WEBVTT - Daybreak Weekend: Nvidia Earnings, Medef Conference, BOK Decision 0:00:00.240 --> 0:00:07.240 Bloomberg Audio Studios, podcasts, radio news. 0:00:11.119 --> 0:00:13.680 This is Bloomberg day Break Weekend, our global look at 0:00:13.680 --> 0:00:15.720 the top stories in the coming week from our day 0:00:15.720 --> 0:00:18.640 Break anchors all around the world. Straight ahead on the program, 0:00:18.640 --> 0:00:21.919 Federal Reserve Chair Jerome Powell opening the door to a 0:00:21.960 --> 0:00:26.080 possible interest rate cut as early as next month. Plus 0:00:26.160 --> 0:00:29.639 earnings from the AI chipmaker and Vidia amid worries about 0:00:29.640 --> 0:00:33.040 its business in China. I'm Tom Busby in New York. 0:00:33.400 --> 0:00:35.400 I'm Stephen Carolyn London, who we are looking at the 0:00:35.440 --> 0:00:39.360 difficult calculations looming for European governments as they prepare their 0:00:39.400 --> 0:00:40.960 spending plans for next year. 0:00:41.479 --> 0:00:44.320 I'm Dek Krisner, looking ahead to this week's rate decision 0:00:44.400 --> 0:00:46.720 from the Bank of Korea, as well as the state 0:00:46.760 --> 0:00:48.800 of the IPO market in Hong Kong. 0:00:50.400 --> 0:00:54.440 That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg 0:00:54.480 --> 0:00:57.120 eleven to three Yeho, New York, Bloomberg ninety nine to 0:00:57.120 --> 0:01:01.440 one Washington, DC, Bloomberg ninety two nine in Boston, DAB 0:01:01.680 --> 0:01:05.959 Digital Radio, London, Sirius XM one twenty one, and around 0:01:06.040 --> 0:01:09.080 the world on Bloomberg Radio dot Com and The Bloomberg 0:01:09.120 --> 0:01:10.000 Business app. 0:01:13.480 --> 0:01:14.039 Good day to you. 0:01:14.160 --> 0:01:16.480 I'm Tom Busby, and we begin today's program with some 0:01:16.560 --> 0:01:20.399 revealing statements from Federal Reserve Chair Jerome Powell about possibly 0:01:20.680 --> 0:01:24.319 changing the FED stance on rates. That's ahead of inflation 0:01:24.480 --> 0:01:27.320 and personal incomes and spending data in the US. We're 0:01:27.360 --> 0:01:31.679 joined by Stuart Paul, us economist with Bloomberg Economics. Well, Stuart, 0:01:31.720 --> 0:01:34.479 I just want to hear your takeaways from Friday's rather 0:01:34.640 --> 0:01:37.399 dubvish speech from Fedchair Jerome Powell, because it looks like 0:01:37.400 --> 0:01:39.920 Wall Street's already pricing in a rate cut at the 0:01:39.920 --> 0:01:40.760 September meeting. 0:01:41.160 --> 0:01:44.400 Well, the hot headline that we got from the speech 0:01:44.440 --> 0:01:47.240 at Jackson Hole is that the balance of risks for 0:01:47.280 --> 0:01:50.560 the Federal Reserve and for monetary policymakers are shifting, and 0:01:50.600 --> 0:01:56.120 in particular the downside risks to employment are shifting materially 0:01:56.240 --> 0:01:59.440 they're rising. So, if anything, the Federal Reserve chairman was 0:01:59.520 --> 0:02:02.760 opening the door or at least acknowledging the cooling labor 0:02:02.800 --> 0:02:06.560 market and opening the door to a rate cut in September. 0:02:06.880 --> 0:02:10.360 But if anything, I think the tone of the speech 0:02:10.760 --> 0:02:13.480 was actually a little bit hawkish, so he could be 0:02:13.520 --> 0:02:17.400 getting something like a hawkish cut in September. He was 0:02:17.480 --> 0:02:20.320 really trying to keep people from reading too much into 0:02:20.320 --> 0:02:23.519 the idea that the resumption of rate cuts would mean 0:02:23.919 --> 0:02:28.160 a cycle of cutting follows. For example, he noted that 0:02:28.520 --> 0:02:30.840 the labor market is cooling, The pace of hiring is 0:02:30.880 --> 0:02:34.320 materially slowing, but there is not a lot of slack 0:02:34.480 --> 0:02:37.760 in the labor market. The pace of GDP growth is slowing, 0:02:38.120 --> 0:02:42.560 but there's not a lot of slack in economic activity. Yes, 0:02:43.080 --> 0:02:46.760 risks to inflation are still skewed to the upside. So 0:02:46.800 --> 0:02:49.960 he was very cautious in his tone. He acknowledged that 0:02:50.160 --> 0:02:53.560 it might be time to adjust the stance of monetary policy, 0:02:53.880 --> 0:02:55.880 but he was not willing to go so far as 0:02:55.919 --> 0:02:58.239 to say there would be multiple sequential cuts. 0:02:58.440 --> 0:03:01.240 Well, what he said about it is we're in a 0:03:01.320 --> 0:03:04.040 curious kind of balance right now in the labor department. 