France's service sector faced challenges in Q2, with the latest data revealing a continued contraction in business activity. New orders had the sharpest decline since January, partly due to election uncertainty. This slowdown led to weakened business confidence and job growth. Although output prices rose minimally, the increase was the smallest in over three years, aligning with pre-pandemic levels.

As a result, the service sector PMI rose slightly to 49.6 in June from 49.3 in May, remaining below 50.0 for the second consecutive month, indicating a slight contraction. Firms attributed lower output to reduced footfall and weaker sales, with some blaming the upcoming general election. Demand for services declined, particularly from non-domestic markets, marking the fastest drop since January.

The composite output index experienced a modest decrease from 48.9 in May to 48.8 in June, suggesting a minor reduction in private sector activity. The products and services sectors both experienced a reduction in new business, which resulted in a quicker completion of backlogs. The service sector was the primary driver of modest employment growth, while business confidence plummeted to its lowest level in four months.

The indices paint a diverse economic picture, highlighting that domestic demand and economic growth are under pressure, while employment growth is the only bright spot. This points to an uncertain and potentially unsustainable recovery for domestic demand and output growth.

The Composite Purchasing Managers' Index (PMI) provides an estimate of private sector output for the preceding month by combining information obtained from surveys of around 750 manufacturing and service sector companies. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) output versus the previous month and the closer to 100 (zero) the faster is output growing (contracting). The report also contains the final estimate of the services PMI. The data are provided by S&P Global.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the purchasing managers' manufacturing indexes, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.