==3) It's certainly shaping up to be a politically eventful summer. Following the earthquake of French President Emmanuel Macron's unexpectedly big loss at the European Parliament election, looms the potentially even bigger aftershock of a new far right, or far left, government in France. The first round of voting in France's snap legislative is now just days away on Sunday, and opinion polls continue to suggest Marine Le Pen's far right RN party is in the lead.
However, the two stage process of the election (with a runoff scheduled a week later on July 7) makes the ultimate outcome still highly uncertain. The bank's base case sees a minority right-wing government taking office in a cohabitation with Macron, and it thinks the constraints of financial markets, a lack of an absolute majority, and EU institutions will ultimately contain the fiscally ambitious -- to put it mildly -- policy proposals.
However, the election is likely to be a bumpy ride for financial markets, and it is highly uncertain to what degree the incoming government will seek to test markets and EU institutions in its attempt to fulfil promises to voters. In a worst case scenario, investors could end up with a United Kingdom/Liz Truss-style bout of market turmoil.
If this weren't exciting enough, in the middle of the two French election rounds is the UK's own parliamentary election, sandwiched in between on July 4. The outcome in the UK looks much more certain and if anything quite boring, policy-wise: a moderate, market-friendly center-left Labour government is likely to win by a landslide, following 14 years of Conservative rule under a progressively more right-wing direction. Given the UK's lack of fiscal space, and with near-zero political appetite to make meaningful changes to Brexit policy, ABN Amro sees no immediate implications for UK growth, inflation, or interest rates.
Where the election may prove more interesting is what happens to the right of the political spectrum in the election aftermath. The Conservative party is expected to suffer a historic defeat, and opinion polls show the far right, populist Reform party significantly eating into its vote share. The UK's first past the post electoral system means that Reform is unlikely to gain many seats, but the final outcome of the election could have significant ramifications for the future of the Conservative party.
Finally, although the US presidential election doesn't take place for another four months, the campaign is heating up, with the first TV debate between President Joe Biden and former President Donald Trump taking place on Thursday, and the second debate happening on Sept. 10.
So far, the polls continue to paint a neck-and-neck contest, but with Trump currently enjoying a marginal lead in key swing states. The bank will have much more to say on the implications of the US presidential election over the coming months, but ABN Amro continues to think a potential re-election of Trump poses the biggest risk to the economic outlook, given his proposals for massive, large-scale import tariffs.
==4) Another notable -- and rather more unwelcome -- recent development has been the sharp rebound in shipping freight tariffs. Tariffs spiked at the beginning of the year, after attacks by the Houthis on vessels passing through the Red Sea led to a large-scale rerouting around the longer Cape of Good Hope route.
Initially, the container shipping industry appeared to have absorbed this change relatively smoothly, helped by record capacity additions. As a result, prices gradually declined from January to late April. Then, tariffs mysteriously and spontaneously began rebounding, with even shipping experts struggling to point to one particular driver. According to Drewry, the rise is being driven by a combination of factors: 1. A temporary lull in capacity additions (significant new capacity is due in the second half of 2024), 2. Somewhat stronger demand, 3. Some bringing forward of shipments due to conerns about delays, 4. Port congestion in parts of Asia.
There should be some easing of these pressures in the near term, particularly as much greater capacity additions are expected (3). Even sustained higher shipping freight tariffs are unlikely by themselves to move the needle on inflation, given the tiny contribution shipping costs make to the final cost of a good (around 1% on average), and given that the post-pandemic falls in shipping costs had likely yet to be fully passed on (tariffs are still less than half the pre-pandemic peak).
As such, even with ships continuing to avoid the Red Sea, the bank doesn't view the latest shipping tariff rises as a major risk to either the inflation nor the growth outlook, particularly as capacity additions mean that this rise is unlikely to be sustained.
Perhaps a more important development to watch is the latest trade spat between the EU and China over electric vehicles (EV), although here too, the bank has seen some encouraging signs that the economic fallout will be limited.
In particular, German Economy Minister and Vice-Prime Minister Robert Habeck's visit to China has yielded an agreement from Beijing to open talks on the matter. While the European Commission's proposed tariffs on EVs are likely to be implemented in some form, the spat looks unlikely to escalate into a large scale confrontation.
A much bigger risk on the trade tariff front looms from a potential Trump re-election, though that would be something to worry about in 2025.
==5) A clear bright spot in the eurozone economy over the past few months has been the services sector. Record-breaking visitor arrivals have been a particular support for activity in southern Europe, but across the eurozone, services activity has grown strongly in 2024 so far. Eurostat data shows services activity grew 5% over Q1 on an annualized basis, while the services PMI suggests that this strong pace of growth carried over into Q2, and probably will continue in Q3.
Aside from rising real incomes, and the gradual fall in interest rates expected over the next few months, another positive driver of services activity is the number of major sporting and cultural events in the eurozone this summer. The European soccer Championship has already kicked off in Germany, and over the coming weeks an Ifo institute analysis suggests that extra visitor spending on hospitality could add 0.1pp to gross domestic product (GDP) growth in Germany in Q3.
GDP in France could see an even bigger boost from the Paris Olympics -- following a similar methodology to Ifo's analysis for Germany, the bank estimates it could add 0.2pp to French Q3 output. While suggesting some near-term upside risks to growth forecasts, it should be noted that these boosts to activity are very much one-offs, and will as suchprobably be subject to payback in Q4 as the effects unwind.
Finally, ABN Amro added it must not ignore the Taylor Swift effect -- if not on activity then perhaps on inflation. After Beyonce concerts famously boosted Swedish inflation last year via a jump in hotel rates, Swift's concerts apparently had a similar upward impact on Sweden's inflation rate for May. According to analytics firm Lighthouse, hotel rates are expected to jump on average 44% in periods when Swift performs.
It should be noted that such events by themselves are far less likely to boost overall eurozone inflation given that the eurozone is many multiples the size of Sweden. However, they could impact the inflation rates of individual countries, and coming alongside the major sporting events happening over the same period (Swift's concerts take place across Europe between May and August), there could well be some modest upside risk to services inflation forecasts over the summer period. But, as with the boost to activity, any temporary effects will surely see payback later in the year.
In conclusion, the main impact of these big summer events will likely be to inject unwelcome volatility to the data rather than provide any meaningful economic signal, concluded ABN Amro.
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