Investment Institute
Macroeconomics

Changing of the Guards

KEY POINTS
Macro management principles holding firm since the 1980s/1990s are coming under criticism, including within mainstream political forces. Paradoxically though, doubts on the role of central banks are emerging while they are on the cusp of winning their war against inflation.
We continue to monitor the political developments in France. Finding the path towards a stable government may take more time.

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. 

Download the full article
Download report (438.9 KB)

    Disclaimer

    This website is published by AXA Investment Managers Australia Ltd (ABN 47 107 346 841 AFSL 273320) (“AXA IM Australia”) and is intended only for professional investors, sophisticated investors and wholesale clients as defined in the Corporations Act 2001 (Cth).

    This publication is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments, 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.

    Market commentary on the website has been prepared for general informational purposes by the authors, who are part of AXA Investment Managers. This market commentary reflects the views of the authors, and statements in it may differ from the views of others in AXA Investment Managers.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    All investment involves risk , including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested.