Jeremy Hunt's announcement of the Spring Budget on 6 March will once again be a balancing act for the British Chancellor of the Exchequer. He has the difficult task of supporting an economy whose activity is stalling and investment needs are increasing, while trying to reverse the trajectory of the public deficit, which widened in 2023.
Recently an agreement has been reached between representatives of the European Council, the European Parliament, and the European Commission on a new economic governance framework. It focuses on risk-based surveillance, differentiation between member states based on their specific situation, the integration of fiscal, reform and investment objectives in a medium-term fiscal plan. The single operational indicator in the form of a net expenditure path should facilitate communication and emphasizes the key role of discretionary primary spending rather than tax increases in bringing public finances under control
The recent decision of the German Federal Constitutional Court has fueled the debate on the debt brake, which imposes strict limits in terms of budget deficit. At the risk of oversimplifying, the question is whether fiscal policy should be based on an iron rule or a golden rule. The debt brake imposes fiscal discipline on future governments, which enhances fiscal policy credibility. However, its focus on the budget deficit implies that under realistic assumptions, public debt in percent of GDP will decline significantly. Proponents of the golden rule argue that, given the huge investment needs -green and digital transition, public support to innovation, etc
Following his clear victory in the presidential election, the new president, Javier Milei, intends to push ahead with the liberalisation and deregulation of the economy. A decree and an omnibus bill containing just over 1,000 measures, including some very radical ones, are already being scrutinised in the National Congress of Argentina. These measures have been received rather favourably by the markets and the IMF. However, against a very tense political and social backdrop, the economy is plunging into stagflation and thecountry’s financial situation is still very precarious. The government has already discussed a reprofiling of domestic public debt repayments with the banks. A default on external debt could still be avoided with support from the IMF
The COVID-19 pandemic and the war in Ukraine have prompted many advanced countries to rethink and relocate their supply chains in order to secure strategic production and to create a framework that will help to promote the energy and environmental transition.
Jerome Powell’s opening remarks at the US Federal Reserve Symposium in Jackson Hole were at the center of attention and focused on the short term and inflation. What is the main takeaway? The fight against inflation is not yet over – a message echoed and supported by Christine Lagarde in her own address.
What characterizes the current business cycle? Whether it is the monetary squeeze, the growth slowdown or disinflation, the word that springs to mind seems to be "slow". Moreover, the prospects for recovery, which will mark the beginning of a new cycle, promise to be characterized as slow as well.
Central banks' decisions influence markets, households and businesses. It is therefore necessary to understand how they will react to incoming data. The Federal Reserve and the ECB have similar reaction functions but offer different guidance because of the differences in terms of economic environment, particularly with respect to real interest rates.
Traditionally, monetary policy focuses on price stability and fiscal policy on other objectives. When inflation is well below (above) target on a sustained basis, this separation of roles implies that monetary policy may need to become extremely accommodative (restrictive). Consequently, interest rates have a large cyclical amplitude, which may have undesirable consequences for the economy and put financial stability at risk. Simulations show that a coordinated approach between monetary and fiscal policy reduces the optimal cumulative amount of rate cuts (hikes). However, putting this into practice would probably be very challenging.
Price stability, financial stability and fiscal sustainability are part of the necessary conditions for the balanced development of an economy in the longer run. They can be considered as pillars on which the ‘economic house’ is built. Weakness or fragility of one pillar -e.g. inflation well above target, overvalued asset prices or a high and rising public debt ratio - may impact the solidity of the other pillars and weaken the overall structure. This gives rise to a debate about the nexus between these three conditions. Given these interactions, it is important that each policy -monetary, fiscal, financial stability oriented- is conducted in a way that takes into account its influence on the other objectives. This should enhance overall economic stability.
On 22 February, the South African National Treasury set out its budget plan ahead of the new fiscal year, which will start on 1 April. After slightly revising its fiscal balance upwards since October 2022, the Treasury now expects a primary surplus starting from the current fiscal year. This performance should gradually improve over the next three years.
The downside risks are increasing for French growth, to the extent that growth could turn out to be lower than the level incorporated by the government in its draft budget bill. For 2023 we estimate that growth could be 1 pp below the government’s assumed figure and that this is likely to imply a limited gap between a deficit of 5.4% of GDP at budget implementation and a level of 5% of GDP included in the draft budget bill. Indeed, the risks appear to be moderate in nature, between a deterioration in the labour market which is expected to remain relatively limited and a cyclical rise in business insolvencies, but at a level which should remain below that of 2019. Moreover, the support of public finances, in particular for purchasing power, remains substantial.
Japanese manufacturers are relying more and more on the activities of their overseas-based subsidiaries as sources of opportunities. Sales by manufacturing companies, realised by these subsidiaries, stood at 38.8 trillion JPY (299.7 billion US dollars) in the 2nd quarter of 2022, a record. This represented 28% of the total sales by Japanese manufacturing companies, when we add the sales by subsidiaries abroad to those of companies located in Japan. This percentage is also a new historic high. The main “expatriation” sector by far remains the transport equipment sector (53.6% of the sector’s total sales are realised abroad), an industry that is strongly embedded in global production chains
The new Italian government, headed by Giorgia Meloni, has come to power in a challenging environment and divisions have already appeared between the various partners of the right-wing alliance. In addition to political dissension, the Italian economic context is also conducive to tension. Most of the barometer’s indicators have continued to deteriorate in recent weeks, both in terms of business and household indices.
