We are almost a week away from a vote that could change the face of Germany. On 18 March, the Bundestag will decide on the adoption of two structural defence and infrastructure projects. A massive budget plan that could exceed EUR 1,000 billion over the next ten years and revive German growth, which has been absent for almost 3 years.
Inflation is no longer the No. 1 economic problem that it has been for the past three years, but it remains a major challenge. While it has not reached its 2% target yet, and the last pockets are slowly deflating, new inflationary pressures are mounting. At this stage, those pressures are limited but not negligible and new inflationary risks, linked to the economic and geopolitical context, are taking shape. The Fed's task is becoming more complicated by the risk of a US stagflation, and the ECB's one happens to be slightly trickier when balancing between downside and upside risks on growth.
Against a backdrop of falling interest rates, new banking loans (excluding renegotiations) to households and to non-financial corporations (NFCs) in the Eurozone continued to accelerate in January 2025. Cumulated over one year, new loans to the non-financial private sector (NFPS) increased by 8.6% year-on-year, after 7.4% in December 2024, to EUR 3,437 bn.
While French growth reached 1.1% in 2023 and 2024, uncertainties, particularly of a political nature, are expected to drive growth slightly down in 2025 (0.7% according to our forecasts). The difference can be explained primarily by the weak growth carry-over after Q4 2024 and Q1 2025. However, we are probably over the worst and growth is expected to strengthen from Q2 onwards. In fact, implementation of the 2025 budget should restore confidence and allow an increase in public consumption compared to Q1 (when it was penalised by renewal of the 2024 budget). Basically, we think that the momentum of the transition to services - accompanied by strong business creations - has not been interrupted. Accordingly, the fundamentals of French growth are preserved.
Central European countries are relatively well-positioned in industrial sectors with high technological content. However, there are differences, with regards to the respective percentages of tech products in value added and in manufacturing sector exports. The share of the high-tech sector, consisting of only three segments in the sector approach (pharmaceuticals, IT/electronics/optical and air/spacecraft), is relatively modest, but the percentage of “medium-high-technology” sector (chemicals, weapons, electrical equipment, machinery, motor vehicles, other vehicles, medical devices) is high. However, these two sectors are also very technology-intensive
At the end of 2024, the household saving rate in the Eurozone was higher than it was before the COVID crisis. Among the four main economies of the Eurozone, France is no exception. Only in Spain and Italy has this trend been accompanied by an increase in investment in housing. In France and Germany, these additional savings are exclusively financial in nature. The factors at the root of the high financial saving rate will not prevent it from falling in 2025, but will contain it.
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.
Activity indicators for October showed encouraging signs of accelerating growth. The support policy measures implemented by the authorities are finally beginning to bear fruit. However, the improvement is not widespread, as deflationary pressures persisted and credit growth continued to weaken.
Discussions on the 2025 draft finance law (PLF) have just begun in the French National Assembly. The backdrop for this PLF must be outlined. France is setting out to consolidate its budget, which is a major yet necessary task. However, things are hanging in the balance due to power struggles in the National Assembly. Over the past few years, a high fiscal deficit has been run up, with the 2024 fiscal deficit and interest burden (which is expected to increase by nearly 1 point of GDP by 2027) leaving the French government with no choice but to take action. In order to stabilise its public debt ratio, France will have to bring its fiscal deficit below 3% of GDP and therefore reduce it each year for at least five years
The household savings rate in France has risen further, up from 17.6% of households' gross disposable income (GDI) in Q1 2024 to 17.9% in Q2 2024, according to the INSEE, i.e. 1 point more in a year. This is also an early sign of an upward trend underway in the Eurozone. While the figures for Q2 are not yet available, the Q1 figures pointed to a savings rate 3 points higher than its pre-COVID level (at 15.4%).
Historical relationships between economic data play a key role in shaping expectations. In the US, the Sahm rule is such an important stylised fact: when the recent increase in the unemployment rate reaches a certain threshold, a recession tends to follow shortly or has even already begun. The jobs report published early August showed that this critical value had been reached, triggering a drop in investor sentiment. At the Jackson Hole conference, Jerome Powell explained that the Fed’s focus is shifting to the labour market and brought an unambiguous message that the rate cutting cycle is to start in September
Growth in exports to the United States (Germany's biggest export customer) has continued to drive German foreign trade in recent years, while trade with the eurozone and China has been relatively stagnant. For the past four months, however, the German PMI for export conditions has been above the threshold of 50 (albeit lower in June at 50.8 than in May at 51.9), suggesting a more global dynamic.
