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Back in February, François Bayrou's government managed to pass a thorny but unconvincing budget for 2025. Since then, you have rightfully forgotten about this topic: speculation about a potential new snap election (and tariffs, of course) took centre stage recently. 
However, public finances remain the most critical and structural sticking point in French politics right now. Nothing has changed since last year's snap election. Over the medium term, France still has to deliver its largest fiscal adjustment of the past 70 years to stabilise its debt-to-GDP ratio, namely 3.0-4.0% of GDP. 
At the end of March, INSEE said that France's 2024 general government budget deficit was 5.8% of GDP (or c.EUR170bn). This figure is narrower than the government's (and our) latest forecast of 6.0%. We still expect that the government's target of 5.4% would be missed in 2025, but by a lesser extent than previously anticipated. Risks are now more tilted to the upside on this deficit figure but we consequently revised down our 2025 public deficit forecast to 5.6% of GDP (previously 6.0%). 
Finally, we look at the possible future lever to solve this issue. French public spending amounted to 57.0% of the GDP in 2023, 7.5ppt more than the Eurozone average. This gap mainly comes from pensions (2.2ppt more than the average) and healthcare (1.5ppt). Without tackling these issues, any substantial fiscal consolidation would remain remote and the debt-to-gdp ratio will continue on its upward path.

This note was finalized on april 24, 2025

Economic activity declined slightly in France in Q4 2024 (-0.1% q/q), after +0.4% in Q3. This slight decline can be explained by a negative backlash after the Paris Olympic and Paralympic Games (OPG), which supported activity by +0.2 percentage point (pp) in Q3. Annual growth therefore stood at 1.1% in 2024, stable compared to 2023.
In Q1 2025, growth is expected to be low but positive (+0.2% q/q), and activity would gradually accelerate over the year. Annual growth is thus expected at 0.8% in 2025. This significant decline compared to the previous year is explained by the weak growth carry-over for 2025 at the end of 2024 (+0.2%) and the effect of the uncertainty that would weigh on activity in the first half of the year. Growth is expected to be driven by domestic demand (excluding inventories) in 2025, with in particular a slight acceleration in household consumption. Inflation is projected to decline again, to 1.1% in the sense of the CPI, after averaging 2% in 2024. Growth is expected to increase sharply in 2026 to +1.4%, with in particular a +0.3pp effect of the recently voted German public measures that would boost exports and to a lesser extent private investment. Inflation is projected to rebound slightly but remain low at 1.3% in 2026.
Our scenario assumes a significant reduction in the government deficit in 2025 (to 5.6%) and 2026 (to 5.1%), but less than the government's target.
Risks to activity are mainly tilted to the downside in the short term, with in particular only a partial integration of the tariff increase announced by D. Trump on April 2 in our scenario.

The Italian economy proved resilient in 2024 in an already unpromising international environment, with better-than-expected growth of 0.7%. But in early 2025 the economic outlook is sending out more mixed signals. Consumer and business confidence is weakening and uncertainties are mounting, with persistent geopolitical tensions and threats of tariff hikes from the United States. All of which puts the recovery on hold.

As such, Italy in 2025 is expected to post a third year of moderate growth (+0.6%). Consumption, supported by slightly more favourable purchasing power, is expected to increase, even though caution continues to prevail in terms of savings. While, exports are likely to suffer from trade tensions, with an expected decline of 0.5%, despite a hoped-for rebound in Europe, thanks to Germany and the increase in defence spending. Our estimate does not factor in Trump’s “Liberation Day” announcements, which would generate a decline of a full 4% to 6% if the 20% customs tariffs were to be applied. Business investment could recover slowly, supported by more favourable monetary conditions, but the slowdown in the construction sector will weigh on overall momentum. Inflation is expected to remain stable at around 1.3%.

Economic activity data released by China this week for the first quarter of 2025 makes a mockery of Donald Trump and his administration. At a time when the United States and China are locked in an intense and multifaceted trade war and the Fed is warning that a US recession is becoming increasingly likely, China has released robust growth figures at odds with the mood of excitement that has reigned since Trump announced his trade tariffs.

A strong start to the year…

First-quarter growth came in at 5.4%, ahead of consensus expectations. This growth was driven by industrial production, which quickened sharply in March, up 7.7% (compared with 5.9% in the January-February period), buoyed in particular by the solar panel, electrical appliances and components, and transport equipment sectors.

However, the main positive surprise was retail sales, which were up 5.9% year on year in March, compared with 4% in January-February. Boosted by a programme of state subsidies that has been doubled from RMB 150 billion to RMB 300 billion (around $40 billion) for 2025, purchases of phones, TVs and household appliances experienced double-digit growth.