0:03:04.120 --> 0:03:06.679 So he is hedging his bets. And when you say 0:03:06.720 --> 0:03:10.840 a hawkish cut, you just mean a quarter percentage point, right. 0:03:10.760 --> 0:03:14.400 A quarter point cut, and a clear signal at the 0:03:14.480 --> 0:03:18.359 time they decide to move right, that additional sequential rate 0:03:18.400 --> 0:03:22.000 cuts are not predetermined. When we get something like a 0:03:22.040 --> 0:03:26.920 hawkish cut, it's really an incremental loosening of monetary policy 0:03:27.480 --> 0:03:31.640 plus hawkish messaging, and that's what Powell was starting to 0:03:31.680 --> 0:03:34.639 signal in his final Jackson Whole speech. 0:03:35.240 --> 0:03:39.280 We have had some dissension previously in the FED, some 0:03:39.320 --> 0:03:42.840 members saying, hey, we're ready to cut any time. Has 0:03:42.880 --> 0:03:45.160 that balance shifted now are there? Do you think it's 0:03:45.200 --> 0:03:47.960 not just him, not just the one or two. Christopher 0:03:47.960 --> 0:03:50.760 Waller and a few others are more saying this may 0:03:50.800 --> 0:03:51.400 be the time. 0:03:52.040 --> 0:03:55.240 Heading into Chairman Powell's speech, other members of the FOMC, 0:03:56.000 --> 0:04:00.520 the branch presidents, including Susan Collins from Boston, All Goals 0:04:00.720 --> 0:04:03.840 from Chicago, Beth Hammock from Cleveland, they were very clear 0:04:03.840 --> 0:04:06.160 that they had not yet made up their mind that 0:04:06.240 --> 0:04:08.960 this is the time to cut rates. There was a 0:04:09.000 --> 0:04:11.680 coalition in July, and it seems like there's still a 0:04:11.680 --> 0:04:16.760 coalition now that is very cautious about moving to looser 0:04:17.000 --> 0:04:20.120 monetary policy right now. But I do think that what 0:04:20.160 --> 0:04:23.640 we saw from Chairman from Chairman Powell, who does speak 0:04:24.080 --> 0:04:29.000 mostly to the central tendency of the committee, that central 0:04:29.040 --> 0:04:32.240 tendency that media FOMC participant is probably getting a little 0:04:32.240 --> 0:04:35.320 bit more comfortable with the idea of moving relatively soon. 0:04:35.760 --> 0:04:38.479 But I think that This is what's most important, This 0:04:38.760 --> 0:04:42.799 relatively hawkish tone that was included in the speech, even 0:04:42.839 --> 0:04:45.880 with signaling that they're becoming more comfortable with one rate cut, 0:04:46.400 --> 0:04:49.960 it would just be probably one rate cut, and I 0:04:50.000 --> 0:04:53.120 think that there could be a negotiation come September that 0:04:53.760 --> 0:04:56.520 it's time to lower by a lower the federal funds 0:04:56.600 --> 0:05:00.000 rate target range by a quarter point. But they would 0:05:00.080 --> 0:05:04.320 move slowly, they'll move deliberately, they'll move cautiously, and probably 0:05:04.440 --> 0:05:08.960 not another time this year. From an economic perspective, Does 0:05:09.000 --> 0:05:12.840 it really matter if they move in September or November 0:05:12.960 --> 0:05:16.159 or December. No, it doesn't really matter from an economic perspective. 0:05:16.240 --> 0:05:18.960 So I think that the Chairman can build a coalition 0:05:19.320 --> 0:05:22.080 given the fact that there had previously been dissension. He 0:05:22.160 --> 0:05:26.640 can build a coalition now that would be more amenable 0:05:26.960 --> 0:05:29.800 to lowering the federal funds r a target range, as 0:05:29.839 --> 0:05:32.039 long as they feel like they're not getting too far 0:05:32.080 --> 0:05:35.360 out ahead of their skis and that they're not devoted 0:05:35.440 --> 0:05:37.400 to sequential rate cuts. 0:05:37.800 --> 0:05:40.479 Well, one thing the Chairman has been consistent on is 0:05:40.520 --> 0:05:43.200 that his decision, the decision of the Central Bank, will 0:05:43.200 --> 0:05:45.839 be data dependent, and we're getting some important data this week. 0:05:45.920 --> 0:05:50.200 July PCE the fence preferred measure of inflation and also 0:05:50.320 --> 0:05:54.039 personal incomes and outlays. You know, just on Friday, the 0:05:54.120 --> 0:05:57.040 Chairman said that the result of the Trump tariffs has 0:05:57.080 --> 0:06:01.200 been now clearly visible, but the effects made relatively short lived. 