she is found to be guilty, which she was then, but she made an appeal. Eventually she has to do one year by, with electronic monitoring. The risk is that if the judgment of the next court or the court of the station, which is a highest appeals court in the country, if that's the conclusion, remained that she'll be guilty and this is taking place before the election, eventually she would have to do a campaign that is eventually truncated or at least on a practical basis, is not going to be ideal. So, there is a risk. Now, the case that her lawyers and her have been pushed forward is eventually that is going to take time, that decision will come after the presidential election. She can reign, run a campaign that is a normal campaign. And if there is a conviction, then it would have to come if she elected five years down the line because the president cannot basically has immunity and be convicted. So, this is basically the way things have been playing out. So, she's going to be candidate. I think it has some implications because at some point we were not knowing who the leader should watch the campaign would be in terms of the national rally, could have been the pen, you could have been Bardela and Bardela has some views that are a bit different to the pen, Bardela has some views that are a bit more liberal, less weight from the state. So, where we go back, the victory to the idea of that original national rally party headed by the pen. And I think we could look at the 2024 manifesto from the party has a good guidance for what will happen in 2027. So, there's, for example, in death and taxes in terms of energy. There is a sense of lowering social contributions paid by employers to increase wages. There's a question of the retirement age that eventually should be lowered, which overall would have a fiscal cost. So, that is something to be in mind. And this is happening at the time now, where the fiscal question is effectively getting a bit more complicated in the sense that you do have that fiscal adjustment that needs to be made over multiple years. And it has taught it already significantly last year. And it needs to continue. So, this year there is an objective from the government to reach the 5% deficit target and this is at risk. This is at risk because geopolitics have been weighing on activity thus we have less growth. And as a result, to reach that 5% you need to do more of this call consolidation. This week we had the government saying that reaching 5 would be eventually difficult. So, that basically announced some saving measures. So, that is something that is already taking into account. But then we have the politics. We have the politics into aspect. We have the elections next year and a new budget to be done before the end of the year, to the other than 27 budgets. So, you have basically the politics and the need to have a new budget that are going to interact together. And there is also the views from the different participants to elections that are going to matter to have an informed views in terms of what would be the fiscal stance for the country beyond 2027. So, there is a lot to basically taking to account in relation to one the political space and to the interaction with the fiscal side. Yeah, I mean, you have covered a lot in that one response. So, you, I mean, on the fiscal side, is there any way of quantifying how much the quantitatively, how much these additional measures would cost? And I guess, I mean, from my perspective as well, the, for me, the sensitivity of the whole political process to increases in spreads is also pretty, pretty important. Because if you lay out the path that starts to look, you know, like you're sticking with 5% deficits, there could be a response from bond markets. And then, you know, that could give you some changes in terms of the political process. So, like, how firmly would you think that these ideas on the fiscal side would actually get pushed through? Or do you think that post-election, they would also be very mindful of kind of the EU targets and any pressure from markets? So, two things. One, on your very first question in terms, can we think about the number in terms of the proposals from the, for example, the National Rally and how much that would create an extra burden in terms of public finances? In 2024, we looked into that based on the party manifesto and we sort of assumed that over two years, we basically had an extra 0.6% of deficit on top of the assumed normal trajectory. So, there is a fiscal cost. Now, the point that you've mentioned in terms of all their forces to basically make sure that eventually you converge back towards a better equilibrium. I think that is right. And that is right into respect. You've mentioned markets. I think this is something that would refrain generally parties to basically get into the idea of spending too much or not taking care of fiscal consultation. That's a very important point. I think the other one is where generally the population is, these end parties are putting the idea of the fiscal stance into their thinking. And I think this is fairly high in terms of what people have in mind. The whole 2022 and in 2024 political issues regarding debt and the deficit have basically been at the forefront of a lot of discussions. But I think this would be part of the campaign. I don't think parties will escape the idea of not, for example, putting numbers onto the projections and into the measures. They would have to take this into account. Or LTKVL, that should mean that parties, including R&N and others, would have to be more careful with the fiscal stance. So, you have two forces. You have the force, which is a market itself. But I think you have something which is a bit more internal in terms of the debate and the importance of that issue in terms of how you talk to the population, how you run your campaign. I think that we'd exert a force that is probably having to take care about the fiscal stance. Okay, I think that's very important. Perhaps just finishing off on the French issue. So in terms of thinking about the election itself, I guess we still don't know how many of the other parties are positioned. So therefore it's still difficult to give actual predictions for what the outcome of next April's presidential election would be. Is that correct? Are you hearing or are you seeing developments that make you feel one way or another in terms of the eventual outcome in terms of what other parties are doing? Yeah, I think this is absolutely correct. The lineup is not known and if you look at past presidential elections, you've seen a lot of surprises. Macron was one of them. And once you have the proper lineup and it will take time and it's going to be late this year or early next year, you're going to be able to form better and form opinions on who could win, what could be proposed, etc. As of now we can say things. We can say that for some time the national rally has been leading the polls. So I think that means that there is a very strong probability that you see Marin Le Pen at the second round of the election. So that would be the third time now that she would contest at the second round. But you don't know who is going to be the other candidate at the second round. So this is where the the information, the new store will be important. I give you an example. Today we had Thicholene Royale that basically was candidate in the past that basically announced that she would be candidate. And so we have to see whether this is something that can have some impact on the campaign, whether she could be seen as a credible candidate, whether she can have a campaign that is good and not some dynamics behind her. But let's add a moment, the national rally is in a strong position overall. And the question is effectively who is going to be competing against them at the second round of the presidential election. Okay. Great. I think let's leave it here for today. There's clearly a lot to watch in terms of political developments in the coming months. And as the first part of our conversation made clear we're also musing around what is going on in terms of the macro economy, especially whether some upside risks are emerging in the in the current day to flow and what that means or what that could mean going forward. We do have a pickup in growth in the forecast anyway. But there is a question about the strength of it and whether it could could surprise even us on the on the upside. So let's leave that and go back to to tracking data and developments and then continue this again next week. This communication is provided for information purposes only. Please refer to JPMorgan research reports related to its content for more information including important disclosures. 2026, Frippin Morgan Chase and Company All Rights Reserved. This episode was recorded on July 10, 2026.