Transcription:
00:13:50 - Emmanuel Laborde
We look forward to the coming year, beginning with the advanced economies. We have two subjects to discuss, giving me a fifty-fifty chance. This discussion will involve Stéphane and Lucie, who will be joining us shortly. Please allow me a moment to move across the set and change my tablet.
Hello everyone, hello Stéphane and Lucie.
Stephane Colliac & Lucie Barette
Hello Emmanuel, hello everyone.
Emmanuel Laborde
Together, we will examine the advanced economies in 2026. Various indicators will provide insight into the trends, and we will begin with Europe, which is of significant interest to us, starting with a key indicator that is typically very revealing: growth. Stéphane, what does this indicator tell us?
00:14:40 - Stephane Colliac
It conveys a rather optimistic message. If we look at Europe, especially Germany, Italy and France, growth was below 1% in 2025. We anticipate at least reaching this threshold in Italy and potentially surpassing it in Germany and France in 2026. This is a positive sign. It suggests a growth rate of 1.5% in the euro zone. In the United Kingdom, which is not part of the European Union, we also expect growth slightly above 1%, specifically 1.1%. And then let’s not forget Spain, which is currently leading and is expected to maintain a growth rate exceeding 2% again in 2026.
00:15:13 - Emmanuel Laborde
So, these are indeed very promising indicators to begin with. How can we explain this outlook?
00:15:18 - Stephane Colliac
This is primarily due to fiscal support, especially in Germany, associated with the rearmament initiative and the infrastructure investment programme specifically in Germany. This is an important element and will ramp up from the fourth quarter of 2025, but especially in 2026, and it should also facilitate growth in other countries. The ECB has reduced interest rates, and this reduction has been passed on to the rates that banks impose on non-financial companies, as well as to market interest rates. So, this should have a positive impact on business investments. Furthermore, if we concentrate on France, there is an additional aspect, which is the increase in aeronautical production, which over the past four months has accounted for three-quarters of its pre-COVID backlog, indicating a 16% rise in production.
00:16:06 - Emmanuel Laborde
We are indeed looking at extremely positive figures. We are only at the end of 2025, the year is not completely over, and yet we are already beginning to see the developments you mention. Can we sense a shift?
00:16:19 - Lucie Barette
Yes, indeed. In the private sector, there is a moderate but visible improvement in economic surveys. And the tech sector is also contributing to this dynamic. In the manufacturing sector, European companies have significant advantages in leveraging big data, artificial intelligence and automation through robotics. Per capita, Europe has 30% more artificial intelligence specialists in its workforce compared to the United States. This is evident in the labour market as, since the end of 2019, nearly one-third of net job creation in the euro zone has occurred within the high-tech sector.
00:16:54 - Emmanuel Laborde
When discussing AI, our initial instinct is naturally to turn our attention to the United States, which is indeed leading in this field. Regarding the US, what are your predictions for the coming year?
00:17:04 - Stephane Colliac
We anticipate a growth rate of approximately 2%, which is considered a relatively good level of growth since the Trump administration took office. That's still good growth. Nevertheless, it is still unevenly distributed, presenting a rather optimistic outlook regarding investments, particularly in artificial intelligence, which we will discuss further. However, the outlook appears more cautious when we examine household confidence, especially in terms of spending intentions, which have recently become slightly less optimistic.
00:17:30 - Emmanuel Laborde
What is the significance of this investment in AI? To reiterate, when we pay attention to economic news, and the media often echoes this sentiment, the investments are in the hundreds or even thousands of dollars. It is truly staggering and can be challenging to grasp, sometimes even for a human being. More broadly, investment seems to be the new catalyst for American growth today. Is that accurate? Is that the essential factor?
00:17:52 - Stephane Colliac
Yes, in the United States and elsewhere, investment is a direct outcome of the industrial policies currently being implemented. While these policies are labelled as industrial, they also encompass elements of protectionism. With the US policy of raising tariffs, one of the forthcoming goals is to bring activities back to the United States. In this context, China serves as a model, as evidenced by the China 2025 plan, which illustrates the country's advancement and consistently high investment levels relative to GDP. In Europe, we have the Draghi plan that has been introduced, along with rearmament initiatives through "Readiness 2030", which also contribute to bolstering investment. Overall, we find ourselves in a favourable environment for investment. Monetary policy is also playing a role because, with declining interest rates, which we will come back to, we are facilitating business investment, given that business lending rates have decreased following the ECB's rate reduction. This is another positive aspect. We are already witnessing a resurgence in investment when we consider the French context. Over the past year, European non-financial companies have experienced a 1.2% increase in real investment. So, to answer the initial part of your question about artificial intelligence, it is responsible for a significant portion of the investment growth in the United States, serving as a crucial factor in the country's economic expansion. So it would be crazy to claim that it has no role to play. It plays a very positive role in US growth. This investment is substantial, as it is aimed at fostering potential growth. While there may be some adverse market effects, which we have previously examined, it is essential not to exaggerate this impact, as we rely heavily on various inputs, especially those sourced from Asia, like semiconductors. Consequently, the influence on growth should not be overstated, as this is the element that mitigates the overall impact.
