GDP growth and InflationUNITED 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 accelerated again at +0.7% q/q in Q2 and Q3, mainly driven by household consumption. We forecast a +2.8% annual GDP growth 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 +2.1% 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 inflation risks associated with upcoming policy changes should lead the Fed to keep the policy rate stable throughout 2025.
CHINA
Economic growth accelerated in Q3 2024 (+0.9% y/y vs. +0.5% in Q2) and stood at 4.8% y/y in the three quarters of 2024. It is projected to strengthen further in Q4 2024 and reach the official target of “about 5%” set for 2024. Domestic demand should benefit, at least in Q4 and the first months of 2025, from all the monetary, fiscal and property policy easing measures implemented since late September. Meanwhile, manufacturing activity should remain supported by the strong performance of exports in the very short term. However, the 2025 outlook remains uncertain. On the one hand, the export sector will face a rising number of protectionist measures. On the other hand, domestic demand remains held back by significant brakes, including the crisis in the property sector, slower growth in household income, and low confidence of the private sector. Consumer price inflation remains very low (+0.3% y/y on average in the first eleven months of 2024) and production prices have been falling for more than two years.
EUROZONE
After a rebound in Q3 2024 (+0.4% q/q), growth in the euro area is expected to slow down in Q4 (+0.3% q/q) before stabilising at 0.2% q/q on a quarterly basis in 2025. On an annual average, growth is expected to strengthen slightly to 1.0% in 2025, with again significant differences between Member States. 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 more growth will be limited by the protectionist turn that is looming 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 strengthened to 0.4% q/q growth in Q3 (after 0.2% q/q in Q2 2024), mainly supported by the positive impact of the Olympics and despite lower business and household investment (-1.2% and -0.6% q/q respectively). Disinflation is now visible (the harmonized index grew by 1.7% y/y in November 2024, compared to 3.9% y/y a year ago) but household consumption growth remains disappointing (excluding the positive impact of the Olympics). In 2025, GDP growth should decrease to 0.8% 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 in 2025, to 1.4%, compared to 0.9% 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 still contained but 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 set to pursue in 2025, but with heightened cautiousness, while core inflation should remain above the 2% y/y target until 2026. Also, we forecast three rate hikes (+25bps each), 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.
