The (welcome) Return of Boring

With little chance now that the Bank of England will ease quickly enough to create a “feelgood effect” in the second half of the year, there was little to gain for the Conservatives by holding off elections until the autumn. The general elections which will be held on 4 July will be very different from the ones in 2019, which pitched a hard-left statist vision with Corbyn against an essentially dirigiste and “hard Brexit” one with Johnson. In the economic realm, the two main parties now differ only by nuances within a general mainstream view. The most salient point on the economic agenda is likely to be the fiscal rules framework, with some not completely marginal issues on policy sequencing and coordination with monetary policy. This will however remain an essentially technical debate, with no space for fiscal adventures on either side. Another interesting point revolves around how a Labour administration could try to offset fiscal prudence with some re-regulation, especially on the labour market, but again, we do not expect big swings. The “elephant in the room” remains Brexit of course, and how a better trade relationship could be built with the EU, but none of the big national parties want to tackle it. All this may make for a relatively boring campaign and election outcome in the macroeconomic realm, but this would come as a nice relief considering how populist propositions have often been at the heart of the debate across the West in the last political cycle.

In the Euro area, suspense on the outcome of the ECB meeting on 6 June is close to nil, since even the hawks are openly making a rate cut then as a baseline. There is however some more debate on the trajectory after June, and the market has moved away, last week, from pricing three full rate cuts for this year – which remains our baseline. We suspect investors have been impressed by the unexpected re-acceleration in negotiated wages in Q1. We are however tempted to treat this print as a “blip” since a big one-off in Germany pushed the aggregate result up. Excluding Germany, negotiated wages visibly decelerated in Q1, and real-time indicators, as well as business surveys, continue to point to a continuation of the deceleration in Q2.