In South Africa, the coalition government formed in June 2024 is overcoming its strong internal divisions one way or another. After three months of stormy negotiations, the final version of the 2025/2026 Budget, presented to Parliament at the end of May, was recently approved by all coalition parties. This is a necessary condition for regaining investor confidence, but it is not enough. The government will also have to ease diplomatic tensions with the United States. Without a significant rebound in investment, economic growth is likely to remain weak over the next three years, contributing to the fragility of public finances.
The outlook remains positive despite international turmoil. The United Arab Emirates (UAE), which is relatively unaffected by the tightening of US trade policy, has room to manoeuvre to cope with lower oil prices and the slowdown in global trade. Its economy is more diversified than that of other Gulf countries. It is also driven by its strong attractiveness to foreign investment and the support of the government. In the longer term, the UAE could also benefit from a potential reconfiguration of trade flows and leverage its assets to maintain its strategic relationship with the United States.
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.
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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 dollar is involved in nine out of ten foreign exchange transactions and still accounts for 58% of total foreign exchange reserves. Commodities, interest rates, derivatives: it is the dominant currency in almost all markets, with one exception: green bonds, which are mainly denominated in euros and whose take-off is mainly driven by companies and public actors based in Europe. In 2025, the green bond market is expected to see another record volume of issuance. It remains to be seen whether the US counteroffensive on social and environmental responsibility will be a threat or an opportunity for sustainable finance. There are many arguments in favor of the latter hypothesis.
The investment required to meet the challenges of competitiveness and energy and technology transition in the European Union is huge, and the need for it is imminent (2025-2030). To this must now be added expenditure to strengthen the European Union's military capabilities. To finance this, the EU must of course speed up its roadmap towards a Savings and Investment Union. But given the urgency, it must also take account of its financial ecosystem and rely on its banks. The postponement of the FRTB (Fundamental Review of Trading Book) until 2027 and the European Commission's legislative proposal on securitisation, expected in June, are steps in this direction.
Central European economies have defied pessimist predictions in recent years on their ability to cope with shocks. The region posted a less pronounced GDP contraction in 2020 compared to advanced EU countries. In 2022, at the onset of the Russia-Ukraine war, the region was viewed as the most exposed within Europe due its high energy dependence on Russia. However, the widely expected recession did not occur as these economies implemented generous fiscal stimulus. Central European countries are now facing the tariff shock imposed by the US administration. Will this time be different?
Since January 2025, the United States has announced major reversals in its foreign and trade policies. For developing countries that depend on international aid, the suspension of USAID and the increase in tariffs on US imports create a double shock that will durably weaken their economic prospects.
Since WWII ended, 80 years ago this week, the US dollar has been the unparalleled dominant currency at the center of the international monetary and financial system. Every now and then, questions have arisen about this dominance and for brief periods became front page material in the financial press. Despite the excitement invariably elicited, the answer was always, sit tight, nothing is going to change. This time feels different. In particular, financial markets’ reaction to the “Liberation Day” tariff announcements, whereby the dollar and US Treasuries sold off instead of being bought as the safe haven of last resort like in all previous crises. But it would be premature to call the end of dollar dominance.
Every Spring and Fall, economic and financial policymakers from the whole world gather in Washington DC for the IMF/WB Meetings. Thousands of private financial sector professionals tag along. All over town, in both formal and informal settings, participants share and compare with their peers their own assessments of the world’s economic prospects. In my 25 years of taking part in these Meetings, this was one of the most interesting ones, with a pervasive sense among participants of living through a pivotal moment of economic history. In what follows, I offer a distillation of what this global pulse-check revealed.
• The euro area government deficit decreased in 2024 to -3.1% of GDP.• Italy and Greece posted primary surpluses even though their interest costs remain high• The fiscal adjustment that still needs to be provided by the countries whose deficits increased in 2024 (France, Austria, Belgium, Finland) will nevertheless act as a brake on growth in the zone.
The announcements on April 2, featuring a massive and widespread (albeit differentiated by country) increase in US tariffs, constitute a historic shock. The final extent of the damage and the aftershocks remain to be seen, but there is no doubt that the economic consequences will be negative, starting with the United States. They are already evident in the turbulence on US financial markets. Even if there is a de-escalation in the trade war, which is our base case scenario, uncertainty remains extremely high, and activity will be penalized for a long time.
One direct and immediate consequence of Donald Trump's announcements on 2 April on tariffs, which are reciprocal and reduced in name only, was to accentuate the downside risks to the US economy and to seriously shake up the financial markets. According to our forecasts, the US economy will slow sharply but avoid recession, on the optimistic assumption of a de-escalation in the trade war and an easing of uncertainty.
After the outperformance of 2023-2024, US growth is expected to slow sharply under the impact of the uncertainty and tariff shocks triggered by the new administration. Recession concerns are returning into the spotlight.
