Mickaëlle FML.: Hello everyone, and welcome to MacroWaves, the BNP Paribas Economic Research podcast that helps you better understand current economic events.
In this edition, we will review the events and trends that have shaped the first half of 2025, and look ahead to the second half of the year. I'm Mickaëlle FML, Head of Communications at BNP Paribas Economic Research. Joining me today is Hélène Baudchon, Deputy Chief Economist and Head of Global Macroeconomic Research.
Hello Hélène !
Hélène B.: Hello Mickaëlle!
Mickaëlle FML.: As we enter the second half of the year, and after a first half marked in particular on the economic front by the tariff war initiated by the United States, we suggest that we pause and look back for a moment. This will allow us to understand the dynamics that have shaped our economies over the last six months. It will also help us to identify to what extent and in what way they will impact the economic outlook for the second half of the year. What scenario should we expect? You have the programme, let's get started!
Mickaëlle FML.: At the start of the year, our chief economist, Isabelle Mateos y Lago, set out five critical questions for 2025 in an editorial:
1/ Will the United States initiate a global tariffs war?
Secondly, there was the question of whether China will finally stimulate domestic consumption in a structural way.
Thirdly, there is the question of whether fiscal policy will have a detrimental effect.
Question 4: Will Europe respond to the warnings it received in 2024?
Question 5: What are the prospects for the UK in terms of overcoming the challenges and difficulties experienced in 2024?
I propose that we review these five questions now, approximately six months later, and answer them in light of the events of the last six months.
Does this programme suit you Hélène?
Hélène B.: Yes, sure. It is always interesting and important to know and understand where you come from in order to (try to) know and understand where you are going...
Mickaëlle FML.: For our first question, which is undoubtedly the most complex in terms of its consequences, we must turn to the other side of the Atlantic. It's January, 2025. President Trump has just taken office. Everyone is wondering whether he will follow through on his campaign promises, particularly regarding tariffs. The suspense was quickly lifted, wasn't it, Hélène?
Hélène B.: Yes, indeed. President Trump rapidly made a series of announcements. At first, the tariffs hikes were relatively targeted and limited in scope. But the intention was already clear, even if there was still room for doubt between the words and the deeds. The question was: does he mean what he says? And this question still exists today in some way, which fuels uncertainty. The tariff offensive then reached its climax (or so we hope) on April 2, which President Trump has dubbed "Liberation Day", with the announcement of so-called "reciprocal" tariffs marking a massive across-the-board increase (albeit differentiated by country). In the meantime and since then, there have also been many reversals, and the general direction now seems to be towards de-escalation, which is good news. But to sum up, yes - and we would have liked to say no – yes, a global tariff war has indeed been set off by the United States.
Mickaëlle FML.: Tariff war is still a prominent topic in the news at the moment, but the question on everyone's mind is now: "At what level will tariffs land?"
Hélène B.: This is indeed a decisive question, on which will depend in particular the extent of the expected inflationary impact in the US and whether the US Federal Reserve extends its monetary status quo. But, as we speak, there is still a great deal of uncertainty. We still don't know what kind of agreement, what kind of deal, the 90-day period of negotiations will produce, particularly those between the United States and the European Union.
Discussions between the United States and China, on the other hand, have moved forward. On June 25th, President Trump confirmed this by announcing the signing of a formal agreement, including the continuation of rare earth exports from China to the US and the maintenance of additional 30% tariffs.
For the rest of the world, our working assumption is an average effective tariff rate on all US imports of above 10% (10% for the floor level of the so-called "reciprocal" tariffs, to which we add sectoral tariffs, such as those on steel and aluminium). As far as sectoral tariffs are concerned, the threat of additional hikes still looms (on chips and pharmaceuticals, in particular, which are currently exempt), and further increases in sectors already hit cannot be ruled out either (such as those on steel and aluminium, which doubled, early June, from 25% to 50%).
There is another layer of uncertainty, linked to the questioning of the legality of "reciprocal" tariffs, even if President Trump is ready to find other judicial basis to circumvent the difficulties.
At the end of the day, if there is one thing we can be fairly certain of, in this environment dominated by uncertainty, it is that the average effective tariff rate will land at a significantly higher level than before Donald Trump's return to the White House (by a factor of 5 to 6). The exact scale of the tariff shock and its implications remain uncertain, but there is a trade shock, even if it is smaller than feared at the time of the Liberation Day announcements. And the shock of uncertainty that doubles it is just as, if not more, disruptive and damaging to economic activity.