0:06:01.279 --> 0:06:03.880 So I mean, is he seeing inflation as maybe it 0:06:03.960 --> 0:06:04.640 isn't so bad. 0:06:05.160 --> 0:06:07.680 For the month of July, We're estimating that core PCE 0:06:08.160 --> 0:06:11.920 prices rose zero point three percent on the month. There 0:06:11.960 --> 0:06:16.880 was actually relatively less pass through of tariff price pressures 0:06:17.040 --> 0:06:20.680 in the month of July. We had seen some in April, May, June, 0:06:20.839 --> 0:06:23.080 a little bit less in July. Where a lot of 0:06:23.080 --> 0:06:25.760 the core inflation pressures are going to be coming from 0:06:26.080 --> 0:06:29.240 is actually from financial services prices. This is a lot 0:06:29.279 --> 0:06:32.440 of things like portfolio management fees, for example. And when 0:06:32.440 --> 0:06:35.599 you see financial services prices rising, it's mostly just the 0:06:35.640 --> 0:06:39.040 reflection of a rally in the equity market. It's a 0:06:39.120 --> 0:06:43.480 rally in financial asset prices that are feeding through into 0:06:43.480 --> 0:06:47.760 financial services prices. And so there's an extent to which 0:06:47.880 --> 0:06:49.919 the Committee is going to be looking at this July 0:06:50.080 --> 0:06:54.800 PCE inflation report and thinking, hmm, there are elevated, frothy 0:06:55.000 --> 0:06:58.720 asset markets and so even if we decide to cut 0:06:58.760 --> 0:07:01.080 rates in September, even if we decide to cut rates 0:07:01.080 --> 0:07:04.320 this year, we should be very slow and deliberate in 0:07:04.400 --> 0:07:09.440 doing so. We still have a reasonably close federal funds 0:07:09.520 --> 0:07:12.560 rate target to what we consider to be neutral right now. 0:07:12.680 --> 0:07:18.000 Monetary policy is only modestly restrictive, if it's restrictive at all, 0:07:18.240 --> 0:07:20.040 So we should move very slowly. 0:07:20.480 --> 0:07:23.440 July PCE and personal spending both out just ahead of 0:07:23.440 --> 0:07:26.840 Wall Street's opening bell this Friday. The next FED meeting 0:07:26.880 --> 0:07:29.800 September sixteenth and seventeenth, a lot to look forward to 0:07:29.840 --> 0:07:33.200 our thanks to Stuart paul Us, economist with Bloomberg Economics. 0:07:33.520 --> 0:07:36.080 We move next to earnings from the last of text 0:07:36.160 --> 0:07:39.560 Magnificent seven to report this period AI chip maker and Nvidia. 0:07:39.680 --> 0:07:42.760 Those results from the world's only four trillion dollar company 0:07:42.800 --> 0:07:45.120 are looming large over Wall Street because of all the 0:07:45.160 --> 0:07:49.560 spending out artificial intelligence and questions about the company's business 0:07:49.640 --> 0:07:51.760 in China. For more on what to expect and what 0:07:51.840 --> 0:07:55.760 maybe next, we're joined by Kun John Sobani, Bloomberg Intelligence, 0:07:56.000 --> 0:08:00.560 Senior Semiconductor analyst. Well, Kunjohn, thank you for here. In 0:08:00.640 --> 0:08:02.600 video shares. They've taken a few hits in the past 0:08:02.640 --> 0:08:05.040 week or so, and there are questions about tariffs and 0:08:05.080 --> 0:08:07.600 what looks like a setback and its ability to sell 0:08:07.680 --> 0:08:10.640 chips in China. So with all that, looking backwards, what 0:08:10.680 --> 0:08:13.000 are you expecting to see in its second quarter results? 0:08:13.840 --> 0:08:17.480 From a results and guide perspective, we expect Nvidia, in 0:08:17.520 --> 0:08:21.840 its typical fashion, to deliver again a strong beat and raise. 