The updated economic scenario and forecasts of the Economic research
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Following on from the first part of our EcoInsight series on US Treasuries, which focused on the US administration's budget plans (US federal debt: the risks of abundance), this second part we are examining how president Trumps’ excesses have harmful effects on the demand for federal paper.The profile of US Federal Government creditors has changed significantly over the past 20 years. The appeal of Treasuries for so-called ‘long-term’ investors (i.e. foreign central banks, resident pension funds and insurers) has waned. More ‘short-term’ investors (i.e. leveraged funds), who favour procyclical strategies, are now very active in this market. This shift has contributed to undermining the safe-haven status of Treasuries, which are now more sensitive to periods of stress
The Genius Act, signed into law on July 18 by President Donald Trump, aims to stimulate stablecoin holdings and demand for T-bills from their issuers. This legislation could ultimately have a significant impact on the scope of monetary policy, banking intermediation, and financial stability. However, the U.S. administration's hope that the increase in net demand for short-term Treasury securities will match that of stablecoins may not entirely come to fruition.
Considered the safest and most liquid assets in the world, US Treasuries are the first choice of investors seeking security. However, the turmoil that hit their market last April, in the wake of the announcement of new US tariffs, revived memories of the dysfunction caused by the COVID-19 pandemic in March 2020. Despite the magnitude of the shock, the market's loss of liquidity at the time came as a surprise, given Treasuries' safe-haven status. As a matter of fact, more than the shock per se, this fragility is due to structural factors.This first part of our EcoInsight series on Treasuries analyses how the US administration's fiscal plans threaten to exacerbate this fragility
Outside the US, GDP growth in the first quarter generally exceeded expectations in the European Union, the UK, and emerging economies, including China. After the surge in imports that preceded the US tariff hike, the backlash in the second quarter will be more limited than expected in most cases. However, it would be premature to sound the all-clear, as three dangers loom: tariffs, inflation, and public debt.
Non-performing loan (NPL) ratios of non-financial corporations declined in most EU/EEA banking systems between 2019 and 2024. On average, the ratio fell significantly to 3.38% in Q4 2024 (-2.4 percentage points since Q1 2019). Only the German, Austrian and Luxembourg banking systems recorded an increase, but they started from a level significantly below the EU/EEA average NPL ratio.
While FDI inflows into Southeast Asia have been higher on average since 2021 than in the 2016–2019 period, they have declined in India. As a share of GDP, net FDI inflows to India (non-resident FDI inflows minus disinvestment) reached only 0.7% of GDP in 2024, the lowest level since 2012. This decline is all the more surprising given that, according to UNCTAD, the value of greenfield FDI projects announced in the country has been rising sharply since 2022.
Faced with the need to find the necessary funding for the massive investments required for the energy and technological transitions identified by Mario Draghi in his report, and for Europe's defence remobilisation (Readiness 2030), on 19 March, the European Commission unveiled its strategy for a Savings and Investments Union (SIEU), of which securitisation is an essential part. On 17 June, the Commission also proposed new measures to boost securitisation activity in the EU while preserving financial stability. These measures are a good basis for relaunching the securitisation market. However, certain aspects could benefit from improvement.
The German government has presented its draft budget for 2025, which is expected to be adopted in September. It is a breakaway budget marked by a clear return to public investment and support for business investment, at the cost of a significant increase in debt. This budget is one of the pillars of Germany's new policy, which should have a rapid positive impact on growth.
The Spending Review and the GBP 725 billion ten-year infrastructure plan, unveiled on 11 and 19 June, respectively, demonstrate the British government's desire to move away from forced fiscal consolidation. Getting public finances back on track remains a major challenge in the UK, which is constrained by pressure from the bond market, and provides a point of comparison for France. This is against a backdrop of major structural upheaval and growing investment needs. At this stage, we believe that the UK's fiscal consolidation strategy is credible, but the government is walking a tightrope.
While the Federal Reserve (Fed) estimates that uncertainty has eased, its conviction that a tariff-related rise in inflation is looming has hardened. The Committee (FOMC) nevertheless appears to be greatly divided on the balance of risks. We maintain our forecast that there will be no rate cuts in 2025 in light of renewed inflationary pressures combined with insufficiently slowing growth.
The quantitative theory of money — the idea that inflation in an economy depends on the quantity of means of payment in circulation — is a very old one. It is generally attributed to the French philosopher and jurist Jean Bodin, who, around the middle of the 16th century, was the first to have the intuition that the causes of the "rise in the price of all things" in Europe were to be found in the influx of precious metals from the New World.
The tariffs imposed by the Trump administration and the acceleration of the US-China decoupling will lead to a slowdown in global economic growth, a further reconfiguration of international trade, and the continued reorganization of value chains. These changes will have multiple consequences for emerging countries. All will suffer negative effects linked to the slowdown in their exports and increased competition from Chinese products. Some may also seize new opportunities to attract FDI and develop their export base.
The first half of 2025 was marked by two major turning points: the outbreak of a global trade war by the United States and, on the European side, announcements regarding rearmament efforts and the German investment plan, supporting the Old Continent's economic revival. The second half of the year will be marked by the aftermath of these announcements and is likely to be as hectic as the first, given the continuing uncertainty surrounding the outcome of the tariffs. The uncertainty surrounding the extent of their inflationary impact in the US and the duration of the Fed's monetary policy status quo is also significant. The risk of a derailment caused by fiscal policy remains
