While French growth reached 1.1% in 2023 and 2024, uncertainties, particularly of a political nature, are expected to drive growth slightly down in 2025 (0.7% according to our forecasts). The difference can be explained primarily by the weak growth carry-over after Q4 2024 and Q1 2025. However, we are probably over the worst and growth is expected to strengthen from Q2 onwards. In fact, implementation of the 2025 budget should restore confidence and allow an increase in public consumption compared to Q1 (when it was penalised by renewal of the 2024 budget). Basically, we think that the momentum of the transition to services - accompanied by strong business creations - has not been interrupted. Accordingly, the fundamentals of French growth are preserved.
The labour market in the UK continues to deteriorate. According to tax data (PAYE) published on 21 January by the ONS, the number of employees in the UK fell by 46,922 (-0.2% m/m) in December, the largest one-month decline since November 2021, which followed a drop of -0.1% in November. The year-on-year change drops drastically and falls below zero (-8,407) for the first time since April 2021.
“Not all died, but all were stricken”. While the Covid-19 pandemic spared no one, its consequences, particularly on the budgetary front, were not the same for everyone.
While emerging economies (EMEs), apart from China, have contributed little to global warming, the future CO2 emissions curve and the resulting additional temperature rise will largely hinge on their ability to conciliate growth and decarbonisation. However, due to limited financial resources, their investments in the "green" transition are low, at around 50 dollars a year per capita, compared to investments which are around seventeen times higher (850 dollars a year per capita) in developed countries. This disparity gave rise to the idea of securing transfers from developed to developing countries at the Copenhagen Conference of the Parties (COP), in 2009.
The Autumn Budget, unveiled by Rachel Reeves on October 30th, attempts to reconcile fiscal adjustment, support for public services and strengthening of UK’s potential growth.
Last week’s news made for grim reading for many in Europe. First came the choice by our American friends to bring back to the White House a man who said just weeks ago that the EU would have to “pay a big price” if he won. Then the German governing coalition collapsed. Following factory closure announcements by VW in Germany a week before, the two largest German banks reported massive increases in their provisions for bad loans. Meanwhile, in France, lay-offs were announced by two high profile French companies in the automotive industry but also in retail a sector hitherto thought to be fine
The presidential election on 5 November is associated with underlying but potentially decisive economic issues.Political aspects: The election pits Vice President Kamala Harris (Democrat) against former President Donald Trump (Republican). The winner will take office on 20 January 2025. The election looks set to be particularly closely contested, despite the momentum in Donald Trump's favour at the end of the campaign. At the same time, voters will be deciding on the composition of the next Congress, which will significantly affect the new administration's room for manoeuvre.Economic context: The vote comes against a backdrop of an apparently stronger economy. This is illustrated by solid macroeconomic performances, despite recent shocks, which are seemingly auguring a soft landing
Discussions on the 2025 draft finance law (PLF) have just begun in the French National Assembly. The backdrop for this PLF must be outlined. France is setting out to consolidate its budget, which is a major yet necessary task. However, things are hanging in the balance due to power struggles in the National Assembly. Over the past few years, a high fiscal deficit has been run up, with the 2024 fiscal deficit and interest burden (which is expected to increase by nearly 1 point of GDP by 2027) leaving the French government with no choice but to take action. In order to stabilise its public debt ratio, France will have to bring its fiscal deficit below 3% of GDP and therefore reduce it each year for at least five years
In Q3 2024, Chinese economic growth accelerated to +0.9% quarter-on-quarter (q/q), after its poor performance in the previous quarter (+0.5% q/q). It stood at +4.6% year-on-year (y/y), which is slightly lower than in Q2, and reached +4.8% y/y over the first three quarters of 2024. In order to hit the official growth target of "around 5%" set for 2024, activity will have to rebound strongly during the final quarter of the year. This means that the fiscal stimulus measures announced by the authorities since the last week of September need to be rolled out quickly. These announcements have provided less details than expected on the stimulus measures and were less significant than expected by the markets
The issue of public finances and their rebalancing has come to the fore, particularly in France, but not only. This problem concerns many other countries, most notably the United States.
The macroeconomic outlook for South Africa is gloomy. After a year of unprecedented electricity shortages in 2023, economic growth is only expected to rebound very slightly in 2024. However, investor confidence has been boosted with new political forces entering into government in June 2024, following the general election in May. The new coalition government, with populist parties largely absent, offers the prospect of a degree of political continuity, continued fiscal consolidation and the implementation of reforms designed to increase the medium-term economic-growth potential. However, this government of national unity is built on uneasy alliances
Germany and France follow different trajectories in terms of fiscal consolidation. The latter is more involved in Germany, where debt is more moderate. However, this is accompanied by a reduced support for the greening of the economy and a GDP stagnation over the last two years. In France, where public debt is higher, maintaining strong fiscal support has been accompanied by an increase in savings. The literature points out that, in this context, fiscal consolidation based on lower spending could support growth.
In order to achieve its climate targets, the European Union will not only have to green its electricity production, but also increase it. This is a daunting industrial and financial challenge, echoed in the “Draghi” report on the future of European competitiveness, as well as the new Green Deal proposed by the re-elected President of the European Commission, Ursula Von Der Leyen.
The newly elected Labour Party has set a target of 1,500,000 extra homes in five years, or 300,000 a year, in an attempt to stem the crisis in England's housing sector. This is not a new figure; it was already the one put forward in the Conservative Party manifesto when Boris Johnson was elected in 2019.
The Italian economy has seen strong recovery since the end of the Covid-19 pandemic. Since 2021, its annual growth has far exceeded that recorded on average in the eurozone, thanks to the implementation of expansionary fiscal policies, which have buoyed consumption and investment, and the gradual recovery of tourism. Since the beginning of 2023 however, economic activity has started to moderate, due to an unfavourable international environment and the gradual abolition of these fiscal measures. In addition, the latter have, by their very nature, impacted the State's public finances, placing the country under the European Commission's excessive deficit procedure (EDP) in June 2024.
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.