Rightly anticipating a deterioration in tariff conditions, Chinese exporters increased their outbound shipments, particularly to the US. Exports surged 12.4% in March and were buoyant across all geographical regions, particularly the ASEAN region (up 11.6%) and the US (up 9.1%). Unsurprisingly, the top exports were consumer goods (textiles, shoes, furniture, phones) and auto parts. China's trade surplus was in excess of $100 billion in March alone and is approaching $1.1 trillion over 12 months.

…but deeper concerns remain unresolved

Whatever happens next in its trade clash with the US, this good news puts China slightly ahead of its 5% growth target for 2025. However, it masks a more nuanced structural picture, with persistent deflationary pressures reflecting a lack of domestic momentum that the consumer goods subsidy programme alone will not be able to make up for.

The first thing to point out is that China is not out of the woods yet when it comes to deflation. The consumer price index was in negative territory in March for the second month running (down 0.7% in March after falling 0.1% in February). This trajectory reflects still constrained domestic demand and raises fears of a powerful deadweight effect on households which, while benefiting from state subsidies, have no intention of significantly changing their trade-offs between saving, spending and paying off debts.

Meanwhile, producers continue to wage a ferocious price war to protect their domestic and foreign market share. The decline in commodity prices over the past week in the wake of Trump's tariff announcements could continue to support this trend while bringing some relief to businesses whose margins have fallen sharply over the past three years.

Secondly, the crisis in the real estate market is not yet over and the sector continues to give off mixed signals. Destocking appears to be ongoing and the difficulties faced by real estate developers mean the number of new projects getting off the ground (as measured by investment and building permits) is still well down. Although prices have begun to stabilise since the end of last year, they are still falling, and the situation continues to differ between major cities (Tier 1 and Tier 2) and those on the periphery (Tier 3 and below).

The situation in the real estate market is fuelling a deflationary environment in China. The authorities have now recognised this state of affairs.

Lastly, while exports had an exceptional month, imports fell sharply in March (down 4.3% YoY) as a result of a commodity price effect but also because Chinese producers are anticipating a decline in demand. This is also the reason for the trade surplus seen in March.

Into the great unknown: the US-China trade war

Having tried the approach of appeasement and negotiation, but with the US showing no sign that it is interested in appeasement or openness, China finally responded forcefully to US trade tariffs.

For the time being, a 125% tariff applies to all imports from the US (compared with a minimum tariff of 145% on imports into the US from China). China has also announced fresh restrictions on exports of some critical metals and rare-earth elements (samarium, gadolinium, terbium, dysprosium, lutetium, scandium and yttrium), launched an anti-dumping investigation (medical CT tubes) and added more US companies to its Unreliable Entities List, severely limiting their scope to do business in China or with Chinese counterparties. China also appears to have withdrawn an order with Boeing and to have already begun diversifying its supplies of agricultural products (beef, soymeal and maize in particular) to include other suppliers such as Brazil and Austria.

With China the only country still targeted by import tariffs since Trump announced a 90-day suspension of his “reciprocal tariffs”, President Xi Jinping also embarked on a diplomatic tour, visiting partners and allies in the region (Cambodia, Vietnam and Malaysia). All three countries – especially Vietnam, whose exports to the US make up 25% of its GDP – would be hit very hard if Trump's reciprocal tariffs were to come into force, with tariffs of 49%, 46% and 24% respectively.

With that in mind, China is keen to convince them to join it in presenting a united front to the US. That puts these three countries in a tricky position: for the time being, they have positioned themselves as negotiators, proposing to lower their own import tariffs on US products and increase their imports from the US in some strategic sectors such as aerospace and liquefied natural gas.

China currently finds itself in the very uncomfortable position of being isolated and struggling to find other countries willing to stand up to the US. As each country pursues its own agenda, the worst-case scenario would be for Chinese products to be hit with very high import tariffs while goods from the rest of the world escaped such treatment. This scenario would force Chinese companies to work harder to circumvent tariffs, with far-reaching consequences for domestic employment and production. It would also prompt the rest of the world (apart from the US) to take action to protect itself against a tidal wave of surplus Chinese products as the US market closed to Chinese imports.

Try as it might try to position itself as a defender of the multilateral system and WTO rules, after two decades of China massively subsidising domestic industry and flouting intellectual property rights, the rest of the world has learned not to trust it. Being anti-American does not necessarily make you pro-China. And, with international firms finding it increasingly difficult to penetrate China's domestic market, the odds are that they – and their home countries – will continue to favour the US market.

