Gilles Moec Macrocast: The First Cut is the Deepest
- 14 October 2024 (7 min read)
The French government’s budget bill for 2025 pledges a discretionary effort of 1.4% of GDP. This is a serious amount, the largest effort over the Medium Term Fiscal and Structural Plan (MTFSP) for 2025-2028. Front-loading the measures, rather than pledging future virtue, is always preferable, especially when political conditions are fragile. When simply looking at how the ratios of spending and tax to GDP are forecasted in the government’s bill, a majority of the effort comes from higher tax. As we argued two weeks ago, given the fragile state of domestic demand, such choice is understandable in the short run. The issue – highlighted for instance by Fitch when they decided to put a “negative outlook” on their rating of France – is that many measures in the 2025 bill are temporary. Now that the government has delivered an “emergency budget”, it will need to sketch out a programme of more systemic measures, probably focusing on the spending side given the already high level of taxation.
In the short run, the market will probably focus on the political capacity of the government to get the budget passed. A “no vote” process via article 49.3 of the Constitution is likely, the real issue being then whether a motion of no confidence would succeed. Our baseline is that the budget will pass, but the government may have to consent to some watering down of its most unpopular aspects. We look at historical precedents to gauge the French MTFSP. The overall effort to get to a 3% deficit in 2029 would not be unprecedented – standing between the 1990s and 2010s past consolidation paths. In both cases though France benefited from a massive reduction in interest rates which we do not think can be replicated this time, and debt only marginally fell at the end of these adjustment phases.
We also take a look across the Atlantic. The higher-than-expected US CPI print for September provides another piece of evidence the Fed may have “jumped the gun” with its 50-bps cut in September, but we still expect 25-bps cuts in November and December.
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.
Risk Warning
The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.