L'IRA meurt

The seamless and apparently painless IRA, contrasting with the complex and carbon tax-heavy European net zero transition is contributing to the current narrative on the widening transatlantic performance gap. True, some aspects of the European approach should be reviewed, and its’ easy to recognize the tangible effect the IRA is already having on US investment, but we continue to think that the US “all carrot and no stick” strategy could well end up being less efficient from a decarbonation point of view and more prone to counter-productive effects given its “adventurous” approach to fiscal sustainability. The current European strategy will probably continue to be challenged on the premise that it is less “pro-growth” than in the US, but we would highlight a recent quantitative work by the French Economic Analysis Council showing that with the right fiscal framework, even a sizable and generalised carbon tax, could be quite manageable in terms of employment impact.

Turning to more immediate considerations, the improvement of the US bond market is of course good news. Breaking down the US yield curve, we may have hit a “sweet spot”: although correcting visibly from their recent peak, real long-term rates remain high enough to complement the Fed’s action via its policy rates, while inflation expectations are low enough to help convince the central bank that enough has been done. There were still some concerning details in the otherwise encouraging CPI print for October, but the rebound in jobless claims confirms the message from the latest payroll data, pointing to more softening of the domestic sources of inflation ahead.

The unemployment rate rose in France by 0.2 percentage point in Q3 2023, exactly the quantum predicted by the pre-Covid relationship between GDP and unemployment. While this may not come as surprise from a macro point of view, surveys suggest that consumers have not yet taken the measure of the deterioration of the labour market. When they do, this could trigger more precautionary saving.