00:19:46 - Emmanuel Laborde
Taking a broader perspective, household consumption has long been the primary engine of growth in the United States. We have observed this trend. Now, as we approach 2026, has there been a shift in this paradigm? Has household consumption become the less significant contributor to growth? Am I justified in making this comparison?
00:20:03 - Lucie Barette
Not yet, but the exceptional performance of the US in terms of consumption is likely nearing its conclusion. This was partially driven by wealth effects, which are now being challenged by the elevated valuations of companies associated with artificial intelligence development. Furthermore, the cooling labour market in the US is expected to dampen the spending enthusiasm of American households. Conversely, in Europe, the improving growth outlook should facilitate a rebound in consumption. Moreover, the labour market is proving more resilient than anticipated, with the unemployment rate close to its low point of 6.3% in September. Nevertheless, the outlook for consumption in Europe continues to be constrained, primarily due to the only modest recovery in real wages, which is unlikely to compensate for the losses incurred during the inflationary phase.
00:20:47 - Emmanuel Laborde
Another aspect that will command our complete focus and assist us in gaining a clearer understanding of what 2026 may entail is, of course, the progression of interest rates. Key rates have decreased, albeit in a somewhat uneven fashion. What consequences might this have for long-term rates? Can we identify a few regions globally and attempt to estimate these rates, tentatively, of course?
00:21:07 - Lucie Barette
Yes. Central banks have reduced their key interest rates, particularly the ECB. This has facilitated a decrease in the borrowing rates for non-financial companies and households. However, this trend of rate cuts is nearing its conclusion, as the ECB is expected to maintain its monetary policy unchanged in 2026 with a key interest rate of 2%, according to our projections, due to the stabilisation of inflationary risks around the 2% target. In the United States and the United Kingdom, monetary policy remains geared towards easing, but this chapter is expected to come to an end in 2026 with a final cut of 25 basis points. In the United States, the deterioration in the labour market has warranted this monetary easing, yet the Fed's flexibility is likely to be constrained by the economy's resilience and inflationary risks.
00:21:57 - Emmanuel Laborde
Furthermore, we must also consider Japan, which has been a significant topic of discussion as we approach the end of this year. Do you agree? It is certainly in the limelight.
00:22:03 - Stephane Colliac
Absolutely. For good reasons, Japan stands out regarding its monetary policy, as the conversation has shifted back to the potential increase in interest rates. This had previously been deferred due to the trade tensions with the United States, the imposition of US tariffs, and the resulting uncertainty. But inflation has not slowed particularly in Japan. Unemployment is very low, structurally very low, around 2%. Migration is tightly regulated, meaning it cannot be relied upon to alleviate labour shortages. Therefore, we find ourselves in a highly constrained economic environment where an increase in interest rates is necessary. Consequently, growth in 2026 is projected to be limited, reaching merely 0.7% in Japan.
00:22:48 - Emmanuel Laborde
Now, let us discuss sovereign rates, Lucie.
00:22:53 - Lucie Barette
Of course. Despite these accommodative measures, long-term sovereign rates are experiencing upward pressure due to the rising public debt in advanced economies. This trend is expected to continue in the euro zone, particularly with the expected rise in German debt. Nevertheless, this will not result in a widening of spreads, including in France.
00:23:10 - Emmanuel Laborde
In the scenario you have outlined, is it plausible that, similarly to early 2025, US policy could again be a source of uncertainty in 2026? Might we witness a recurrence of this situation?