Mickaëlle FML.: Speaking of disruption, I would be interested to hear your views on whether the effects of this tariff war and these uncertainties are becoming apparent with regard to global economic activity.
Hélène B.: Well, for the moment, the impact of the tariff shock on economic activity and inflation is hard to see, especially in the US. For a part, it is normal because it is too early to have a clear view of the situation, in particular given the numerous U-turns by the president Trump. The situation is far from stabilized to say the least. Uncertainty is fueling a wait-and-see attitude. And there has been a lot of front-loaded purchases, before the announcements of tariff increases and their entry into force. And this front-loading has introduced a lot of volatility/noise into the data. So, for the moment, as I said, we do not have a clear picture of what’s going on.
What we observe, however, is the consensus among forecasters around a scenario of a marked slowdown in the US economy between 2024 and 2025 (to the tune of 1 percentage point), while the forecasts for the Eurozone are less unfavourable, or even slightly positive. For instance, according to their latest forecasts, the IMF expects Eurozone growth to be marginally lower in 2025 (at 0.8% as an annual average after 0.9% in 2024), while the ECB and the European Commission see it as marginally higher (0.9%). For the OECD, it would be slightly higher (1% in 2025). Our own scenario is slightly more optimistic: we are expecting 1.2% growth in 2025 for the Eurozone.
Mickaëlle FML.: You are talking about a marked slowdown of US growth between 2024 and 2025. What will happen on the inflation front? What are the likely implications of these developments for inflation? What impact might the tariff changes have on inflation in the United States?
Hélène B.: That's the big question, or at least one of the big questions. All the more so as the inflation figures available so far show no significant impact of the tariff hikes that have already taken effect, particularly against China. But that does not mean that there will be no inflationary impact. In part, it is too early to see any. For the time being, the warning signs are limited to a sharp rise in household inflation expectations (and even these latter have begun to recede, which is a good thing). We are also seeing a clear upturn in input prices in the business climate surveys.
We are of the view, however, that US inflation will rise as a result of higher tariffs. We have little doubt about that. Jerome Powell, Chairman of the US Federal Reserve, says it himself, and I quote: "Ultimately the cost of the tariff has to be paid, and some of it will fall on the end consumer. We know that’s coming” (end of quote).
The question that arises is the extent of this extra-inflation. As I said earlier, it will depend in part on the landing point for tariffs. Four other factors are likely to limit the inflation bump:
i/ if companies agree to cut their margins (which does not appear to be the most likely scenario)
ii/ the expected slowdown in demand will also have a disinflationary effect, as will the fall in oil prices (assuming it continues)
iii/ it is also important to bear in mind that, given the current uncertainty, the process of passing on tariff increases to consumer prices will take time, spreading out and diluting their upward effects on inflation over time, which could make these upward effects less visible.
An appreciation of the US dollar would also have a downward impact on US inflation, but the greenback is not currently trending in this direction. And we expect it to continue to depreciate over the second half of the year.
Mickaëlle FML.: Could this imply that the Fed will extend its status quo on interest rates until the end of the year?
Hélène B.: That is our baseline scenario. But we can see that the FOMC is divided on the issue. In our scenario (which is stagflationary, with higher inflation despite lower growth), the Fed has no choice but to extend its monetary status quo until the end of the year.
On the one hand, it cannot resume rate cuts given the upside risks to inflation. Furthermore, as long as the economic slowdown remains contained (which is the case at this stage, particularly in view of developments on the labour market until May), it does not call for rate cuts. And Jerome Powell himself describes the economic situation as solid.
On the other hand, the Fed cannot raise interest rates either to counter the risk of higher inflation, given the downside risks to growth. Ultimately, the status quo seems to be the best option for the Fed while it waits to see how the situation develops, in either direction.
Interestingly, the ECB does not face the same dilemma. Until June, the conditions were quite clearly in place for it to continue cutting rates (inflation back on target, weak growth). The question for the ECB now is whether its cycle of rate cuts, which began 1 year ago, has come to an end. In our view, not quite: we are expecting a final cut of 25 basis points in September, given the downside risks to growth. This would leave the ECB's monetary policy in the neutral zone (i.e. neither holding back nor supporting activity).
Mickaëlle FML.: Thank you, Hélène. There were a number of points to address in response to the implications of the US tariff war. Let us now turn to the second question, for which we are going to China. At the beginning of the year, there was a discussion about whether China would finally stimulate its domestic consumption in a structural way. What are your thoughts on the current situation, Hélène?