Jittery markets have responded with relief to the few concessions made by the Trump administration, which, under pressure from American firms like Apple, has suspended import tariffs on tech products (computers, phones, tablets, etc.), which account for around 20% of Chinese exports to the US, worth $100 billion a year. The release of China's growth figures, on the other hand, has had no significant impact.

Another question will be how to understand the strategy pursued by China's central bank, which in recent weeks has allowed the yuan exchange rate to devalue slightly. With currency reserves in excess of $3.5 trillion, China could easily afford to defend its currency if necessary. But allowing the yuan to depreciate sharply would surely be seen by the Trump administration – which has regularly accused China of manipulating its currency by undervaluing it – as a further provocation. Other countries, including in particular emerging countries, which rely on price competitiveness (rather than competing on factors other than price) to boost their exports, would probably be quick to condemn such practices, making it harder for China to build a political alliance in opposition to US decisions. It is therefore likely that China will opt to allow the yuan to depreciate very slightly while making every effort to stabilise it at around the pivotal level of USD/CNY 7.3. After all, if US import tariffs were to remain very
high (above the 60% originally announced by Trump during his election campaign, for which China undoubtedly prepared itself), devaluation would be a very inefficient way for China to try to maintain its US market share.

Our opinion

Any good news is welcome in the current environment and, by maintaining its ambitious 5% growth trajectory, China has gained some ammunition for the trade war that lies ahead. However, we must not allow the March and Q1 data to blind us to problems – recent or otherwise – in the Chinese economy. Persistent deflation underscores just how much work China still has to do to revive consumer spending and suggests that the latter could fall again as soon as the subsidy programme expires. With the stock of vacant homes slowly declining, the real estate crisis that is fuelling this deflation appears to be far from over. Lastly, China is locked in a tug of war with the US, the outcome of which is highly uncertain. Whether it can succeed in rallying allies to stand with it will mainly depend on the US attitude towards the rest of the world. Its isolation – perhaps the Trump administration's primary goal – would be difficult to manage, though its dominance in logistics and its status as a major industrial power mean it still has some aces up its sleeve in this great game of trading poker.

We expect GDP growth of 0.3% quarter-on-quarter in the first quarter of 2025 after +0.1% in the fourth quarter of 2024. But the recently released monthly GDP data for February suggest upside risks to our forecast. Growth in the first quarter could be close to 0.6% in quarterly variation.

Activity is expected to slow down in the second quarter. We expect growth of around 0.2% quarter-on-quarter due to increased global uncertainty, tighter financial market conditions following the imposition of tariffs by the White House, but also the rise in employer National Insurance contributions (NICs) by the UK government and in regulated energy prices in April.

Annual GDP growth is revised downwards to 0.9% in 2025 and 1.4% in 2026 (compared to 1.1% and 1.6% expected respectively three months ago), forecasts surrounded by a high degree of uncertainty due to the uncertain impact of tariffs. We have revised upwards our unemployment rate forecast to 4.7% in the second half of 2025 and in 2026, from 4.4% in the fourth quarter of 2024.

US tariffs on goods imported from the UK could subtract from 0.1% to 0.6% of UK real GDP, or even more in the event of retaliation or announcements of additional tariffs (notably those expected on pharmaceutical products); in the worst-case scenario imagined by the OBR, tariffs can subtract up to 1% of UK GDP in 2026-27. Such an impact is not factored into our forecasts. On the labour market, employment expectations were already deteriorating due to the rise in labour costs in April (employers NICs and the national living wage) and several tens of thousands of jobs could be lost as a result of the tariffs. 

With the government having almost no room for manoeuvre, any support for the economy will have to be provided by a more aggressive easing of monetary policy. We expect the BoE to cut rates by 25 basis points per quarter this year (in May, August and November 2025) in our central scenario, which would bring the Bank rate to 3.75% at the end of the year (from 4.5% today). However, the BoE could accelerate its pace of rate cuts.

The Spanish economy began 2025 with greater momentum than its European partners. In 2024, GDP grew by 3.2%, increasing by 0.8% in Q4, supported by consumption and investment. The fundamentals are solid: a current account surplus for the 13th year, private debt limited to 125.1% of GDP (vs. 153.5% in the eurozone) and public debt down to 101.8%. The net international investment position also improved. This strong performance served to increase the growth forecast to 2.5% in 2025. The recovery remains concentrated on domestic demand. Lower interest rates, disinflation (inflation is expected to be 2.5% in 2025) and a high savings rate should boost consumption. Employment is set to increase by 2% and unemployment is forecast to fall to 10.9%.
Despite this favourable environment, foreign trade is expected to have a negative impact, due to dynamic imports and slowing exports. Geopolitical and trade tensions (US-EU) represent a significant risk. The full deployment of NGEU funds will be important in maintaining the momentum of private investment.