By Frédérique Carrier, Head of Investment Strategy for RBC Wealth Management in the British Isles and Asia
On February 9 and 10, European countries met to discuss their response to the U.S.’s Inflation Reduction Act (IRA). The ill-named act ensures close to $400 billion in tax credits and subsidies will support the country’s renewable and clean energy industries over the next 10 years.
Europe, long a leader in many of these industries, thinks its competitive position is threatened—not only by these subsidies. Investing in the U.S. is simple, as the IRA rules apply to all states uniformly. By contrast, a single tax incentive across the continent does not exist in Europe, as each national government is responsible for setting tax credits—which can differ widely. Moreover, natural gas prices in the U.S. are cheaper, despite their recent decline in Europe. As such, spurred into action by the IRA, Europe is busy formulating a response—no easy task when 27 countries are involved.
The Green Deal Industrial Plan could bring meaningful change. The European Commission has proposed speeding up and simplifying the approval of green-finance tools, thus supporting the transition to a green and digital economy. It also calls on national governments to introduce tax breaks and subsidies for green investments and urges an increase in funding. Final proposals will be discussed by the March EU Summit. A successful implementation of this new industrial approach could underpin economic growth.
Separately, economic data in the UK once again fuelled higher bond yields. The drop in inflation from 10.5% to 10.1% in January was mainly attributable to a 3.8% drop in fuel costs in January. However, it’s not all good news, as the data is also a little mixed. The labour market is not cooling fast enough to put the central bank at ease on upside surprises to inflation coming through from the labour market. Regular wage growth exceeded economists’ consensus expectations, rising from 6.5% to 6.7% in December. The latest guidance from the Bank of England (BoE) suggested that more rate hikes would be contingent on upward surprises to inflation and wage growth. With a slew of data releases before the March 23 BoE meeting, we expect bond yields to remain volatile as the market tries to gauge the central bank’s next move.
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