Week Ahead (25 September)

Wednesday, 27 September – Washington and Berlin to hold a meeting on transatlantic economic policy

A US delegation led by Deputy Treasury Secretary Wally Adeyemo and Deputy National Security Adviser Mike Pyle are expected to meet this week with the German Chancellor Olaf Scholz’s top economic advisor, Jörg Kukies. The economic dialogue was launched two years ago between US President Joe Biden and former Chancellor Angela Merkel when she visited Washington for the last time as Chancellor of Germany.

The issues of cyber security, critical infrastructure, and industrial policies will likely be the main topics of discussion, with Germany’s new China strategy at the epicenter. Specifically, US officials will likely seek clarity on the phase-out of Huawei from Germany’s telecom sector and follow up on Germany’s Economy Minister Robert Habeck's recent announcement of greater restrictions on German companies investing in China.

Meanwhile, a report by the German Economic Institute shows that German companies are remaining defiant amid calls for “de-risking” as data shows that China accounted for 16.4% of Germany’s worldwide investments in the first half of 2023, up from 11.6% in the same period in 2022. 

Wednesday, 27 September – Spanish parliament to vote on a bid by the opposition leader Alberto Núñez Feijóo to form a government

Spain's parliament is set to vote on the candidacy of Alberto Núñez Feijóo, leader of the conservative Popular Party and the country's opposition, to become the next prime minister.

As a reminder, the centre-right Partido Popular (PP) won the most seats (137) with Prime Minister Pedro Sánchez’s PSOE securing 121 seats. Despite coming first, PP underperformed expectations and its path to power was further complicated by the poor performance of Vox, its most likely partner in a right-wing coalition, which lost 19 seats to finish with 33. With 176 seats required for a majority, there is no clear pathway to power, although Sánchez looks more likely to be able to secure the support of MPs from regional and secessionist parties.

Last month, King Felipe VI tasked Feijóo with the mission of forming a government capable of securing a parliamentary majority on a lawmaker vote scheduled for Wednesday. Given that no candidate obtained an outright majority or clear coalition path, tradition dictates that the candidate of the party with the most votes gets the first attempt. If Feijóo fails to win the first vote with an absolute majority on 27 September, a second vote occurs 48 hours later, requiring a simple majority. If this first attempt to form a government fails, a two-month period starts, during which other party leaders, including current Prime Minister Pedro Sánchez, will try to form a government coalition.

Sánchez will almost certainly need to secure votes from the Catalan pro-independence Junts’ 7 MPs. To that end, he will need to open negotiations with Junts party leader Carles Puidgemont who remains in exile in Belgium as he is wanted by the Spanish legal system for his party in the 2017 independence referendum. In exchange, Puigdemont is likely to demand at a minimum an amnesty for all those involved in that referendum plus a pathway towards a fresh independence poll. The latter in particular is likely to be a bridge too far even for the left-leaning Sánchez. Indicatively, 40,000 supporters of the PP took to the streets yesterday in protest against rumors suggesting that acting Prime Minister Pedro Sánchez might propose amnesty for Catalan separatists as part of a deal to secure their support for his continued tenure as prime minister.

With no clear pathway to government formation, another election remains a possibility. If no candidate secures sufficient votes, a new election could be scheduled for 47 days later.

Friday, 29 September – Eurostat flash inflation estimate for September

On Friday, Eurostat will publish Eurozone flash inflation data for September. In August, Eurozone headline inflation was 5.2%, down from 5.3% the previous month, after peaking at 10.6% in October 2022. This was the lowest euro-area year-over-year inflation rate since the beginning of 2022. Likewise, core inflation in August dropped to 5.2% from 5.3%.

In June, the ECB raised its inflation forecasts for the next two years, projecting that the headline rate will run at 5.4% in 2023, falling to 3% in 2024 and 2.2% in 2025. Against this backdrop, the European Central Bank (ECB) decided earlier this month to once again raise interest rates by 25 basis points to 4%, its tenth consecutive rate hike. The were also signals that it could be its last one, with the Bank possibly shifting its focus from raising rates to keeping them sufficiently high for as long as it takes to curb inflation. Nevertheless, hawkish members of the ECB’s Governing Council like Austria’s Robert Holzmann or Slovakia’s Peter Kazimir have indicated that despite growing fears of recession, the latest hike might not be the last.

With inflation still being significantly above the ECB’s medium-term target of 2%, the release of inflation estimate figures this week will indicate whether core inflation can continue its recent downward trend reducing the prospects of another rate hike in October. The ECB will need to continue to walk a tightrope, balancing between the need to keep rate hikes high to curb core inflation, without increasing the risk of recession.