The Italian economy has seen strong recovery since the end of the Covid-19 pandemic. Since 2021, its annual growth has far exceeded that recorded on average in the eurozone, thanks to the implementation of expansionary fiscal policies, which have buoyed consumption and investment, and the gradual recovery of tourism. Since the beginning of 2023 however, economic activity has started to moderate, due to an unfavourable international environment and the gradual abolition of these fiscal measures. In addition, the latter have, by their very nature, impacted the State's public finances, placing the country under the European Commission's excessive deficit procedure (EDP) in June 2024.
Q1 2024 saw the household savings rate rise to 17.6% (from 17.2% in Q4 2023), thanks to moderate growth in consumption (+0.1% q/q in volume terms) in Q1 and higher growth in purchasing power (+0.6% q/q). While the savings rate has fluctuated at around 2.5 points above its pre-COVID level (14.6% in 2019) since mid-2021, we expect it to now fall back down to this 2019 level by the end of 2025. Significant support for household consumption.
In the US, household deleveraging, fixed rate mortgages, rising financial income on the back of higher interest rates and dividends, in combination with an increase in net worth have contributed to the resilience of households in an environment of aggressive monetary tightening. Nevertheless, some caution is warranted. Aggregate data, by construction, do not shed light on the heterogeneity of households. The financially fragile categories will need to be monitored closely in an environment of high rates for longer, in view of possible spillover effects to the broader economy should their situation worsen significantly.
April could see core inflation (according to the INSEE definition) fall back down to 2%. Disinflation is gradually spreading to more and more items (particularly to manufactured goods and food), resulting in inflation remaining above 2% year-on-year for just half of these items over the first three months of the year.
Since China's accession to the World Trade Organisation (WTO) in December 2001, the European Union's bilateral deficit with the country has widened from EUR 39 billion to EUR 292 billion in 2023 (Eurostat data). This is by far the largest deterioration recorded by the Old Continent with a trading partner, even though, as a whole, the EU's trade balance with the rest of the world returned to surplus in 2023.
The publication of INSEE’s business climate survey on Thursday 25 April confirms the prospect of an improvement in demand, which has remained depressed in recent months. Ahead of the publication of important data from 30 April, we anticipate that growth, having remained weak in Q1, should accelerate in Q2, benefiting from the disinflation observed. However, the improvement may not be sufficient to rule out the risk of business insolvencies remaining high.
Economic indicators for the first two months of 2024 showed a slight improvement in activity, driven primarily by the export manufacturing sector. Growth in industrial production reached +7% y/y in real terms in January-February 2024 compared to +6% in Q4 2023, and manufacturing investment also strengthened slightly. It increased by +9.4% y/y in nominal terms over the first two months, after +6.5% over 2023 as a whole.
Canada has experienced sluggish economic growth in 2023, owing to rising prices and higher credit costs, which had a direct impact on the investment and consumption channels, despite the benefits of the country’s growing population. Furthermore, one cannot expect a significant improvement over the short run. Canadian households are amongst the most indebted in the world. Admittedly, their level of net wealth contributes to offset this fact, but it still implies an increased vulnerability against the backdrop of monetary tightening and a deteriorating labour market
The economic situation in January and February highlights the uncertainties surrounding 2024 with, on the positive side, improvements in the business climate in several countries and resilient labour markets (Europe) or labour markets remaining dynamic (US). Combined with a disinflation trajectory not yet spreading to all sectors (services in particular), all these factors are tending to defer expectations of rate cuts.
Business climate and consumer confidence indices remained stable at a low level in February, highlighting Germany's limited economic impulse in Q1. According to our forecasts, GDP growth should be zero, after a contraction of 0.3% q/q in Q4: growth without momentum (for the time being) but also without a carryover effect (-0.2% after Q4 2023).
The last time growth was significant (in Q2 2023, with +0.6% q/q), this was explained by significant restocking (contribution of 0.5 points, after a contribution of -0.4 points in the previous quarter). A similar restocking trend could occur in Q1 2024, following a negative contribution of inventories in Q4 2023 (-0.7 points). However, this very negative figure suggests that demand in Q1 is particularly subdued, and is not expected to contribute to growth (if growth were to prove positive).
January's business confidence surveys recovered in Italy: the composite PMI index rose 2.1 points and now stands at 50.7. This improvement was driven by services, for which the PMI returned to the expansion zone after six months in contraction territory (+1.4 points, at 51.2). The companies surveyed are now reporting an increase in upcoming new business (52.5; +4.4 points), bringing employment with it (51.2). Meanwhile, the deterioration in the manufacturing sector, observed since April 2023, is continuing to slow, with the associated PMI index gaining 3.2 points in January, standing at 48.5.
The start of 2024 has seen an unexpectedly strong non-farm payrolls gain, hitting 353,000 in January (+30,000 m/m) – the highest figure seen for more than a year. In addition, this figure was coupled with a significant upward revision to the December data (330,000 jobs created, compared to the initial figure of 216,000). At the same time, the unemployment (+3.7%) and participation (+62.5%) rates remained stable.