0:08:22.600 --> 0:08:27.679 Our checks suggest strong Blackwell ramp ongoing and also strong 0:08:27.760 --> 0:08:30.720 networking attached along with it, so that should boost both 0:08:30.720 --> 0:08:34.120 compute and networking. The GB three hundred, which is their 0:08:34.160 --> 0:08:37.640 next version of Blackwell GPUs, also is likely to be 0:08:37.720 --> 0:08:40.480 running ahead of schedules, so that can also help with 0:08:40.559 --> 0:08:44.319 a guidance beat. But from a stock reaction perspective, the 0:08:44.400 --> 0:08:48.520 key focus again will be on narrative rather than purely numbers, 0:08:48.520 --> 0:08:51.200 as we have seen over the last few quarters. First, 0:08:51.280 --> 0:08:55.240 a key topic front and center is the magnitude and 0:08:55.360 --> 0:08:59.040 the timing of resuming the China Hills. They have now 0:08:59.080 --> 0:09:02.280 received license approval from the Trump Admin, but there are 0:09:02.320 --> 0:09:06.120 still a lot of unclarity and moving parts regarding how 0:09:06.240 --> 0:09:10.240 soon can they restart production and start shipping if those 0:09:10.280 --> 0:09:14.160 customers are still there wanting the same h twenty parts 0:09:14.480 --> 0:09:16.840 news has come out which hasn't made confunded yet, but 0:09:16.880 --> 0:09:20.080 there seems to be that the Chinese government forcing the 0:09:20.120 --> 0:09:22.120 customers not to buy in Nvidia chips. So there's a 0:09:22.160 --> 0:09:24.560 lot of moving parts around that China angle, which will 0:09:24.600 --> 0:09:25.439 be very important. 0:09:25.640 --> 0:09:29.680 Well, those chips that the Trump administration has given Nvidia 0:09:30.160 --> 0:09:34.600 the access into China to sell, they're less powerful, certainly 0:09:34.600 --> 0:09:37.920 not the Blackwell trips. These are older chips. So the 0:09:38.200 --> 0:09:40.920 huaweis and the other companies there do they make a 0:09:40.960 --> 0:09:43.440 similar product? I mean, is that the reason why if 0:09:43.480 --> 0:09:47.800 this is confirmed about Beijing saying we don't want your chips. 0:09:47.720 --> 0:09:50.720 At this point, there is if you take the best 0:09:50.760 --> 0:09:54.720 available GPU over in China, yes, you know, it is 0:09:54.800 --> 0:09:58.880 comparable to the older Age twenties that NVIDIAs said selling. 0:09:59.160 --> 0:10:02.800 But regardless of that, those GPUs don't have enough supply 0:10:03.000 --> 0:10:06.000 capacity because they don't have access to the leading edge 0:10:06.000 --> 0:10:09.440 fabs as Nvidia does. So you know, if there was 0:10:09.520 --> 0:10:13.199 no pressure from the Chinese government, the customers would happily 0:10:13.240 --> 0:10:15.760 and readily buy a lot more of the Age twenties. 0:10:15.800 --> 0:10:19.520 So right now, it's a lot more geopolitics driving this 0:10:19.640 --> 0:10:23.479 scenario or rather than just pure demand, supply and performance comparison. 0:10:23.920 --> 0:10:26.679 Well, Reuters reported last week that in Video may be 0:10:26.800 --> 0:10:29.480 working on a new chip a little more powerful than 0:10:29.520 --> 0:10:32.679 the Age twenty that is just for China. Has this 0:10:32.760 --> 0:10:33.920 been confirmed. 0:10:34.080 --> 0:10:36.240 This has not been confirmed. And again this is a 0:10:36.320 --> 0:10:38.959 lot of news has come out over the last few 0:10:39.000 --> 0:10:41.959 weeks which everyone including US is waiting to speak to 0:10:42.000 --> 0:10:45.440 the company as they report earnings to confirm a lot 0:10:45.480 --> 0:10:48.000 of these things. And you know, I wouldn't be surprised 0:10:48.040 --> 0:10:52.320 regarding the new chip. Every big generation Leap architecture generation Leap, 0:10:52.760 --> 0:10:56.079 Nvidia has designed a new chip for China. So now 0:10:56.120 --> 0:10:58.920 we are as it is shipping blackwell, it makes sense 0:10:58.960 --> 0:11:02.160 that it is designing a lower powered black Belt version, 0:11:02.200 --> 0:11:05.000 which is what the Reuter News was talking about, and 0:11:05.080 --> 0:11:07.360 so that would not be very surprising to us. But 0:11:07.440 --> 0:11:09.280 again you would have to go through this whole cycle 0:11:09.360 --> 0:11:13.040 of getting licensing and sanctions because it will be definitely 0:11:13.120 --> 0:11:14.800 more powerful than the Age twenty. 0:11:15.480 --> 0:11:19.280 Well, with all of this is a four trillion dollar company. 