Throughout 2024, over 60 countries are hosting or have already hosted political elections, encompassing a significant portion of the global population. After recent election surprises—including France’s snap elections—markets have shown unease around political uncertainty ahead and the long-term implications of fiscal policy. Beyond the macroeconomic implications, potential policy changes, particularly in major economies, could meaningfully affect global economic stability amid heightened geopolitical tensions. Market participants are closely assessing the potential for long-term risks associated with policy shifts, as these could affect currency valuations and credit ratings, subsequently influencing markets. A pertinent example of this is the recent French election, where both left-wing party New Popular Front (“NPF”) and right-wing party National Rally (“NR”) proposed programs requiring fiscal policy expansions. This potential for policy shifts could further increase France's debt and exert downward pressure on its government credit rating. Last month, S&P already downgraded from "AA" to "AA-," a move that could meaningfully impact financial markets.
Similarly, political uncertainty lies ahead in the US while we are observing also moderating economic conditions, softening projections for Q2 GDP, and a cooling labor market. While our outlook has not materially changed, we note that economic risks are becoming more tangible and are likely to inform broader perspectives on public and private markets.
Global Elections and Examples of Their Potential Implications
Examples of political shifts affecting markets are not limited to recent events in France. Recent elections in the UK and India, two of the largest global economies by GDP, are expected to have implications on both global markets and their domestic economies. In the UK, last week’s decisive victory for the Labor Party ended over a decade of conservative leadership, likely leading to market-influencing policy shifts (particularly in the housing sector). In India, Prime Minister Narendra Modi, whose economic management has had mixed results, won but must rely on coalition partners due to the narrow victory margin. Without a majority, Modi will need to navigate coalition politics, potentially leading to policy compromises and shifts. This is significant given India’s role as an emerging market and its important relationship to global trade and services.
Further highlighting the potential implications of political change, last month’s election in the European Union, which prompted French President Emmanuel Macron to announce a snap election, resulted in the Euro tumbling 0.4% against the US Dollar in a short amount of time (see accompanying visual). As a principal economy in the Eurozone, political shifts in France have significant regional implications. A coalition government with either the right or the left may increase fiscal risk due to proposed spending, a hung parliament could delay addressing high debt levels. France’s budget deficit, at 5.5% last year, already exceeds the EU's 3% limit. Despite being lower than the US's 6.2% deficit, France lacks sole control over its currency, increasing vulnerability to bond market pressures, which is noteworthy given that France represents one of the largest bond markets globally. Before the snap election announcement, the spread between the French and German 10-year bonds was around 40-50 basis points, but it has since exceeded 80 basis points, now close to 70 basis points. While growing debt poses a risk to the overall economy, real asset investments may retain value better than other investments during a debt crisis.
Softening US Economic Conditions
In the US, which also faces an election this year, economic conditions are softening without sustained declines in inflation. The Atlanta Fed’s Q2 GDPNow model currently stands at 2%, up from last week’s projection of 1.5% but lower than June estimates. The latest jobs report suggests some labor market softening. While a robust 206K jobs were added, most of those jobs came from acyclical sectors such as education and health services and government. Further, the unemployment rate increased to 4.1%, 10 basis points above the Fed’s year-end projections in the June SEP and narrowly missing triggering the Sahm Rule. Though still below the post-GFC average of 6.4%, this marks a 70-basis point rise in the unemployment rate over 14 months.
With Fed Chair Powell testifying before Congress this week, many of the Chair’s comments focused on inflation and labor market risks coming into balance. Despite softening economic conditions, core PCE, the preferred metric of the Fed, has remained sticky. It recently fell from 2.8%, a level held since February, to 2.6% in May, below the June SEP projection for year-end. The Fed may still, however, need to see a more sustained path towards 2% before cutting rates. We believe a cooling labor market and rising unemployment rate may pave the way for rate cuts this year as the risks of over tightening for too long are starting to materialize.