Government bond yields in advanced economies are highly correlated, much more than the correlation of real GDP growth. Governments should be cognizant that a lack of fiscal discipline can create negative externalities, by pushing up bond yields abroad. Given the prospect of huge financing needs in the public and private sector, every issuer of debt should prepare for the possibility of structurally higher interest rates and stress test his balance sheet in order to test its resilience.
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Equity indices, Currencies & commodities, and Bond markets.
Who's next? As soon as he became the 47th President of the United States, Donald J. Trump drew the weapon of tariffs, “the most beautiful word in the dictionary”, as he put it. Mexico, Canada and China were the first to be hit, while the European Union (EU) was explicitly targeted.
GDP figures for Q4 2024 confirm a clear divergence between growth which is sustained in the US (0.6% q/q) or accelerating in China (1.6% q/q), and mixed performances in Europe with a stagnating GDP: -0.2% in Germany, -0.1% in France or stagnation in Italy, compared to +0.8% in Spain. In Japan and the UK, these figures have not yet been published, but our estimates are 0.2% and 0.3% q/q, respectively.
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“Not all died, but all were stricken”. While the Covid-19 pandemic spared no one, its consequences, particularly on the budgetary front, were not the same for everyone.
The global economy faces a long list of uncertainties -growth, inflation, interest rates, political, geopolitical, tariffs, etc. When uncertainty is exceptionally high, as is the case today, the economic environment becomes intrinsically unstable and may evolve suddenly and drastically. This acts as an economic headwind because companies that are highly exposed to these sources of uncertainty may postpone investment and hiring decisions. This may weigh on household confidence, triggering a reduction in discretionary spending. Financial markets may also become more volatile because investors shorten their investment horizon. There is a clear urgency of creating a predictable policy environment.
While in most major advanced economies the year-on-year growth in nominal wages has been back above inflation for a few months now, we can ask ourselves where households’ purchasing power stands compared to its pre-inflationary crisis level. This purchasing power can be measured in two ways: in the broad sense and more accurately, when it is calculated on the basis of the real gross disposable income (GDI) of households; and in a narrower sense, but perhaps more meaningful for households, when it is assessed on the basis of real wages.
