Investment Institute
Viewpoint Chief Economist

Summers’ Blues

  • 12 June 2023 (5 min read)

  • Fed to “stay put” for now, ECB to hike by 25bps, but all eyes on “soft forward guidance”.
  • Larry Summers has painted a bleak picture of the US long-term fiscal challenges. We use it as a starter to discuss Europe.

This week is of course going to be defined by the central banks. We expect the Fed to “stay put” for now, but the focus will be on the future trajectory. We expect the prepared statement to stick to the line laid out in May and maintain a “soft directional” bias, but we acknowledge that the US data flow will have to deteriorate further on the growth side – as in our baseline - to avoid another hike in July, while the May inflation print to be released this week could be crucial. Just like everyone else we expect the ECB to hike by 25 bps this Thursday while maintaining a tightening bias for the future, but without firm guidance. We continue to think July will be the peak of the ECB’s tightening, but we also think that the Governing Council has not reached a consensus as to what to do after the summer break. September remains in play, despite the Euro area’s fall in “technical recession.”

Now, while we have been discussing monetary policy a lot since the end of the pandemic, we think fiscal policy is going to be more in focus in the coming years. We listened carefully to Larry Summers’ speech at the Peterson Institute on 1 June. It’s not for the faint-hearted, as he painted a quite bleak picture of the structural forces shaping US public finances. His main point seems to be that Americans need to accept a significant rise in taxation across the board, implicitly towards European levels. This is of course a politically challenging proposal in the current environment, both for the right and the left since he believes that the “populist solution” (taxing the wealthiest only) would not be commensurate with the magnitude of the revenue shortfall on trend.

Europe’s starting point is more favourable (the deficit and debt ratios are lower in the Euro area as a whole than in the US, “consent to taxation” is higher, the fiscal process is less ideologically charged), but thorny issues abound on the horizon. We add to the mix the cost of the green transition, drawing on Jean Pisani-Ferry and Selma Mahfouz’s report. While the debate usually focuses on more debt and more tax, we also take a quick look at episodes of spending restraint.

Have our latest insights delivered straight to your inbox

SUBSCRIBE NOW
Subscribe to updates.

Related Articles

Viewpoint Chief Economist

European Convergence

Viewpoint Chief Economist

Draghi Captures the Zeitgeist

Viewpoint Chief Economist

Zoom on the Boom

    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.
    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ
    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    Back to top