While the government has already put in place a series of measures totalling 65 billion euros (equivalent to 1.8% of GDP), on 29 September Olaf Scholz announced “a double whammy”, to use his own words, with the introduction of measures to help with the cost of energy, up to a maximum amount of 200 billion euros. It is not expected that the entire budget will be used up; initial estimates suggest that half of the maximum budget would be utilised. This large-scale plan (5.5% of GDP) should make it possible to subsidise electricity consumption for households and businesses (around 80% of their usual consumption) and to maintain a reduced VAT rate of 7% on gas until spring 2024.
Gabriel Boric, the candidate of the very broad left-wing coalition, won the second round of the presidential election last December. He took office in mid-March, and is already facing numerous challenges. His general policy speech at the beginning of June, and then the tax reforms he brought forward at the end of June, have confirmed his intention to implement economic and social policies which differ from those of previous governments. His ambitious objective for his term of office is to begin a rapid "green transition", but also to find the "right balance" between the need for reforms in favour of greater social justice and the need to remain "fiscally responsible"
Egyptian external accounts have been under pressure since the beginning of the year and the outlook is uncertain. Although the current account was able to withstand external shocks thanks to the rise in gas revenues, only the massive support of the Gulf countries enabled Egypt to cope with portfolio investment outflows and to avoid a foreign exchange crisis. The dynamic remains negative in the short term, given the drop in net foreign currency assets in the banking system and persistent exchange rate pressures, despite depreciation of more than 20% since the beginning of the year
Significant uncertainty remains following the general elections in Kenya. Against a sensitive socio-economic backdrop, the first challenge for William Ruto, the new president, is the continuation of fiscal consolidation and public debt reduction measures. Although he rules out a preventive debt restructuring, the high level of sovereign risk requires a slowdown in the deterioration of public finances. The budget deficit averaged -7.7% of GDP over the period 2015/21 and public debt reached almost 70% of GDP in 2021 (compared with 49% in 2015). Moreover, the interest charge on public debt now represents more than 20% of budgetary revenues and its total service absorbs 50% of revenues (compared with 38% in 2015). Kenya’s financing capacity is currently heavily constrained
Financial markets in the UK have recently been confronted with a ‘dash for cash’, whereby investors sell off even safe assets such as long-term government bonds to obtain cash. The catalyst was the announcement of an expansionary fiscal policy, which might force the Bank of England to hike interest rates more aggressively given the potential inflationary consequences. Leverage and the ensuing margin calls acted as an accelerator of the jump in Gilt yields. The events show the necessity for a coordination of economic policy
UK growth contracted slightly in Q2, but the economy should not enter a recession before Q4. On the one hand, the labour market continues to operate at full employment, which will partially absorb the sharp impact of inflation on purchasing power. On the other hand, the new government plan to support households and businesses should mitigate future energy price increases. Faced with persistent inflation, the Bank of England (BoE) is further accelerating its monetary normalisation, at the risk of precipitating a contraction in the economy.
After eight years in opposition, the conservatives have returned to power in Sweden in rather unfavourable circumstances. Although economic activity has proved resilient so far, it is showing clear signs of a slowdown. And faced with rising inflation, the population is demanding more support from the state authorities. Furthermore, the government will quickly need to adopt a position on the NATO accession process before assuming the presidency of the European Union from 1 January 2023. The difficulty will be managing to form a coalition government spanning the Liberals (on the centre-right) to the Sweden Democrats (far-right).
The results of Italy's parliamentary elections have handed power to the right-wing coalition led by Giorgia Meloni. The new administration will quickly be put to the test, since it will take over an increasingly struggling economy exposed to a high risk of recession this winter. Our current forecast is that real GDP will fall by 0.4% quarter-on-quarter in the fourth quarter, followed by a 0.2% q/q drop in the following quarter. The industrial sector, the first section of the economy affected by disruption linked to the war in Ukraine and the rise in production costs, is experiencing a downturn.
Over the next five years, French economic policy will have to continue to deal with structural issues, such as full employment, the delay of companies in terms of robotisation, the competitiveness of companies and the place of industry. It will most likely also continue to focus, at least in the short term, on supporting household purchasing power, as it has done since 2019. These projects, which will have to be carried out in parallel, will have to be reconciled with the cost of the ecological and energy transition against the background of public debt that has already risen sharply and interest rates that are moving higher, albeit in a controlled way.
Since 8 July, a new governmental scheme has offered an ‘anti-inflation’ cheque of EUR200 per person to 2.7 million of the most vulnerable Spanish households. This measure is part of a total package of EUR9 billion, approved by the authorities at the end of June. This also includes another cut in VAT on electricity (from 10% to 5%) and a cut in travel costs. These steps to support households’ purchasing power are welcome as inflationary pressures continue to rise.
After being severely hit by the Omicron variant, economic activity picked up again as of February, and the recovery is expected to continue with growth reaching 4% in 2022. Through no fault of its own, Norway is one of the big winners of the Russia-Ukraine conflict thanks to a substantial increase in oil and gas revenues, which are expected to reach NOK 1,500 bn in 2022 (about EUR 143 bn). Although inflation is milder than in the other European countries, the Norwegian central bank has expressed its determination to tighten monetary conditions as much as necessary to break the inflationary momentum. To bring inflation within its target range, NorgesBank plans to gradually raise its key deposit rate to 2.5% by the end of 2023.
