11 October 2024
Summary
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This week we look at four critical issues:
The cost of rising waters for European families
Storm Kirk is the latest to highlight Europe’s vulnerability to severe flooding, just a month after Storm Boris triggered severe flooding across Central Europe, impacting nearly 2mn people and causing insured losses estimated at EUR2-3bn. With climate change increasing the frequency and intensity of flooding events, households are paying the price. We find that a 1-meter rise in river flood reduces household disposable income growth by -0.08% on average. Between 2000 and 2010, families in France, Italy and Germany experienced total cumulative disposable income losses of EUR16,400, EUR10,500, and EUR7,800. An already hefty price which could rise further by as much as +40%, +60% and +24% over the next decade, even under climate mitigation.
Fiscal policy reality check for France and Italy
October’s multiple fiscal deadlines will be the first test for the EU’s reformed fiscal rules; all eyes are on France and Italy’s recently announced medium-term fiscal plans. Italy seems to have committed to some fiscal discipline, on top of positive developments on the revenue side. Its fiscal deficit is now expected at 3.8% of GDP in 2024 (from 4.3% previously estimated) and the primary balance is already returning to a 0.1% surplus this year. However, given the limited details from the government, some assumptions such as the 1% target growth for this year and the catch up in NGEU spending, seem overly optimistic. Meanwhile, the French fiscal deficit has been confirmed at -6.1% of GDP in 2024, the largest fiscal slippage the country has registered since 2000 (excluding 2009 and 2020). The -5% of GDP fiscal deficit target for 2025 looks unrealistic and we expect a fiscal slippage of -0.5pp. In this context, a potential downgrade from its current AA- rating is a possibility since France is currently borrowing at similar conditions as Spain (rated A-).
Good things come in threes? ECB to cut again amid cloudy outlook
At its next meeting on 17 October, we expect the ECB to cut the deposit rate for a third time this year to 3.25%. With leading economic indicators surprising on the downside and inflation at 1.8% y/y, speeding up the rate-cutting cycle seems appropriate. Going forward, we still expect a terminal rate of 2.25% to be reached in the second half of 2025, though uncertainty remains high. Factors such as fluctuating oil prices and the outcome of the US elections could significantly impact growth and inflation, potentially altering the ECB’s course. With quantitative tightening accelerating on autopilot, government bond yields will face additional pressure as EUR 410 billion per year (3.3% of GDP) is offloaded from the ECB's balance sheet going forward. Combined with the fiscal outlook, there is little room for Eurozone spreads to narrow, despite lower policy rates.
Authors
Ana Boata
Allianz Trade
Allianz Trade
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