20180717-NATIXIS-Will_the_euro_zone_be_forced_to_conduct_a_more_expansionary_fiscal_policy__6页_721kb

Flash Economics Summary

Core Content

This document from Natixis analyzes the potential for the euro zone to adopt a more expansionary fiscal policy in response to three key factors that are likely to slow economic growth:

1. Rise in oil prices
2. Major recruitment difficulties for companies
3. Normalization of the euro zone's monetary policy

The report suggests that these factors will collectively contribute to a slowdown in growth and that governments may be compelled to respond with more expansionary fiscal measures to counteract the negative effects.

Main Factors Affecting Growth

1. Rise in Oil Prices

• The increase in oil prices raises the cost of energy imports for the euro zone.
• This leads to a reduction in real income and growth, as shown in Chart 1A and supporting data in Charts 1B and C.

2. Recruitment Difficulties

• Chart 2 indicates that recruitment difficulties have become severe in the euro zone.
• This is expected to slow job creation, which in turn will slow overall economic growth.
• Charts 3A and B show the initial signs of this slowdown in employment and PMI data.

3. Normalization of Monetary Policy

• The ECB is likely to stop quantitative easing by the end of 2018 (Chart 4A).
• Interest rate hikes are expected to start in mid-2019 (Chart 4B).
• Rising interest rates (Charts 4C and D) will act as a drag on growth.

Government Response

1. Expected Fiscal Policy Shift

• If growth slows, the only viable response is for governments to adopt a more expansionary fiscal policy.
• This is seen as a necessary measure to counteract the adverse effects of the three slowdown factors.

2. Fiscal Deficits and Structural Trends

• The structural fiscal deficit in the euro zone has been increasing since 2017.
• Chart 6A shows the overall euro zone fiscal deficit, while Chart 6B highlights the trend for the euro zone excluding Germany.
• France is expected to face an increasing fiscal deficit from 2019 onwards, while Germany, Spain, and Italy are also seeing an upward trend in their structural fiscal deficits (Chart 7).

3. National Examples

• Italy: The new coalition government aims to reduce taxes on households and SMEs and increase government spending in areas like security and universal income.
• France: Without adjustment policies, the country is expected to experience a continuously rising fiscal deficit.

Key Information

• The report is intended for professional and qualified investors only.
• It is strictly confidential and should not be shared with third parties without prior consent.
• The analysis is based on public information and does not constitute a personalized investment recommendation.
• No liability is accepted for the accuracy, completeness, or relevance of the information provided.
• The views expressed are those of the authors and may differ from those of Natixis or other entities.

Disclaimer Highlights

• Regulatory Context: The document is subject to various regulatory requirements in different jurisdictions.
• No Investment Recommendation: It is not a financial analysis and does not meet legal standards for independent investment research.
• No Liability: Natixis and its affiliates are not liable for any actions taken based on the information in this document.
• Professional Clients Only: In certain regions, including Hong Kong and Dubai, the document is intended for professional clients only.

Conclusion

The euro zone is likely to face a growth slowdown due to the combined effects of rising oil prices, recruitment challenges, and the normalization of monetary policy. In response, governments are expected to adopt more expansionary fiscal policies, which may lead to increased fiscal deficits in several member states. This shift is seen as necessary to prevent a pro-cyclical monetary policy and to stimulate economic activity.