00:23:26 - Stephane Colliac
It is possible, so we need to look at which aspect to consider. The trade policy was the one where US policy was most disruptive in 2025. Typically, this should be a resolved matter, as agreements have been signed, including trade agreements like the one between the European Union and the United States, which also served as a model for other agreements signed later around the world. However, if the Supreme Court were to cancel these agreements, particularly the so-called reciprocal tariffs, we would undoubtedly have to reopen that issue. Nevertheless, we believe that, for the most part, that issue was addressed in 2025. Conversely, there are two additional factors that could significantly influence the United States policy. One factor could be energy policy and the pursuit of low energy prices, which was already highlighted in 2025 by the administration and has led to subsidies promoting the development of coal mining. However, we see that, alongside the advancement of artificial intelligence, electricity consumption is on the rise, electricity prices are also increasing, and therefore there is clearly more work to be done to lower energy costs. Additionally, global conflict resolution could also be influential, particularly given the conflict in the Middle East, which was resolved in 2025. There is a conflict between Russia and Ukraine, two countries that produce vast quantities of various raw materials, including energy resources. Resolving these conflicts could potentially contribute to lowering energy prices.
00:25:05 - Emmanuel Laborde
We will also be monitoring the Fed, as we briefly discussed with Hélène. The Fed will be active in its policy decisions, and additionally, there is a new dynamic in its interactions with President Trump.
00:25:15 - Stephane Colliac
Indeed. Already in 2025, we observed a clear inclination to push the Fed towards lowering interest rates, potentially even below what economic fundamentals would typically support. Since the Fed's actions are guided by these fundamentals, it refrained from reducing rates to the extent desired by the US administration. In 2026, there may arise an opportunity for the administration to exert greater influence over the Fed, coinciding with the conclusion of Jerome Powell's term as governor. Consequently, a new governor will assume office. With the changes in the monetary policy committee in the United States, we might witness increased oversight and, as a result, lower interest rates. The impact of lower energy prices coupled with lower interest rates could foster short-term growth. This is a potential outcome we could anticipate. However, if achieving this involves undermining the Fed's credibility, it could lead to adverse consequences in the medium term. We have to remind the successes that Paul Volcker achieved in the early 1980s by raising interest rates in front of high inflation, which ultimately resulted in reduced inflation and sustainable growth. Conversely, pursuing the opposite strategy could incur significant costs.
00:26:19 - Emmanuel Laborde
Let us take lessons from history and strive to avoid repeating past mistakes. Our focus is on the euro-dollar exchange rate. If we analyse it over the year, smoothing out fluctuations, we project an 11% variation in the euro's value against the dollar in 2025, which is still quite significant. For individuals of my generation, this evokes memories of the era of a strong euro, which is quite advantageous for travel to the United States, yet poses concerns from an economist's perspective, especially regarding European exports. What scenarios might we encounter, Lucie?
00:26:48 - Lucie Barette
Initially, the dollar experienced a decline in the first half of 2025 as a result of the new US economic policy. At the same time, the euro gained from enhanced growth and the rise in long-term interest rates, especially in Germany. The exchange rate stabilised at $1.15 per euro and continues to hold at that level today. Looking ahead to 2026, we expect it to approach $1.20 per euro. This situation leads to two significant outcomes. The first outcome is that the strength of the euro bolsters disinflation. For instance, from January to November 2025, the price of a barrel of oil in euros decreased by 25%. The second outcome is less advantageous and concerns European competitiveness, with an appreciation of more than 10% against the dollar and currencies that move with it, including the Chinese yuan.
00:27:38 - Emmanuel Laborde
You mentioned the Chinese currency, which provides an excellent introduction to our second topic regarding emerging economies. I have one final question for you, Stéphane, on this matter. From a trade perspective, could China in 2026 potentially become, and I put this in quotation marks, a greater challenge for Europe than the United States has been over the past year?
00:27:59 - Stephane Colliac
Yes, perhaps already, as we have noted that with the rise in US customs tariffs, China is now primarily targeting European for new market opportunities. This could certainly lead to complications, as it presents an industrial challenge, with heightened Chinese competition against Germany, the emergence of high-end Chinese products, and the issues this creates. Additionally, there are challenges related to retail and wholesale trade, with the reduction of intermediaries in trade, which constitutes approximately 20% of an economy. Consequently, by minimising the number of intermediaries, this inherently competes with traditional wholesale and retail channels. If we assess the cost disparity between China and the European Union, various studies estimate this difference to be approximately 30%. Consequently, in direct competition, copying with a significant gap is evidently challenging. How can the European Union address this competition? Clearly, in front of clear distortions and evident dumping, imposing customs duties may serve as a viable response, but this should only apply in specific contexts rather than as a blanket increase in customs duties. At the same time, the implementation of the Draghi plan is essential. Additionally, fostering locally produced content within European manufacturing is another strategy. Therefore, any measures that facilitate this will serve as a counter to the increasing competition from China.
00:29:27 - Emmanuel Laborde
This topic has been previously addressed and will undoubtedly resurface in the news concerning all Economic Research publications. Thank you both.