0:11:19.920 --> 0:11:23.480 How important is China to Invidia's future revenue? I mean, 0:11:23.520 --> 0:11:25.560 it looks like they're doing well without it, but we 0:11:25.640 --> 0:11:28.240 all know it's the second largest economy on Earth. You know, 0:11:28.280 --> 0:11:32.840 the spending is astronomical. How big is China to Invidia. 0:11:33.559 --> 0:11:35.520 Yeah, so there are two parts of it. One is 0:11:35.520 --> 0:11:39.160 from a tamp perspective. It's definitely the sort of biggest 0:11:39.160 --> 0:11:42.760 stamp outside of the US when it comes to what 0:11:43.400 --> 0:11:48.120 Nvidia can sell to, and it is home to the 0:11:48.160 --> 0:11:52.160 next largest hyperscalers and cloud providers. So it's definitely a 0:11:52.200 --> 0:11:54.880 big market that you don't want to lose out, especially 0:11:54.920 --> 0:11:58.719 if you're Nvidia for the long term. But however, in 0:11:58.760 --> 0:12:01.000 the near term, right now, you know it can do 0:12:01.280 --> 0:12:04.200 very well without it. It is doing very well without it. 0:12:04.480 --> 0:12:09.040 We don't suspect that this China headwind will stop from 0:12:09.080 --> 0:12:12.560 it growing into the numbers and as estimates. But right now, 0:12:12.640 --> 0:12:15.160 given the size and the growth it has delivered, the 0:12:15.240 --> 0:12:18.560 focus is how better can you do? So even if 0:12:18.920 --> 0:12:21.640 it's just let's call it ten to twenty billion dollars 0:12:21.640 --> 0:12:23.559 a year right now, which is a drop in the 0:12:23.600 --> 0:12:26.440 bucket given how much revenue they are setting everywhere else, 0:12:27.040 --> 0:12:30.360 because all the investors and Byside is trying to just 0:12:30.520 --> 0:12:33.040 get to the highest number, and if they can beat 0:12:33.080 --> 0:12:35.120 that to that, the narrative will be a lot more 0:12:35.120 --> 0:12:37.400 important right now than the numbers well. 0:12:37.240 --> 0:12:40.120 In Vidious Q two earnings out after the market closes 0:12:40.160 --> 0:12:44.080 this coming Wednesday. Are thanks to Kunjohn Sopani, Bloomberg Intelligence 0:12:44.200 --> 0:12:48.240 Senior Semiconductor Analyst, and coming up on Bloomberg day Break weekend, 0:12:48.320 --> 0:12:51.400 we'll look at the difficult calculations looming for European governments 0:12:51.440 --> 0:12:54.760 as they prepare their spending plans for next year. I'm 0:12:54.800 --> 0:13:00.440 Tom Busby, and this is Bloomber. This is Blueberg Day 0:13:00.440 --> 0:13:02.680 Break Weekend, our global look ahead at the top stories 0:13:02.679 --> 0:13:05.480 for investors in the coming week. I'm Tom Busby in 0:13:05.520 --> 0:13:08.000 New York. Up later in our program, we'll look ahead 0:13:08.040 --> 0:13:11.800 to a monetary policy decision from South Korea's Central Bank. 0:13:12.200 --> 0:13:14.880 But first in Europe, the end of the traditional summer 0:13:14.920 --> 0:13:17.520 holiday period will see politicians return to work in the 0:13:17.559 --> 0:13:20.880 coming days. In many countries, their biggest challenge will be 0:13:20.960 --> 0:13:24.640 drawing up budget plans that increase defense spending while also 0:13:24.679 --> 0:13:28.560 tackling enormous debt piles amid week economic growth. In France, 0:13:28.600 --> 0:13:31.240 the conversation will kick off at the annual summer conference 0:13:31.240 --> 0:13:35.080 of the country's biggest business group MEDEF. For more, let's 0:13:35.080 --> 0:13:37.520 go to London and bring in Bloomberg Daybreak. Europe banker 0:13:37.640 --> 0:13:38.880 Stephen Carroll. 0:13:38.920 --> 0:13:42.480 Tom It's a cliche, but politicians do take summer holidays 0:13:42.480 --> 0:13:44.480 in Europe, and that usually means that at this time 0:13:44.520 --> 0:13:47.880 of year, the looming political challenges return with the bang. 0:13:48.120 --> 0:13:50.920 In France, the season known as Laurentree for schools but 0:13:51.000 --> 0:13:54.640 also for politics. This year's MEDEF conference is a chance 0:13:54.640 --> 0:13:57.360 for employers to set out their positions ahead of a 0:13:57.440 --> 0:14:01.320 fractious budget to base. The Prime Minister U faces the 0:14:01.400 --> 0:14:05.000 daunting task of building support in Parliament for his budget plan, 0:14:05.240 --> 0:14:08.640 which contains forty four billion