Weekly house view | Election surprises

A small rise in the composite purchasing manager’ index in November for the first time in five months constituted a sliver of good news for the euro area last week. Much of the improvement was due to manufacturing, where activity may be bottoming out. But this news was overshadowed by other events that point to important challenges the continent will face next year. In Germany, the decision by the constitutional court to block government moves to spend EUR60 bn of unspent ‘emergency’ funds from the covid pandemic sent budget plans into disarray, especially as huge sums raised to tackle climate change and other projects are sitting in off-budget vehicles set up to circumvent Germany’s constitutionally enshrined ‘debt brake’. The government has responded by suspending the 2023 debt brake for the fourth year running. But the court ruling leaves huge question marks over next year, with fiscal tightening the last thing that a fragile German economy needs.

Adding to European uncertainties was the surprise triumph of Geert Wilders’ anti-immigration and anti-EU Party for Freedom (PVV) in the Dutch general election. While it remains unclear how, when and with whom it could form a governing coalition, the PVV’s surge could stiffen Dutch resistance to EU budget increases, further common borrowing and aid to the Ukraine. With immigration concerns mounting around Europe, Wilders’ victory will also serve as a wake-up call to mainstream politicians ahead of an intense electoral year that includes elections to the European Parliament and in countries like Portugal and Austria (as well as possibly the UK). Outside Europe, the presidential election in Taiwan will come even soon (next January). There, the opposition’s move to field a joint candidate against the ruling Democratic Progressive Party candidate (DPP) collapsed. The presidential race is still expected to be close and will determine whether the delicate relations between Taiwan and China stabilise or not.  Finally on the electoral front, a week after winning the Argentinian presidential election, Xavier Milei seems to be back-tracking on some of his more radical policies, notably dollarisation of the economy. With a thin political base and lacking control of parliament, it remains to be seen how far Milei can go in his radical agenda to overhaul Argentina.  

In the US, Thanksgiving was followed by a strong ‘Black Friday’, with online sale rising 7.5% from a year before. The consumption binge is now set to carry over into ‘Cyber Monday’, underlining the strength of US consumer spending. This doesn’t quite tally with somewhat subdued consumer sentiment, as revealed in the latest University of Michigan consumer sentiment survey, but it chimes better with the rise in one-year inflation expectations contained in the same survey. Strong spending and the rise in inflation expectations sent US Treasury yields higher again late last week, further underlining how volatile the bond market has become.