Europe Economic Weekly: Moving parts

Research evidence excerpt

Europe Economic Weekly: Moving parts

ease near-term policy uncertainty and

lead to tighter financial conditions, which could weigh on growth. The process of

electing a new leader could take months, keeping uncertainty on economic and fiscal

policy elevated. Uncertainty can delay investment and consumption decisions, also

weighing on growth. The latter is the risk we would worry more about very near term.

Second, while markets are likely to price in broad policy continuity under Starmer staying

or Streeting as PM, a soft-left-leaning candidate could raise concerns about adherence

to fiscal rules, the potential for higher borrowing, and risks to fiscal credibility. But we

would make the same point as last week – breaking fiscal rules is not a foregone

conclusion, and market pressures could constrain radical proposals. However, it cannot

be ruled out – some have suggested tweaks in the fiscal framework, which can increase

risks of a rise in borrowing.

Third, the most immediate implication is one of even less fiscal space, potentially

meaning additional constraints in the aftermath of current events. The rise in yields,

along with possibly weaker growth or higher inflation, are likely to have already squeezed

the headroom. We estimate that since the March budget, higher long-term yields and

front-end repricing (driven by the Iran conflict as well as political uncertainty) are likely

to have narrowed the headroom by close to £10bn from £23.6bn. That estimate carries

uncertainty, however, as it depends heavily on the OBR’s medium-term forecasts.

China-EU trade: more a matter of imbalance than diversion

Alongside the significant increase in China’s trade surplus with the EU, a recurring

theme is its trade diversion away from the US into the EU. The numbers are striking.