French elections round two, the political tide turns in the UK and globetrotters drive the tourism rebound

05 July 2024

Executive summary

This week, we look at three critical issues:

  • French elections: ready for round two? Ahead of the second round of France’s legislative elections, a hung parliament is still the most likely scenario. The process of forming the next government could extend well into the summer under a hung parliament, but the hard deadline will be the end of September to pass the 2025 draft budget bill. President Macron may appoint RN head Jordan Bardella as Prime Minister in the short term even if the RN is short of an absolute majority, but we doubt such as government will last beyond September. Ultimately, the most likely scenario is that a technocratic government takes over to maintain some policy continuity and run current affairs. However, the public deficit would remain large at close to -5% of GDP in 2025 and the government would be inherently unstable. Both European and French assets have recovered after the first round and are now pricing in the diminished likelihood of a right-wing majority.
  • UK elections: the tide turns. As expected, the Labour party won the legislative elections with a large majority of seats (410 seats out of 650), ending 14 years of Conservative rule and beating Tony Blair’s 179 majority in 1997. We expect pragmatism and fiscal discipline to take precedence over higher public spending, at least in the beginning, with more ambitious policy changes likely only after 2025. The public deficit would reach -5.7% of GDP in 2024, thanks to the cyclical recovery supporting receipts, and -5.8% in 2025 as the government loosens policy. From 2026, we expect a modest fiscal consolidation of GBP15bn (0.5% of GDP) per year, with the government likely to rely on tax increases to fund higher spending and reduce the deficit. The economy is picking up pace after a dismal 2023 and we expect GDP to grow by +1.3% this year as financial conditions should continue to ease, followed by +1.9% in 2025, benefiting from the fiscal boost. Under a pragmatic Labour government, we see 10y GILT yields finishing 2024 at 3.7% (vs 4.2% currently), UK equity markets delivering returns of around 5% yearly and corporate spreads remaining stable in 2024, 2025 and 2026.
  • Globetrotters driving the tourism rebound. Despite the economic uncertainty and mounting geopolitical tensions, the sun is still shining over the tourism sector. On average, global hotel occupancy rates stood at 68% as of May, the highest level since the pandemic. The cruise industry in particular is expecting summer 2024 to beat summer 2019 as ships are fully booked. International travel is by far the biggest driver of the tourism rebound, with Europe keeping its crown as the world’s top destination. But Chinese tourists remain the biggest spenders: Chinese expenditures on international travel reached USD196bn last year (compared to USD150bn by Americans and USD112bn by Germans).

Ludovic Subran

Allianz SE

Maxime Darmet

Allianz Trade

Jordi Basco-Carrera

Allianz SE

Bjoern Griesbach

Allianz SE

Maria Latorre

Allianz Trade