Elections Loom Large With Losses On The Left And A Leaning To Largesse. Inflation Is The Key For Policy.

• Global politics is in the spotlight. More than half of the world’s population will head to the polls this year. And it began in Europe last weekend. France and the UK are both likely see a change in government, which will have the potential to reshape the economic and fiscal landscape.
• Across the Tasman, inflation was hotter than expected in May. The report was enough to have local commentators question the direction in Aussie rates.
• Here at home, the dataflow has definitely softened. Several surveys last week confirmed the continued weakness in confidence among businesses and households. We have updated our forecasts (see COTW) and expect a year of soft growth, rising unemployment, and a slow but steady fall in inflation.

Here’s our take on current events

2024 is the year of elections. Over 80 countries – more than half of the world’s population – will head to the polls this year. And it kicked off last weekend in France. France held the first round of parliamentary elections yesterday. And as signalled by the opinion polls, the far-right National Rally (RN) are comfortably out in front with over a third of the vote. The leftist bloc is in second place, and current President Emmanuel Macron’s centrist bloc trailing in third place. The second round takes place this Sunday. The final result is still far from certain. But should the RN come out victorious, it will be the first far-right government in France’s post-war period. The election has the potential to reshape France’s economic and fiscal landscape. An absolute majority of the RN will likely see public borrowing swell. The party’s manifesto entails a high-spending economic programme including tax cuts for businesses and households. For financial markets, the risk premium on French debt has become front and centre. Last week, the spread of the 10-year French bond over Germany’s closed over 80bps – the highest since 2012.

Over in the UK, the general election will take place on Thursday. It will be the first time in over 80 years that the UK will hold an election in July. As the opinion polls suggest, the opposition Labour Party will likely come out victorious. The new government will inherit a relatively stable economy where inflation is coming down and interest rates are falling. However, the UK is grappling with poor public finances. Public debt has ballooned to £2.7 trillion - the highest since 1961. A lift in taxes and/or a significant cutback in spending is inevitable for whichever party that wins, regardless of what their manifesto currently entails.

Down under, all eyes were on Aussie’s inflation data last week, which was hotter than expected. In the year to May, prices rose by 4%, up from 3.6%. While the trimmed mean measure also lifted to 4.4% from 4.1%. There were notable increases in housing, up 5.2%, and transport up 4.9%, which remain concerning. However, part of the monthly rise comes from base effects across services inflation, particularly holiday travel and accommodation when prices fell 10% last year. Stripping out the volatile items and holiday travel, the core measure actually fell to 4% from 4.1%. It’s fair to say that last week’s report was sending mixed signals, making it hard to say for certain whether a reacceleration in inflation is underway. Nonetheless, the report was enough to have commentators questioning the direction of Aussie rates.

Here at home, we delved into some confidence surveys. And they detailed weakness in the economy. Businesses and consumers are feeling the impact of a weak economy. It’s not surprising to see further falls across confidence indicators. 2023 was a tough year. And while the outlook for 2024 is better, it’s still soft. Tomorrow’s NZIER Quarterly Survey of Business Opinion will also likely remind us that we’re not out of the woods yet. It’s a white-knuckle ride for many. But, if the economy evolves as we expect, then we see the RBNZ delivering the first rate cut in November. For now, survive ‘til 25 remains the mantra on the ground.

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