euros of tax rises and 0:14:08.720 --> 0:14:12.400 spending cuts. Without a majority, his government's future hangs in 0:14:12.440 --> 0:14:15.440 the balance. Bairu will be trying to avoid the fate 0:14:15.480 --> 0:14:18.640 of his predecessor, Michel Bagnier, whose government was toppled over 0:14:18.679 --> 0:14:22.280 its budget last December. The situation is causing growing concern 0:14:22.320 --> 0:14:25.440 amongst investors, not just in France, but also in several 0:14:25.480 --> 0:14:29.400 other European countries. Many governments are grappling with similar budget 0:14:29.400 --> 0:14:32.000 try issues, and they need to submit their spending plans 0:14:32.000 --> 0:14:35.440 to the European Union by mid October. They're balancing the 0:14:35.480 --> 0:14:38.920 need to increase defense spending, pay bigger social welfare and 0:14:39.000 --> 0:14:42.880 pension bills for their aging populations and cover debts encouraged 0:14:42.920 --> 0:14:46.000 during the COVID pandemic, all the while trying to avoid 0:14:46.120 --> 0:14:50.480 painful tax rises or spending cuts. Here's what Jeffrey's economist 0:14:50.520 --> 0:14:52.520 Madupe out of Bembo had to say about the situation 0:14:52.600 --> 0:14:54.680 when she spoke to us on Bloomberg Radio. 0:14:55.040 --> 0:14:58.440 In previous kind of budget cycles last year, the opposition 0:14:58.520 --> 0:15:01.840 knows that they can extract the game from the government, 0:15:01.840 --> 0:15:03.680 and so they will do that. But I think the 0:15:03.760 --> 0:15:05.520 question is how far it goes. Will it just be 0:15:05.560 --> 0:15:09.760 a case of trying to maybe remove certain budget reductions 0:15:09.760 --> 0:15:12.240 that have been penciled in, or will it be a 0:15:12.240 --> 0:15:14.240 case of bringing down the government. And I think if 0:15:14.280 --> 0:15:16.000 we get into that situation where it's a case of 0:15:16.000 --> 0:15:18.520 bringing down the government, that's where I see. I mean, 0:15:18.840 --> 0:15:21.560 it's a really big risk for France there because another 0:15:21.600 --> 0:15:24.360 election then we're thinking about presidential elections, a lot of 0:15:24.400 --> 0:15:26.920 uncertainty about who would come in presidential elections. I think 0:15:26.960 --> 0:15:28.920 it really opens up a really big can of worms. 0:15:28.960 --> 0:15:30.760 And that's why we are negative on France because I 0:15:30.760 --> 0:15:33.360 think all of these sorts of scenarios that we're talking 0:15:33.400 --> 0:15:36.160 about are very possible. They of course tell risks, but 0:15:36.240 --> 0:15:38.520 they have a greater probability. 0:15:39.080 --> 0:15:41.280 As Jeffrey's economist and we dupey out of Bembo speaking 0:15:41.320 --> 0:15:44.320 to me recently about the situation in France. Let's get 0:15:44.320 --> 0:15:47.360 into the broader political and economic challenges ahead, then with 0:15:47.440 --> 0:15:50.800 our senior geoeconomics analyst for Europe, Antonio burrough So and 0:15:50.840 --> 0:15:54.640 are European economist Anna Andrade. Welcome to you both. Antonio, 0:15:54.680 --> 0:15:56.720 I want to start with you and just to lay 0:15:56.760 --> 0:16:00.280 the land of the political situation in France the heading 0:16:00.280 --> 0:16:03.840 into these difficult negotiations. What is the situation looking like 0:16:04.000 --> 0:16:04.720 for the government. 0:16:06.400 --> 0:16:09.120 Well, the picture is looking quite challenging, I would say, 0:16:09.160 --> 0:16:11.720 because the problem, the main problem is that the government 0:16:11.840 --> 0:16:16.280 lacks a majority in the National Assembly, that's the crucial 0:16:16.360 --> 0:16:19.800 lower chamber in France. The government is essentially short of 0:16:20.160 --> 0:16:23.320 seventy nine deputies, right, and I think that means two things. 0:16:23.680 --> 0:16:27.640 The first is that it's very hard to get legislation 0:16:27.760 --> 0:16:30.080 past in parliament, not just a budget. I mean, this 0:16:30.120 --> 0:16:33.600 is a government that struggles to get things done in parliament. 