SEBASTIAN VISMARA, Senior Global Macro Economist de Bny Investments, Analyze the environment macro globally at a “complex” moment, as recognized, to issue projections “for the continuous political news of each day.” Of the last, the German stimuli pack and the increase in defense expenditure approved by the EU.
How has the game changed the decision of the new German government to eliminate the budget deficit limit?
It is a great decision. The policies that have been discussed are very large and is not just the fact of removing the debt limit in the Constitution, it is also the infrastructure and defense spending program. If you add everything, it is quite large. And not only goes from Germany. Everyone will have to increase security for security defense. Something that I think was necessary. However, I think we will not see a great impact this year and will be more long term, especially with the issue of defense because there is no capacity, so some flows will go to the US in the short term.
Do you think it is a first step before new measures or is it definitive?
It is already large and significant enough and is very integral. It has an expense in defense, infrastructure and tax discounts. We have to finally see what is approved in Parliament but it is a good sign for the rest of the countries that have to also take another step. There will also be a union of defense spending by the EU although it will not cover all the increase in the expenditure required. Some countries, such as Italy, will have difficulty increasing the deficit and that is why it is important that there is union.
How will this affect the inflation cycle and interest rates?
There will be upward pressure for inflation in Europe in many sectors but in particular defense and its production capacity. We have increased the expectation for the types. We no longer expect the ECB to take them below 2%, where we think they will stay.
It is clearly an obstacle on the BCE route …
The ECB does not worry or not to reduce interest rates per I know. I mean, the reason why type guys was going down is because the economy was weak. Now we expect a great increase in domestic demand in Europe in the long term and now reaching that 2% will be somewhat more complicated.
How do you think this expense package will be channeled until you reach the consumer?
Analyzing the German case, the announced spending package is complemented with a fiscal reduction. Each program has different short and long -term implications but it is true that there is still sufficient productive capacity yet so it will go to the US, which could bring a tariff agreement between the US and the EU. We will have to see what the US announces in this aspect but could help that higher defense expense and a possible increase in the demand for liquefied natural gas. And this is why the impact will not be as large as in the long term. These are both, both how much it will be spent and where that expense will go, so we believe that more impact on growth will be seen. The rest of the stimulus package is more domestic and will have a more direct flow towards its economy.
Do you think the markets have been too optimistic so far?
I think that in the short term, the markets do seem, but if you move away a little and analyze, the divergence between Europe and the US had no precedents. It is true that based on this, I would not expect that the bags continue much further but now there is a structural reason to be optimistic with Europe because this issue will keep the next decade with us although there is some volatility caused by Trump’s ads. This is structural, it is positive and is long term for the region.
With respect to tariffs, what is your base scenario? Is it part of a negotiation or a real threat?
My opinion is that there is an underlying plan in chaos. I think that tariffs, in part, will serve to finance some tax drops and are seen as a source of income, as it has already been in the past too, although we must see how high will be finally and what goods will be taxed. But I also think they are part of a tactic to sit down to negotiate and get something in return.
And what do you think will ask Europe in exchange for tariffs?
There are some things that are already happening. For example, a greater expense in defense by Europe or a greater amount of purchases of American goods and energy products. On the other hand, it can also demand a better treatment for American companies in Europe, such as technological ones, which are encountering some sanctions in recent months. In any case, our base scenario is a 10% tariff to Europe, not 25%. But I would not be surprised that this 25% is the starting point of the negotiation.
And do you expect a similar response from the EU?
I think there will be an answer but in a more concrete way, similar to what happened in 2018 with the tariffs to steel by the US that were answered with import taxes in other sectors to maximize the impact on the political basis of the Republican party. Then a 100% tariff was set to Harley-Davidson imports, for example, and now we expect something similar.
Returning to the policies of the ECB, now the debate passes where the neutral type is. Where do you see it?
Yes, it’s true. Lagarde has been saying many times, and not only lagarde, both implicitly and explicitly that the neutral type was the goal and that has been guiding the market towards what would be the neutral type between 2.25% and 1.75% and is probably where it is. We think that the types will take even below the neutral type because the effect of tariffs is not considering.
Do you think, therefore, that in the next meeting they will have to modify the estimates?
Yes. Not on the neutral type but it may be on their next steps if they include these two opposite forces such as tariffs and new spending programs, which greatly expands the range of possibilities that the ECB has. Our expectation is to end the year in 2% with the effect of tariffs.
Do you think it would be good for the ECB to have a tool like the ‘dot plot’?
It is something that central banks think on many occasions. The ‘dot plots’ are used by markets as a promise and that is not what central banks want because their communication develops from the premise of the information that is had at a specific moment on the world and the economy, but, obviously, things change and a ‘dot plot’ is always taken too seriously.
Was there the same debate at the Bank of England when you worked there?
It is a debate that is always in central banks, about communication and what is the best way to transmit policies. There are those who defend that it is useful because it creates the lack of parity on a vision and those who see it as a promise from the central bank, something that is not. It would be surprising if the ECB decided to adopt something like that.
At the last meeting we saw for the first time they talked clearly about the end of the type cuts cycle. Do you think it is something that the market needed?
Before finishing cutting types you have to point out that they are reaching that point so as not to surprise the market. But for now there is still a lot of uncertainty due to tariffs and expenditure in defense and infrastructure. I would have surprised that they would not have done it because it is quite aligned with what the central banks usually do in these cases.
Has the political risk in Europe disappeared after the German elections?
Depends. We have had a motion of confidence in Portugal now and after the elections in France, Germany and the United Kingdom it seems that there is some more stability now, but not very clearly. But yes, now we see more of certainty in this regard.
In the US Trump has brought a new inflationist risk with taxes and tariffs. Is the Fed unarmed against him?
I think the Fed is in a complicated place because it seems that growth will slow down a bit and tax support will not come to the rescue. It seems that there will be an extension of the tax cuts that are already in the economy and will not contribute more growth as it did in recent years. At the same time, tariffs create upward pressure in prices, so for a central bank that still has inflation above the goal, it must carefully walk with what it does. I suspect that the Fed will be very careful and will have to do what happens to the economy and the data before acting. This, obviously, will be so unless unemployment begins to rise very quickly, which in that case will have to lower types, but it is not what we expect. We have two more drops for the second half of the year.
With these new inflationary pressures, have US consumption and market labor data lost importance?
No. I think they are still very important but I suspect that we will see a higher savings rate and a slowdown in consumption as we saw in 2018. It would be very surprising that we see a consumption with which there have been between 2020 and 2024. Salary data is already being seen that point to a deceleration in some sectors. The forecasts on consumption remain the main catalyst for us and we see a decrease in this regard.
Finally, do you think that now the ‘macro’ is more difficult to predict?
The ‘macro’ is at an interesting point and is difficult to predict precisely because of the continuous political news every day. The best thing that investors can do is attend to what regulators say and ignore the noise around. The market is a mechanism of weighting and probabilities in which each investor makes its own estimate. Now it is discounted in part that there is a slowdown in growth. What we do not see is a recession or anything similar.
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