- The results of the German federal elections point to a lengthy negotiation process
- We use the Spanish and Irish real estate bubbles of 10 years ago to shed a light on China’s options
- The Fed is unfazed by mounting uncertainty – the next two months could be volatile though
The first projections for the next Bundestag seem to leave three options open: “traffic light”, “Jamaica” … and another “grand coalition” between SPD (Social Democratic Party) and Christian Democratic Union-Christian Social Union (CDU-CSU). No solution looks obvious, and this suggests Angela Merkel could still be Chancellor for some months in 2022. By the time a coalition agreement is struck, the French presidential campaign may have started in earnest. European Union (EU) affairs could be at a standstill until next summer.
While uncertainty is still high around the Evergrande case, we look at China’s capacity to deal with its real estate bubble using the experience of Spain and Ireland 10 years ago. Contrary to the peripheral countries of the Euro area, China’s central bank is fully flexible, its International Investment Position is positive, and its capital account is not fully liberalized. This allows China to choose the timing and pace of its real-estate overhaul. However, such “clean-up” is a condition to the further modernization of its macro management.
Moreover, a lesson of the Spanish and Irish experience is that real-estate bubbles artificially inflate economic growth while deteriorating its quality through sub-optimal labour and capital allocation. Still, deflating the bubble comes with large transition costs.
Beyond telegraphing the beginning of tapering in November – unless the dataflow deteriorates significantly - the latest Federal Open Market Committee (FOMC) meeting was remarkable for the continuation of the “hawkish shift” on policy rates, although the Fed’s economic outlook has barely changed relative to June. There was a similar move at the Bank of England last week as well. This, together with the “grumblings” at the European Central Bank (ECB) on inflation risks suggest the “tide is turning” on the global monetary stance, even if we can expect some volatility ahead – not least the extreme complications of the US fiscal process. Some “pause for thought” remains possible.
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.