GDP growth and InflationUNITED STATES
The US economy is heading towards a sharp slowdown in 2025, contrasting with the remarkable dynamism displayed in 2024, illustrated with a +2.8% average annual growth rate (+2.9% in 2023), well above its long-term pace. Household consumption was the main driver. But there are early signs of a slowdown. In 2025, the sequential growth rate is expected to slow markedly, reducing the average annual growth rate to +1.3%. This weakening from the effect of uncertainty and tariff shocks on demand and the general macroenvironment prompted a return of the recession risk. Developments in 2024 on the inflation front suggested a soft landing, with CPI moderating to +2.7% a/a in Q4-2024. However, changes in economic policy should lead to a rise in inflation, up to +4.0% a/a in Q2-2026. As a result, after 1pp of cumulative decline in the second half of 2024, the Fed is expected to maintain a stable target range for the Fed Funds rate throughout 2025 (+4.25% – +4.5%).
CHINA
Economic growth 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. However, activity lost some momentum in Q1 2025 and the export sector is now going to suffer from the collapse in trade with the US, especially if the prohibitive tariffs introduced by President Trump as of April 11 are maintained. Economic policy will turn even more supportive, and the strengthening of private consumption will be a key priority for the authorities. However, domestic demand will remain held back by significant brakes, including the continued correction in the property sector and low consumer confidence. Deflationary pressures will persist.
EUROZONE
According to our forecasts, the increase in military spending in Europe, and the significant fiscal support in Germany will provide a boost to the euro area growth in 2025 and 2026. The moderation of inflation, the continuation of the ECB's interest rate cut cycle, and the strengthening of the effects of NGEU funds will be additional supporting factors. Margins for growth will be limited in the short term by the trade conflict with the United States, persistent difficulties in industry, underlined by the still low, albeit slightly better levels of PMIs, and uncertainty about the Chinese economy. We expect the ECB to cut policy rates by 25 basis points in June and July, until the deposit rate reaches 1.75% in July 2025, which is in the low end 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 0,9% in 2025, compared to 2.3% in 2024) but household consumption growth remains disappointing. In 2025, GDP growth should decrease to 0.6% against a background of deterioration of the labor market and as a result of significant political uncertainty (after 1.1% in 2023 and 2024). In 2026, growth should accelerate to 1.1% as a result of German growth recovery.
UNITED KINGDOM
Activity is expected to slow slightly at 1.0% in 2025 after growth of 1.1% in 2024. Increased defence investment in the UK and elsewhere in Europe will have a positive effect on GDP, but this will be offset in the short term by the consequences of the trade war. 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. 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, although risks remain somewhat tilted to the downside.
JAPAN
Japanese growth is expected to come to a halt in 2025. In 2024, the average annual growth rate decreased to +0.1%, mainly due to the negative 2023 carryover, and the contraction in Q1 due to one-off factors. In the coming quarters, the pace of growth is expected to be zero or even negative, under the effect of uncertainty and the negative consequences on Japanese exports induced by the United States' trade policy. On the other hand, household consumption is expected to benefit from the upward trend in wages, which the Shunto (wage negotiations) 2025 will probably extend after the record of 2024, against a backdrop of tensions on the labour market. Nevertheless, domestic demand remains structurally weak, while supply constraints are weighing on potential growth.? However, the average annual growth rate is expected to land at +0.7% thanks to the 2024 carryover effect. While the Bank of Japan has started a cautious monetary tightening cycle in 2024, bringing the key rate to +0.5%, a pause for the rest of 2025 can be anticipated due to the expected slowdown in growth.?
CHANGE
Structural changes in fiscal policy in Europe have led us to revise upwards our EUR-USD forecast for 2025 and 2026. The dollar's decline would be gradual but nevertheless limited by the restrictive monetary policy in the United States and the interest rate differential with the Eurozone.
Interest and exchange rates