Hélène B.: The answer is both yes and no! Yes, in the sense that the Chinese authorities have introduced measures to stimulate household consumption (which are rather effective by the way) in order to counter / offset, as much as possible, the negative effects of the US trade war on Chinese exports and growth. But, at this stage, the current support is not calibrated / it does not appear to be sufficient to bring about a lasting change in the engines of growth (with a growing role for private consumption and a diminishing one for exports). The support to consumption remains a cyclical one. But this could eventually change and lead to something more structural, as the authorities seem to be committed to giving a greater role to consumption.
Mickaëlle FML.: For the third question, let us turn to the topic of fiscal policy. At the start of the year, there was some uncertainty around the potential impact of fiscal policy on economic stability, given the significant fiscal imbalances and financing needs of several countries. What is the current situation?
Hélène B.: The good news is that, no, fiscal policy has not been a derailer...
Mickaëlle FML.: But the risk remains...
Hélène B. Answer: Yes, indeed. While there has been no major derailment, we have nevertheless observed several episodes of pressure on long-term interest rates over the first six months of the year, particularly US long-term rates, meaning that even the US is now under the watchful eye of the bond markets. The deterioration in US public finances, which the One Big Beautiful Bill Act under discussion is likely to exacerbate, is no longer going unnoticed.
On the one hand, it is true that concerns about the budget slippage can be put into perspective, as we also have to consider the fiscal revenues from higher tariffs. These latter will mitigate the widening of the deficit. But, on the other hand, these same tariffs and the planned spending cuts will weigh on economic growth and offset, at least in part if not totally, the expected positive impact of the tax cuts embedded in the OBBBA.
On the European side, the German budgetary turnaround and the EU ReArm plan also raise important financing questions, but there is reason to see the glass as half full, unlike the situation in the US. On the one hand, the EU as a whole has a greater budgetary room for manoeuvre (thanks to a significantly lower ratio of public debt to GDP). Secondly, the potential support for growth from this additional budget spending is clearer than in the US. Finally, even if there is still a fair amount of reluctance, the opinions seem to become more open to the idea, to the necessity of more common European debt, which would also provide the markets with an alternative safe haven.
Mickaëlle FML.: We will now focus on Europe for the final two questions in this section Hélène, beginning with a question on the EU. Please can you confirm whether Europe has heard the warnings that were sounded in 2024?
Hélène B.: Clearly, yes, Europe is waking up and that's the good news of the first half of the year, even if there is still a lot to do. As much as the US tariff shock is a major negative turning point, the European response (in the form of a massive rearmament effort and the German investment plan), which is also massive, is a major positive turning point. These announcements come on top of a renewed effort to boost the competitiveness of the European economy, in line with the recommendations of the Draghi report. I invite all our listeners to consult the various publications we have produced on these topics: they are very insightful, and we are defending a voluntarist, constructive point of view that is as optimistic as possible.
Mickaëlle FML.: Finally, Hélène, this is one final question, and we will have completed the full circle: can the UK pull itself out of the gloom of 2024? Have we found any answers during the first half of the year?
Hélène B.: This question remains unanswered. The UK's economic situation remains mixed and difficult; fiscal consolidation in the UK is no easier than in France, or even more difficult. On the other hand, what is notable and positive from our point of view are the signs of a reset of UK-EU relationships, of a rapprochement, notably through the Security and Defense Partnership.
Mickaëlle FML.: Thank you, Hélène, for your comprehensive clarifications. It is fair to say that the first half of 2025 has been a very busy and agitated period. In view of everything we've just said, will the second half of 2025 be as hectic as the first?
Hélène B.: Once again, uncertainty reigns and that's one of the reasons why we should expect another turbulent six months. The financial markets are looking to see the glass as half full, but they remain nervous and, we think, vulnerable to bad news. And it seems likely that there will be more of it on the other side of the Atlantic. So let's keep our seatbelts fastened - we're probably not finished with the rollercoaster ride yet!
Mickaëlle FML.: So that gives us the schedule for a new podcast with all these elements to keep an eye on! Thanks again Hélène! Thank you to all our listeners for following us again.
Hélène B.: Thank you Mickaëlle, thank you all.
Mickaëlle FML.: I'd just like to remind you that you can find the analyses of our team of economists throughout the year on the BNP Paribas economic research website. We wish you a great summer. Stay tuned. See you soon!
