World – 2025-2026 Scenario: place your bets

The contours of the "new world" are clearly taking shape: domination by force at the expense of the rule of law and multilateral institutions, trade wars replacing the now-defunct globalisation, fragmentation/regionalisa¬tion of trade flows. The paths that lead to this new territory, the paths that usually enable us to draw up economic scenarios over a shorter horizon, are chaotic. In particular, they are distorted by US trade obsessions: tariffs so high that they almost look like threats, dates for the implementation of sanctions announced and then postponed, hopes for negotiations, expected retaliation from targeted countries, and so on. The versatility and excessiveness of the US administration’s threats are such that their victims move from uncertainty, which is already highly penalising, to a state of stupefaction, obliterating their ability to think, anticipate and react.

Stupefaction is precisely what Donald Trump's tariff announcements on “Liberation Day” produced. Firstly, because the tariffs – which Trump claims are sucking the life out of the US economy, are perplexing when compared with what is actually applied. Secondly, because the tariffs announced (including the strangely calculated reciprocal tariffs) exceed what had been anticipated and are likely to be further tightened. Finally, because we had just completed our quarterly scenario…

The scenario's figures may be amended once the definitive trade provisions (US measures and retaliation by other major countries) have been decided, but its credo remains that the cost of protectionism is already high and could get even higher. Its first extra cost, in the form of additional inflation, justifies the drop in US growth forecast for 2025. 
In the US, since the beginning of the year, the market has radically altered its stance, with the strong belief in ‘American exceptionalism’ giving way to heightened fears about growth. Back in December, our scenario was based on a policy timeline conducive to a US slowdown by mid-2025. It still assumes that punitive policies (tariffs and immigration restrictions, implemented by executive order) will be applied before pro-growth measures such as tax cuts, which require Congressional approval. In essence, the overall policy mix is tilted slightly towards growth. More precisely, as it stands, before the full application of the 2 April announcements, our scenario envisages growth of 1.7% in 2025, a clear slowdown from the 2.8% posted in 2024 and a slight downward revision of our December 2024 forecast (1.9%). This slowdown is accompanied by inflation close to 3% at the end of 2025.

In response to the declaration of trade war, Europe has not disarmed. A transatlantic rift has opened up. This rift had already been incorporated in the form of a double negative impact: higher tariffs  and increased uncertainty, taking a total of 0.3ppt off the Eurozone’s growth rate. The latest round of tariffs included in the scenario (25% tariffs on automobiles) takes off a further 0.1ppt. But the promising European response in the form of infrastructure investment and military spending, and above all the German tax package, would bring additional growth to the Eurozone, which is currently expected to reach 1.0% in 2025 and 1.5% in 2026 (compared with 1.2% previously). The intensification of the trade confrontation with the US, not included in our central scenario, poses a downside risk on both sides of the Atlantic. 

After “Liberation Day”, the Fed will be faced with an even more perilous balancing act. It will have to combine support for weakened growth, while rising inflation is the first risk to the US economy brought on by tariffs. The Fed could end up relaunching its rate-cutting process, but with limited easing, with two further 25bp cuts in June and September, before entering a prolonged pause with the Fed Funds rate upper bound at 4.0%. However, the risks are tilted to the upside: it would be no surprise to see the Fed cut rates less than twice in 2025.

As for the ECB, the depressive impact of US tariffs is countered by the prospect of stronger growth due to the German package. Against a backdrop of immense uncertainty, the ECB is obliged to be cautious: with a certain amount of audacity, our current scenario only includes one 25bp cut in June followed by a long pause, with a deposit rate at 2.25%, and the maintenance of quantitative tightening. Unlike the US, the risk is rather bearish, with the possibility of a cut in April: this bias is maintained.
Interest rates are supposed to bet early on the promise of growth: an assumption that should be maintained. While monetary easing appears to be nearing an end, the second phase of Trump's economic policy, presumed to be favourable to growth, and hopes of European momentum boosted by German public spending, remain conducive to a gradual rise in interest rates.

In the US, in the absence of any risk of a hard landing, it is unlikely that the 10Y Treasury yield will fall below 4.0% for long. If we base our interest rate forecasts on the monetary scenario and the tempo of economic policy measures, the 10Y UST would fall until mid-year, before firming up in H225 (to 4.45% by the end of 2025) and in 2026 (to 4.75% by the end of 2026).  In the Eurozone, Germany's change in fiscal policy means that we can expect the German 10Y Bund yield to reach 3% by the end of 2025 (ie, almost 20bp above the swap of the same maturity) and major countries to tighten Bund spreads. France, Italy and Spain would offer spreads of 60bp, 105bp and 55bp respectively above the Bund at the end of 2025.

Finally, on the USD front, the “Trump trades” did not last long. While Trump's election was favourable to the USD’s appreciation, it all went south after Inauguration Day: the speed of its depreciation since the start of the year has come as a surprise. The USD is likely to remain under pressure, particularly if concerns over the "Mar-a-Lago accord" are revived: the EUR could thus appreciate and peak at USD1.12 by the end of 2025.

Completed on April 3 2025
The main assumptions of the scenario and associated pricing, including growth and inflation, were finalized on March 31, 2025.