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Fiscal Policy

Colombia’s tax reform, inflation problems persist

The new tax bill unveiled by Colombia’s government, which aims to raise tax revenues to fund the government’s social programmes and “consolidate the fiscal adjustment” doesn’t change our view that the government’s debt-to-GDP ratio will continue to rise over the coming years. Meanwhile, the July inflation figures show that price pressures across the region remain acute, but central bank’s tightening cycles are still likely to come to an end over the next couple of months.

12 August 2022

Demographic woes persist, tourists waiting at the gate

An exodus of long-term migrants contributed to the 0.6% fall in Japan’s population last year but with border controls loosened since March net migration is bouncing back strongly. Even so, we still see GDP growth settling around 0.5% over the longer-term as a shrinking workforce offsets productivity gains. Meanwhile, Japan remains a highly popular tourist destination and once the onerous procedural requirements for entry are lifted, probably sometime in Q4, tourist arrivals and spending should rebound strongly.

12 August 2022

RBA to slow pace of tightening from October

The latest survey data suggest that inflation will continue to accelerate over coming months and we expect the Reserve Bank of Australia to deliver another 50bp rate hike next month. But with food spot prices returning to the level before the Ukraine war and wholesale gas and electricity prices coming off the boil, the Bank will probably slow the pace of tightening to smaller 25bp hikes from October.

12 August 2022
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Why we expect a euro-zone recession

We think the euro-zone will soon fall into recession as high inflation, tighter monetary policy and weak global growth take their toll. While the economy should recover next year, the rebound will be held back by a lack of policy support. What’s more, we think the biggest risks to our forecasts are to the downside, notably from Russia turning off the gas taps completely or the ECB failing to avert a sovereign debt crisis.

What will this recession look like?

We expect a recession in 2022/23 to be driven by high inflation, with a contraction in real consumer spending at its epicentre. But with household and corporate balance sheets still relatively healthy, we suspect the recession will be mild by historical standards.

EU & the rule of law dispute: why do EU funds matter?

EU funds will provide a key boost to economies in Central and Eastern Europe in the coming years as the region navigates a challenging macro environment and slowing global growth. Disputes with the European Commission over the rule of law in Hungary and Poland look close to being resolved, but the risk of funds being halted indefinitely remains high and would weigh heavily on growth in both countries. Emerging Europe Drop-In (11th Aug): We’re expecting downturns in Central and Eastern Europe, but how bad could it get? Join this 20-minute briefing on our Q3 Outlook report, including the latest on Turkey, Russia and whether Hungary’s forint has further to fall. Register now.

Rhine troubles add to pressure on German industry

The fall in the Rhine’s water level is a small problem for German industry compared to the gas crisis, or indeed the recent shortage of semiconductors. But if it persists until December it could subtract 0.2ppts from GDP in Q3 and Q4 and add a touch to inflation.

Democrats embrace fiscal tightening

The Inflation Reduction Act passed by the Senate over the weekend will, despite its name, do little to rein in inflation, but the climate provisions will make a meaningful difference in efforts to reduce GHG emissions. The bill represents a cumulative fiscal tightening of slightly more than $300bn, or 1.3% of GDP, over the next decade, which is a marked change from the fiscal packages passed by both parties in recent years that all added to the deficit. CPI Drop-In (10th Aug): Will July finally mark the turning point for US inflation? Join our US Economics team for a briefing shortly after the CPI release about the data and likely Fed response. Register now.

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