Multi-faceted Balancing Act Needed
- 30 September 2024 (10 min read)
That France is now paying more than Spain to fund itself is a reminder that the budget bill for 2025, due to be transmitted to parliament next week, needs to provide enough of a “first instalment” on a credible fiscal correction trajectory. The government is operating in a tricky macro context. French domestic demand is weak. Without the contribution from government consumption and investment, domestic demand would have been falling since Q4 2023. The finance minister must walk a tightrope: cutting the deficit enough as a “statement of intent” to the market and the European authorities, without triggering a recession which would be counter-productive from a fiscal point of view. Yet, a “moderate only” effort for 2025 will be workable only if the medium-term strategy is convincing. From this point of view, preserving the capacity of the corporate sector to invest will be key.
France is not the only Euro area country in a “soft patch”. Registered unemployment continues to rise in Germany and business surveys are not encouraging. Even if growth in the South remains more than decent, the ECB hawks’ sole focus on upside risks for inflation look increasingly difficult to justify, especially since surveys suggest that selling price expectations, including in the services sector, continue to normalise. The market was pricing last Friday a 75% probability of a 25bp rate cut on 17 October. As much as we sympathise with the need to remove monetary restriction fast, the lack of signal from the Governing Council that an outlook change is imminent continues to make us doubt the ECB won’t want to wait until December, even if the call becomes every day closer.
In the US, the market was non-plussed by last week’s data flow, although another fall in initial unemployment claims coupled with a small uptick in core inflation would suggest the Fed may not have to deliver all the stimulus it has hinted at in the latest dot plot. This week’s payroll might change the market dynamics, but the bar for this is probably high.
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