0:16:34.160 --> 0:16:36.680 And the second problem is that it basically leaves the 0:16:36.720 --> 0:16:40.920 government exposed to potential no confidence motions in parliament, and 0:16:41.000 --> 0:16:44.440 that you know, if a non confidence motion is supported 0:16:44.440 --> 0:16:46.480 by the parliament, that leads to the collapse of the government, 0:16:46.480 --> 0:16:49.240 which is what happened last year. Right, So, I think 0:16:49.360 --> 0:16:52.880 that creates a very challenging situation for the government. Adding 0:16:52.920 --> 0:16:54.880 to this is the fact that there is a lot 0:16:54.920 --> 0:16:58.960 of political polarization in the country. Political parties are extremely polarized, 0:16:58.960 --> 0:17:02.600 which makes reach compromise is also very difficult in parliament. 0:17:02.640 --> 0:17:04.639 So as a whole, I would say it's fair to 0:17:04.680 --> 0:17:07.359 characterize the political situation as quite difficult. 0:17:07.440 --> 0:17:11.720 And let's turn to the fiscal situation that France is facing. 0:17:11.800 --> 0:17:14.200 How did it get to this position and how does 0:17:14.240 --> 0:17:16.600 it compare to what we're seeing elsewhere in Europe? 0:17:17.040 --> 0:17:20.399 Sure so, I think the markets really woke up to 0:17:20.480 --> 0:17:23.840 francis fiscal problems in twenty twenty four when Macron called 0:17:23.840 --> 0:17:26.960 the snap election, but really the problems had been building 0:17:27.200 --> 0:17:30.920 way before that. And if you look at the primary balance, 0:17:30.960 --> 0:17:34.399 which provides a better reading on fiscal efforts because essentially 0:17:34.480 --> 0:17:38.000 the excluding interest payments. While Greece, Italy and Portugal, all 0:17:38.000 --> 0:17:40.200 the countries that have been most affected by the sovereign 0:17:40.200 --> 0:17:44.200 depth crisis, were undertaking big consolidation efforts and targeting primary 0:17:44.280 --> 0:17:49.200 balanced surpluses away from deficits. France was still running significant deficits. 0:17:49.400 --> 0:17:52.680 Now it wasn't the only one. Spain was not necessarily 0:17:53.160 --> 0:17:55.920 very committed to physical discipline as well. But the key 0:17:55.960 --> 0:17:59.040 difference then as now was that growth was much faster there, 0:17:59.080 --> 0:18:02.600 which helped reduced the dept to GDP ratio prior to 0:18:02.640 --> 0:18:06.040 the pandemic, while in France it actually increased. And now 0:18:06.160 --> 0:18:09.240 then we had the pandemic, which made everything worse. And 0:18:09.359 --> 0:18:12.520 France in particularly has had a problem in braining and 0:18:12.600 --> 0:18:16.119 spending over the past few years. Now that's due to 0:18:16.440 --> 0:18:21.560 a mix of factors including slippadge by local authorities, growing 0:18:21.640 --> 0:18:26.600 spending in pensions and disappointing tax revenues. And the government's 0:18:26.640 --> 0:18:30.239 plan is quite ambitious. It's committed to that. I mean, 0:18:30.280 --> 0:18:33.919 obviously the politics of it are quite difficult, as Antonio said, 0:18:34.400 --> 0:18:37.480 but I would just flag that we also just don't 0:18:37.520 --> 0:18:40.880 know where these savings beyond twenty twenty six are going 0:18:40.960 --> 0:18:44.479 to come from, because in the medium term structural plans 0:18:44.520 --> 0:18:46.600 that France sent to the Commission, and by the way, 0:18:46.640 --> 0:18:48.720 this is not a friend's only problem. It's a problem 0:18:48.760 --> 0:18:51.560 across all the governments. They send sort of the debt 0:18:51.600 --> 0:18:54.080 deficity targets that they want to reach in five to 0:18:54.119 --> 0:18:57.480 seven years, but they just haven't detailed the tax and 0:18:57.520 --> 0:19:01.080 spending decisions that will underpin those targets. So the plans 0:19:01.160 --> 0:19:03.720 are really not credible. 0:19:04.359 --> 0:19:07.119 Well, let's discuss that further, Antonio. I mean, it was 0:19:07.200 --> 0:19:09.639 unusual to see the French Prime Minister lay out the 0:19:09.680 --> 0:19:13.240 first draft of his spending plans quite early in the summer. 0:19:13.480 --> 0:19:16.199 There was lots of unpopular proposals, and it's like cutting 0:19:16.200 --> 0:19:20.240 two public holidays for example. What chances are there really 0:19:20.359 --> 0:19:23.479 being able to get a compromise on a budget for France. 