Changing of the Guards
- 15 July 2024 (10 min read)
Understandably, the French elections and the US presidential race have focused attention on the potential for radical policy experimentation. We think attention should also be drawn to how even mainstream political forces can be affected by a new approach to macroeconomic management straying away from the main principles which have been guiding policymakers since the 1980s. A circumspect attitude towards the role of fiscal policy in cyclical fine-tuning, the primacy of monetary policy and a distrust for direct state intervention in capital allocation are giving way to enthusiasm for activist fiscal policy, a critical view of the capacity of monetary policy alone to deal with inflation shocks and some appetite for price controls. We review a paper by Van Klooster and Weber which in our view encapsulates very well the new Zeitgeist. While we agree that without determined government action during Covid and the energy price shock triggered by the Ukraine war a painful recession could not have been avoided, there is a risk that what was emergency management turns into a structural shift.
Paradoxically, central banks are coming under heavy criticism when they are on the cusp of a victory on the inflation shock. We do not expect any hard decision this week, but the ECB Governing Council meeting should be the occasion to make it clearer that the June cut was only the start of a process, and we expect the next 25 bps cut coming in September. In the US, the June print for the CPI probably sealed the deal for a first cut in September.
We continue to monitor the latest political developments in France. The President has made it plain he would wait for compromises across political families to emerge before appointing a new Prime Minister. This process could still take some time. We draw attention to the fact that beyond the budget bill for 2025, a new government will have to produce a credible medium-term plan to allow the EU to grant France extra time to bring its deficit to 3%. This will take more than just cobbling up together a non-committal budget.
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.
Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.
Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.