Executive summary
This week, we look at four critical issues:
- China’s Third Plenum: don’t hold your breath. All eyes are on China’s Third Plenum, taking place in Beijing next week, for clues on how policymakers plan to combat economic slowdown. The central government could take on more spending and debt responsibilities to alleviate the pressure on local governments. More wide-ranging tax reforms could also be considered. To address the struggling property market, we estimate that close to another 700 million square meters of housing inventories need to be absorbed, which would require RMB4trn of funding (3.2% of GDP). This could boost housing sales and household confidence, and help developers finish ongoing projects. But recent plena have fallen short of expectations and this edition may also only provide policy directions in line with the current approach.
- Germany: penny-pinching on public investments. Germany needs EUR600bn in additional public investments over the next decade to revive its economic growth. But its latest budget does not even come close despite manageable debt and low interest rates. Public investments fell by as much as -EUR21.7bn in 2023 and private companies are also underinvesting, especially in the manufacturing sector. A 1% decline in the business outlook leads to a reduction in investment activity by -1.8%, while increased economic policy uncertainty results in a significant -17.4% drop. In this context, increasing public investments, reducing economic policy uncertainty and boosting the business environment would go a long way to revive the appetite for private investments as well.
- French elections: The cost of uncertainty. With no party winning an absolute majority in the French elections, the battle is on to form the next government before the 2025 draft budget bill is due at the end of September. The most likely scenario remains a moderate/centrist or technocratic minority government, with risks of moderate fiscal slippages. A minority left-wing government is another possibility though it would be more unstable and struggle both politically and legally to deliver on core electorate pledges such as the unwinding of the pension reform or the 14% increase in the minimum wage. We estimate that increased political uncertainty will knock 0.1-0.2pp off France’s GDP growth in Q3 and Q4.
- ECB: More data please. At the 18 July meeting, we expect the ECB to pause, keeping the deposit rate unchanged at 3.75%, after a controversial initial rate cut in June. We maintain our forecast of another 25bps cut in September as the next batch of inflation and wage data should confirm that disinflation is on track despite some recent upside surprises. Quantitative tightening is set to continue on autopilot, given that the worst-case political outcome in France has been avoided. With fragmentation risks fading, there is no reason to expect an activation of the ECB’s Transmission Protection Instrument (TPI) anytime soon.