2024 was marked by further progress in disinflation, in both the United States and the Eurozone, sufficient to pave the way for rate cuts. However, 2025 may be quite different from 2024, with expected divergent inflation trajectories between the United States and the euro area and, therefore, a decoupling of monetary policies (extended status quo for the Fed, continued gradual rate cuts for the ECB).
The U.S. Foreign Trade is structurally in deficit.In 2023, the deficit in the balance of goods exceeded one trillion dollars, which amounted to 3.8 percent of GDP.While this may be seen as a reflection of the strength of the American consumer, Donald Trump analyzes it as the result of ‘violent treatment’ and ‘abusive practices’ from his trading partners.
For the time being, Donald Trump has not specified his intentions on banking regulation. However, there is a risk that he will push for an incomplete translation of the finalisation of Basel 3 into US law. This would undermine efforts to harmonise international prudential frameworks and introduce significant distortions of competition between US and European banks.
While the German economy continues to underperform and France remains in a middle ground, Southern European countries have become the driving force behind economic momentum in the Eurozone.
The Autumn Budget, unveiled by Rachel Reeves on October 30th, attempts to reconcile fiscal adjustment, support for public services and strengthening of UK’s potential growth.
On the global oil market, we currently have a slightly dynamic demand. China's oil demand in particular which represents around 15% of the global oil demand.
The issue of public finances and their rebalancing has come to the fore, particularly in France, but not only. This problem concerns many other countries, most notably the United States.
Germany and France follow different trajectories in terms of fiscal consolidation. The latter is more involved in Germany, where debt is more moderate. However, this is accompanied by a reduced support for the greening of the economy and a GDP stagnation over the last two years. In France, where public debt is higher, maintaining strong fiscal support has been accompanied by an increase in savings. The literature points out that, in this context, fiscal consolidation based on lower spending could support growth.
In September, the U.S. Federal Reserve at last followed suit with the ECB and the Bank of England and cut its policy rates for the first time since March 2020. But the Fed marked its difference, favoring a significant 50-basis-point cut instead of a more gradual 25. At least on that point, the suspense is over. But the rest of the story has yet to be written.
In the second quarter of 2024, Turkish growth fell below 3% year-on-year for the first time since 2019. On a quarterly basis, GDP even remained stable. Without the positive contribution of foreign trade and inventories, GDP would even have fallen.
Growth and inflation figures in the UK have surprised favourably since the beginning of the year. These results are of course welcome, but they do not reflect a genuine recovery in the economic situation across the Channel.
The Chinese export sector has weathered well the rise in trade tensions and tech rivalry with the US since 2018. The Chinese industry has shown a solid capacity to adapt to the increase in trade barriers and it has kept its leadership position in global trade.
In Central Europe, 5-year government bond yields have broadly toned down since the last peak observed in 2022, amidst acute geopolitical uncertainties.
Human activity is highly dependent on information. What to eat? Which movie to watch? Where to travel? What to study? Where to work? It all depends on information. The same applies to economic activity, where information has a crucial influence on business strategy: which products and services should we provide? Where should we produce them? How should we sell them? What is the marketing strategy? At which price? Et cetera.It also influences economic policy by governments, by central banks, and of course, information has a profound impact on the functioning of financial markets.
According to the expression “goods things come in threes”, France would meet Germany for the third time in the three lasts Euro football tournaments and win a third consecutive success. On the economic front, French results have already outpaced German results in three important areas over the past five years: job creation, investment growth and the transition to services. As a result, it is not surprising that France generated an additional 0.5 percentage point growth per year compared to Germany.
In recent weeks the guidance from several ECB Governing Council members had become increasingly clear that the June meeting would see its first rate cut in this cycle. Against this background, not acting was out of the question, despite the uptick in the latest inflation data.
Because it relies on fossil energies, 80% of the energy mix around the world, economic activity produces greenhouse gas, mainly carbon dioxide which contributes to global warming. This phenomenon, theorized two hundred years ago by French mathematician Joseph Fourier, and which the IPCC, the International Panel of experts on Climate Change, has been describing for thirty years to alert us is no longer contested.
It is highly likely that this year the ECB will cut its policy rate before the Fed does. This sequencing has become a topic of debate amongst central bank watchers, as if the ECB would be jumping the queue and refuse to wait in line until the Fed has eased policy. Does it matter if the ECB cuts rates before the Fed? The answer is no.
In the first quarter, real GDP growth in the United States and the Eurozone was almost on a par, at a quarterly rate of 0.4% for the United States and 0.3% for the Eurozone, according to initial estimates. However, on a year-on-year basis, the situation remains very much to the United States’ advantage, with growth of 3% when Eurozone growth is only 0.4%.
In recent years there has been a substitution between consumption of goods and consumption of services. This substitution even accelerated after Covid, with inflation accelerating, and is expected to continue in the coming years. Thus, while consumption of goods has declined since the beginning of 2022, this deterioration is partly due to this substitution effect and not to a reduction in household spending, since total consumption is higher than its pre-inflation level (end 2021).
The debate on monetary sovereignty in emerging countries is resurfacing with, on the one hand, the plan of Argentinian President Javier Milei to dollarise his economy, and on the other, the temptation of several West African country leaders to abandon the CFA franc. The abandonment of the CFA franc with the aim of recovering the flexibility of an unpegged exchange rate regime and greater autonomy of monetary policy, is an argument that is either weak in theory or unconvincing in practice.
News about growth, inflation and monetary policy influences bond and equity markets. For bonds, the relationship is straightforward but for equities, the relationship is more complex. Therefore, the correlation between bond prices and equity prices fluctuates over time. Since 2000 it has been predominantly negative, thereby creating a diversification effect. It underpins the demand for bonds, even when yields are very low. Unsurprisingly, during the recent Federal Reserve tightening cycle, the correlation has turned positive again. Based on past experience, one would expect that, as the Federal Reserve starts cutting rates later this year, the bond-equity correlation would turn negative again.
In Saudi Arabia, the decline in oil production is weighing on economic growth, but non-oil activity is buoyant thanks to massive investment programs. In the short term, tight labour market and rising geopolitical risk could constrain the rebound in activity. In the medium term, the kingdom's financial strength should allow the economy to continue to diversify.
When questions have been answered, new ones pop up, reflecting a shift in focus. We are again experiencing this phenomenon. Recent comments by Christine Lagarde and Jerome Powell have provided implicit guidance on the timing of the first rate cut. The focus is now shifting to how fast and how far policy rates will be reduced
The US 2-10s yield curve has been inverted since mid-2022, with no clear signs of an impending recession in the US economy. Thanks to the current risk-on mood, this looks like a “false positive”, as it did in the mid-1990s.
