European Commission plays bad cop, the fiscal pinch of the left in France and overcapacities in China

21 June 2024

Executive summary

This week, we look at three critical issues:

  • European Commission plays bad cop on fiscal deficits. France, Italy, Poland, Belgium, Hungary, Slovakia and Malta have been named and shamed for running fiscal deficits above -3% of GDP. But we will only find out in mid-July how forcefully the new fiscal rules will be applied – and how much wiggle room is offered to the EU members. For Italy, an Excessive Deficit Procedure would mean a significant fiscal adjustment in the structural balance (~1% of GDP per year) and up to 0.05% of GDP in fines. In France, the fiscal deficit is likely to remain above -4.5% of GDP in 2025-26 no matter who wins the parliamentary elections in July.  
  • French elections: The fiscal pinch of the Front Populaire. Polls indicate that the left-wing alliance could secure around 28% of votes in the first round, more than President Macron’s Renaissance alliance (18%) but less than the right-wing alliance (33%). The left-wing alliance aims to unleash EUR125bn of spending, funded by substantial tax increases, with a net fiscal cost of around EUR33bn or close to 1.2% of GDP. The French government bond spread would widen to 120bps in 2024, nearly double the increase expected under a far-right government, and GDP growth would be hit by a contained -0.3pp in 2025 as tighter financial conditions more than offset the growth-boosting effect of fiscal expansion. But the public deficit would rise above -6% of GDP, and negative economic impacts could build up over time amid lower potential growth and a loss of competitiveness.
  • Overcapacities in China call for higher outbound investment. This month’s G7 statement is the latest to raise concerns about excess capacity in China, where the industrial capacity-utilization rate has declined from 77.2% in Q1 2021 to 73.6% in Q1 2024, the lowest level since 2016 (outside Covid-19). A cyclical imbalance is again at play today amid still-soft domestic demand and supply-side stimulus measures. The domestic context is giving Chinese exporters room to further lower prices to maintain or expand overseas market share, or to make up for higher tariffs. And China’s trade surplus is set to rise further, particularly with emerging economies who account for nearly 60% of Chinese exports. Increasing outbound investment could be a win-win solution to mitigate the trade surplus, but is likely to face geopolitical pushback.

Ludovic Subran

Allianz SE

Bjoern Griesbach

Allianz SE

Maddalena Martini

Allianz SE

Jordi Basco-Carrera

Allianz SE

Françoise Huang

Allianz Trade

Manfred Stamer

Allianz Trade

Maxime Darmet

Allianz Trade

Yao Lu

Allianz Trade