GDP growth and Inflation
UNITED STATES
The US economy continues to display dynamism and resilience to the monetary tightening. In the wake of a slowdown in Q1 2024 (+0.3% q/q, following +0.8% in Q4 2023), GDP growth has stood between +0.6% - +0.8% during the following quarters, mainly driven by household consumption. Annual GDP growth amounted to +2.8% in 2024, following +2.9% in 2023, enabled by the carryover effect and the catch-up in real income. The currently above-trend activity should face a slowdown in 2025, with a +2.3% annual growth rate, before the material impact of economic policy changes appears in 2026. The ongoing year’s developments in the realm of inflation have increased the likelihood of the soft-landing scenario, and CPI is expected to stand at +2.6% y/y in Q4 2024. The rebalancing of risks surrounding inflation and the labour market paved the way for the Fed to undertake monetary loosening. The target rate was lowered in September (-50 bps), November (-25 bps) and December (-25 bps, bringing the target to +4.25% - +4.5%). However, the Fed decided to hold in January, whereas the inflation risks associated with upcoming policy changes should lead the Fed to keep the policy rate stable throughout 2025.
CHINA
Economic growth continued to accelerate in Q4 2024 and stood at 5% in 2024. Domestic demand has benefited from all the monetary, fiscal and property policy easing measures implemented since late September. Meanwhile, manufacturing activity has been boosted by the strong performance of exports. These supportive factors should persist in the very short term, before economic growth returns to a downward trend. Firstly, the export sector will face a rising number of protectionist measures. Secondly, domestic demand will remain held back by significant brakes, including the crisis in the property sector and low confidence of the private sector. Deflationary pressures will persist, nonetheless consumer price inflation is projected to accelerate slightly during 2025.
EUROZONE
Eurozone growth stalled in the fourth quarter of 2024, and the annual average for 2024 (+0.7%) is lower than in 2023 (+1.0%). However, significant differences are observed between member States and these are expected to persist in 2025. These differences are also felt on the labour market, where the signals are becoming more negative in France and Germany, while the unemployment rate continues to fall in Spain and Italy. Scope for growth will be limited in 2025 by the protectionist turn in the United States, persistent difficulties in industry, underlined by the currently low levels of PMI indices, and uncertainty about the Chinese economy. However, these headwinds would be offset by supportive factors, such as the moderation in inflation, the continuation of the ECB's easing cycle, and the stronger impact expected from NGEU Funds. We expect the ECB to cut policy rates by 25 basis points at each of its meetings, until the deposit rate reaches 2% in June 2025, which is in the middle of our neutral rate estimate range.
FRANCE
GDP growth deteriorated to -0.1% q/q growth in Q4 (after 0.4% q/q in Q3 2024), mainly as the positive impact of the Olympics observed in Q3 (+0.2%) played on the downside on Q4 figures and as the activity level excluding this Olympics impact turned weaker (0.1% in Q4 compared to 0.2% in Q3), as a result of higher policy uncertainty. Disinflation is now visible and should continue in 2025 (the harmonized index should grow by 1.1% in 2025, compared to 2.3% in 2024) but household consumption growth remains disappointing. In 2025, GDP growth should decrease to 0.7% against a background of deterioration of the labor market and as a result of significant political uncertainty (after 1.1% in 2023 and 2024).
UNITED KINGDOM
Activity is expected to strengthen slightly in 2025, to 1.1%, compared with an expected figure of 0.8% in 2024. The policy mix (a combination of fiscal and monetary policies) should be more accommodative, although its positive effects should be limited given the very gradual decline in interest rates and the introduction of more restrictive fiscal rules. Inflation should remain significantly above the 2% target in 2025, supported by wage growth, which will nevertheless moderate, particularly in the public sector. We forecast that the BoE will cut the bank rate at a pace of one cut per quarter in 2025, with the terminal rate not being reached until 2026. The degree of monetary restraint is thus expected to remain positive in 2025. That said, the gradual deterioration in the labour market as well as the decline in activity in the industrial and retail sectors (visible in the latest PMI and CBI surveys) could lead to a faster monetary easing than currently anticipated.
JAPAN
A rebound in activity is expected in 2025, with a +0,6% average annual GDP growth rate. This would take over from a decline in 2024 (-0,2%), mainly attributable to a negative 2023 carryover effect along with the Q1 contraction linked to one-off factors. Household consumption should benefit from the upward trend in wages over the coming quarters, that the 2025 Shunto will probably extend after the 2024 high result. Nevertheless, domestic demand remains endemically weak, while supply constraints keep weighing on potential output. In this respect, the +0,1% quarterly advances anticipated for 2025 point to an output gap close to neutral. The Bank of Japan has initiated a monetary tightening cycle in 2024 which is pursuing in 2025, but with heightened cautiousness, while core inflation should remain above the 2% y/y target until 2026. Also, we forecast two rate hikes (+25bps each) in 2025 following January’s movement, bringing the uncollateralized overnight target rate to +1.0% by year-end – its highest level since 1995.
INTEREST RATES AND EXCHANGE RATES
Interest rates and exchange ratesWe are fundamentally bearish regarding the US dollar, but it is so far supported by geopolitical tensions and diverging trends between the US and the Eurozone. This leads us to forecast a EUR-USD parity towards the end of 2025. The yen would depreciate moderately versus the USD, also as a result of the desynchronization of monetary policy, as the BoJ is tightening its monetary stance.