0:19:25.200 --> 0:19:29.720 Well, just like last year were essentially the government collapsed 0:19:29.760 --> 0:19:33.160 over the budget and then last minute emergency budget had 0:19:33.160 --> 0:19:35.600 to be approved. I think it's going to be very 0:19:35.600 --> 0:19:38.280 hard for the government to get the budget passed. In 0:19:38.359 --> 0:19:42.560 a survey that was done in July by French poster Elab, 0:19:43.160 --> 0:19:46.359 you could see that seventy two percent of respondents said that, 0:19:46.800 --> 0:19:48.879 you know, they acknowledged that dead must be reduced, but 0:19:48.920 --> 0:19:51.119 that the efforts been demanded by the budget by the 0:19:51.160 --> 0:19:53.760 government are too great. Right, So it's not a popular budget. 0:19:54.119 --> 0:19:58.159 Also same survey, sixty six percent of respondents say that 0:19:58.200 --> 0:20:00.880 they want the position parties to file and no confidence 0:20:00.920 --> 0:20:03.760 motion is the government right, So you can see it's 0:20:04.040 --> 0:20:08.880 not a particularly popular budget and you know, the challenge 0:20:09.160 --> 0:20:11.520 of the fact that you need to really engage in 0:20:11.520 --> 0:20:14.840 physical consolidation to reduce the budget deficit is compounded by 0:20:14.840 --> 0:20:18.560 the lack of parliamentary majority. But that doesn't mean that 0:20:18.560 --> 0:20:21.120 the government cannot make some concessions. In fact, I don't 0:20:21.200 --> 0:20:24.080 think the current the budget in this current form might 0:20:24.080 --> 0:20:25.919 be able to be passed, but I think the government 0:20:25.920 --> 0:20:28.520 can provides certain concessions to at least have a chance 0:20:28.560 --> 0:20:30.560 to get it approved by opposition parties. 0:20:31.160 --> 0:20:34.000 And Antonio because we're thinking about this in the context 0:20:34.000 --> 0:20:36.679 of this upcoming business conference, where of course employers and 0:20:36.880 --> 0:20:38.879 business leaders are going to be very worried about what 0:20:38.920 --> 0:20:42.119 it could mean for them fiscally. They've previously been asked 0:20:42.160 --> 0:20:45.760 to give larger contributions in terms of payroll taxes towards 0:20:45.800 --> 0:20:49.840 the French budget. I mean, how worried do employers and 0:20:49.880 --> 0:20:52.360 perhaps citizens have to be about tax ris as being 0:20:52.400 --> 0:20:54.479 part of an eventual budget package in France. 0:20:55.600 --> 0:20:58.160 Well, I think that depends on the final compromise that 0:20:58.960 --> 0:21:01.879 the government, if they can get a compromise, that the 0:21:02.000 --> 0:21:05.400 form of that that will take. So, as I said, 0:21:05.440 --> 0:21:08.280 I think there is room for concessions and I think that's, 0:21:08.440 --> 0:21:10.520 by the way, probably why the initial draft of the 0:21:10.520 --> 0:21:13.960 budget looks so tough, because I think the strategy of 0:21:14.760 --> 0:21:18.200 Prime Minister consul who is essentially to present a very 0:21:18.240 --> 0:21:21.199 tough budget and then leave room to negotiate with opposition parties. 0:21:22.359 --> 0:21:26.720 But obviously consolidation physical consolidation is never popular, so the 0:21:26.800 --> 0:21:29.119 problem is that opposition parties do not want to be 0:21:29.160 --> 0:21:32.080 associated with the consolidation efforts. That being said, if you 0:21:32.119 --> 0:21:35.439 look in terms of potential compromises. So last year, the 0:21:35.480 --> 0:21:39.680 previous government of Prime Minister Darnie tried to make concessions 0:21:39.680 --> 0:21:42.400 to the far right National Rally Party of my Elepen 0:21:43.040 --> 0:21:45.320 and then that backfire in the end, actually a no 0:21:45.400 --> 0:21:47.520 confidence motion, as I said, was voted and the government 0:21:47.600 --> 0:21:50.199 ended up collapsing. So I think the government is not 0:21:50.240 --> 0:21:53.520 going to look at its right, rather, in my look 0:21:53.680 --> 0:21:56.080 towards its left when you have the Socialist Party which 0:21:56.119 --> 0:21:59.320