Mohit Kumar was born in India and is very positive about the economic growth of the country, the emerging one that he sees with the most possibilities of challenging the large Western economies with its productivity. Based in London for decades, the chief European economist at the American investment bank Jefferies believes that the European Union will end up jointly facing the planned defense spending. And he points out that financial markets are increasingly going to focus more on the fiscal discipline of governments, both in Europe and in the United States.
After last week’s ECB rate cut, what do you expect from now on?
The June cut was as expected. And July will be too soon for a new reduction, inflation is still attached to the economy and growth has begun to recover. In this scenario, we would have cuts in September and December. Although the ECB can act independently of the Fed to a limited extent. If the Fed doesn’t touch rates this year, then we would see just two ECB cuts this year.
What is your forecast for the Fed? Do you think it will not lower rates in 2024?
I think the Fed will cut rates in September. The dilemma for the Fed is choosing between employment or inflation and the labor market is going to weaken in the coming months, there are already economic indicators that point to this. I’m not talking about recession but about a slowdown in the labor market. I think Powell is going to prioritize the labor market, it is an election year. We want to think that the Fed is independent but the political pressure is there. We expect a cut in September and another in December. And by 2025, we don’t expect a downgrade at every meeting. We do not expect inflation in 2025 to fall rapidly. Both the ECB and the Fed are far from the neutral interest rate. I think that in two years the rates in the US will be close to 4%. And in the euro zone, I see rates at 3% even in two years.
Looking ahead to next year there is an element that has not been considered, not even in Europe, and that is fiscal expansion. Whoever is president in the United States, whether it is Trump or Biden, we will see fiscal expansion next year. If we talk about more defense spending, that means fiscal expansion and inflation, in Europe and the United States.
What could happen to monetary policy in the US if Donald Trump wins the elections? Is the independence of the Fed at risk?
I want to think that the Fed is independent and will remain so. It is true that everyone knows that Trump does not like Powell, but the Fed chairman is very professional and will want to develop a policy based on the fundamentals of the economy, not on politics. I am not saying that the Fed is not influenced by politics, which it is, given that its actions must be approved by political power. Yes, there will be pressure with Trump to lower rates. And given the dilemma between employment and inflation, I believe that the Fed could give more weight to employment than to inflation in that case if Trump wins.
Is the fiscal deficit going to be a problem in 2025 in the United States, regardless of who wins?
I don’t think we’re going to see anything like what happened with the UK tax plan in the fall of 2022. The dollar is seen by investors as a safe haven asset. The monetary reserves are in dollars, I do not believe that there can be a massive increase in yields on US debt, as happened with the British debt. That said, I do believe that in 2025 the market will put more focus on fiscal discipline in the US. The important thing will be to see what happens with risk premiums. And if there is more deficit in 2025, it will be reflected in risk premiums.
And what will the situation be like in the euro zone in terms of fiscal consolidation and risk premiums?
It will depend on issues such as defense spending, for example. If a country raises it individually, the risk premium would rise, as could happen, for example, in Spain. But my view is that defense spending will be addressed jointly, it is a problem at EU level. We could see a new funding program for defense spending. Some type of joint issuance in the EU to finance it would be the most likely option. But my prediction is that in the next three years there will be some new type of European fund.
Even despite the new political scenario left by the recent European elections?
When deciding on EU funding, the European Parliament is not that important. The euro zone is always very reactive but it has been very good at responding to the last crisis. You will face increasing pressure to increase defense spending. And looking ahead to the coming years, I see few alternatives to increased fiscal spending programs, both in Europe and the US.
What could be the role of the private sector in these financing needs that the EU faces?
It’s very important. And retail demand is also gaining weight in sovereign debt issues, which offer attractive returns to individuals. It is a phenomenon that is going to grow. If there were tax incentives for the purchase of sovereign debt by individuals, as some countries are promoting, it would make even more sense for the retailer.
Europe does not have technological giants and faces a disadvantage in competitiveness. What is the magnitude of the problem?
Europe has a very important productivity problem and one of the reasons for this is demographics, it has an older population. If the population ages, productivity falls. It happens in Europe but also in China. It is a global phenomenon. We must invest more in technology. Immigration is also another way to combat the decline in productivity but poses more political obstacles. It is clear that we must bet on technology. Yes, I am very positive in certain emerging countries, like India. By 2030, around 40% of the world’s population in their most productive working age will be Indian.
As an economist, how do you analyze the power that large technology multinationals such as Microsoft, Apple or Nvidia have today? Should they be taken more into account as agents with great economic influence?
I wouldn’t say that much. These tech giants are responding to the emergence of artificial intelligence, which is now only in its infancy. In a few years, artificial intelligence will be present in all aspects of our lives, in employment, health, education… I would not say that these companies are controlling the economy, they are benefiting. And from the market point of view, they will continue to receive a lot of investment. They will continue to grow and rise on the stock market.
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