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    Europe – 2025-2026 Scenario: European economies in a waiting and transition phase

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    • 2025.30.06
    • Economics
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    World – Macro-economic scenario 2025-2026: a nerve-wracking context, some unprecedented resistance

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    • 2025.20.06
    • Economics
    • Industry and Services
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    South Korea: does the election of Lee Jae-myung mark the end of the political crisis?

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    • 2025.19.06
    • Economics
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    Are food supplements really making French people healthier?

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    • 2025.12.06
    • Industry and Services
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    Morocco: we can do it!

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    • 2025.05.06
    • Economics
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    China and the United States: the need for de-escalation

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    • 2025.22.05
    • Economics
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    Gulf States – Oil: navigating back to basics amid stormy seas

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    • 2025.16.05
    • Economics
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  • Europe – 2025-2026 Scenario

    The past quarter has contributed to heighten uncertainty over the growth trajectories of the major economies, which are facing a global shock to confidence and a reorganisation of their relative competitiveness. The American exceptionalism of growth that has long been above potential, even under the influence of a restrictive monetary policy, has been called into question by the new trade policy, which is acting as a negative shock, leading to a slowdown in growth.

    Although the European economy will be negatively affected, the asymmetrical nature of the shock makes it less vulnerable. In addition, the desire for greater strategic autonomy on the part of the European economies is taking shape in concrete measures to increase spending on infrastructure and defence, which, by offsetting the negative impact of the trade shock, are putting the Eurozone on an upward growth trajectory, defying the inexorability of a decline in potential growth. All the more reason to put forward the hypothesis of an “European exceptionalism”.

  • World – Macro-economic scenario 2025-2026

    There were already many risks, both economic and geopolitical, influencing our scenario, both in terms of cyclical inflections and structural aspects. Compounding these risks, Israel’s attack on Iran on 13 June constitutes an unprecedented escalation in terms of its scale and its severity. This act marks a strategic turning point for the region.

    Our scenario, already rocked by recently fickle, unpredictable US economy policy, comes against an an increasingly uncertain backdrop where disruptive events (eg, blockage of the Strait of Hormuz, incidents on Gulf infrastructures) cannot be completely ruled out.

    For the US, the year began with the refrain of US exceptionalism (above-potential growth, resilience despite interest rates set to rise, the USD’s privileged status, unlimited capacity to take on debt and pass on risks to the rest of the world), but markets soon became disenchanted with US assets following the “Liberation Day” tariff announcements. President Donald Trump soon backpedalled, announcing a 90-day pause on the tariffs and a reduction in the so-called “reciprocal tariffs” to 10%, casting serious doubts as to Trump’s ability to truly honour his domestic and international commitments. Sentiment has swung wildly between two extremes, negative and positive.

    Although our forecasts for 2025 have been revised downwards slightly, our US scenario has remained on course, in line with the timing of the economic policy measures: while avoiding recession, growth is expected to fall back sharply in 2025, with inflation picking up, before recovering in 2026. Even with the recent de-escalation, tariffs remain significantly higher than they were before Trump was elected to his second term. The negative impact of the new trade policy is the main driver of the decline in growth expected in 2025 (1.5% after 2.8% in 2024), while the more growth-favourable aspects (One Big Beautiful Bill, tax cuts deregulation) are expected to contribute to a rebound in growth in 2026 (2.2%). The hypothesis of a recession in 2025 has been ruled out on the grounds of solid fundamentals, including reduced sensitivity to interest rates, solid household finances and a labour market that remains relatively robust, albeit showing signs of deterioration.

    Despite the expected slowdown in growth, our inflation forecasts have been revised upwards. The tariffs are expected to increase YoY inflation by around 80bp at the point of maximum impact. Although this effect is temporary, inflation (as an annual average) would reach 2.9% in 2025 and 2.7% in 2026. It would therefore continue to exceed 2%, with underlying inflation stabilising at around 2.5% by the end of 2026.

    Against an unpredictable backdrop marked by conflict, Europe’s salvation would lie in its domestic demand, which would make it stronger in the face of a global slowdown. We see two potential alternative scenarios, with a delicate balance between them: (1) a resilient Eurozone economy bolstered by an increase in private sector spending and above all in public spending on defence & infrastructure; and (2) a scenario of stagnation in activity due to a combination of negative shocks: competitiveness shocks linked to higher tariffs, an appreciation of the EUR and the negative impact of uncertainty on private sector confidence. We favour the resilience scenario, based on a resilient labour market, a healthy economic & financial situation for the private sector and a favourable impetus from the credit cycle. The actual implementation of additional public spending, particularly the “German bazooka”, certainly needs to be confirmed. But this spending could offer the Eurozone growth driven by stronger domestic demand at a time when global growth is weakening. It would offer a kind of exceptionalism, particularly in light of the past decade, which would set Eurozone growth above potential in the medium term. Average annual growth in the Eurozone should accelerate slightly to 0.9% in 2025 and strengthen to 1.3% in 2026. Average inflation should continue to ease, reaching 2.1% and 1.8% in 2025 and 2026 respectively.

    This scenario assumes a status quo in the tariff confrontation with the US on 4 June, ie, an across-the-board increase in tariffs to 10%, with the exception of exempted products, 25% on automobiles and 50% on steel. The risks associated with this central scenario are bearish. The stagnation scenario could materialise if the trade confrontation with the US were to intensify, if the competitiveness constraints were to bite further, if private sector confidence were to deteriorate significantly and, finally, if the fiscal stimulus were to be implemented more gradually than anticipated.

    In the not-too-distant past, such an uncertain environment, with a global slowdown and shrinking export markets, would certainly have led to an ‘underperformance’ by emerging economies, which were also handicapped by market aversion to risk, rising interest rates and pressure on their currencies. However, despite tariffs (the effects of which will vary greatly from one economy to another), our overall scenario remains rather optimistic for the major emerging countries. They could show unprecedented resilience, thanks to support that could partially cushion the impact of a lacklustre environment: relatively strong labour markets, solid domestic demand, monetary easing (with rare exceptions) and limited Chinese deceleration. Finally, emerging currencies have held up well, and the risk of defensive rate hikes penalising growth is lower than might have been feared. This relatively positive outlook is, however, accompanied by higher-than-usual secondary risks, due to the unpredictability of US policies.

    In terms of monetary policy, the end of the easing cycles is approaching. In the US, The Fed is firmly in “wait and see” mode, faced with a scenario of a clear downturn in 2025, a rebound in 2026 and rising inflation that would continue to significantly exceed its target – as well as the degree of uncertainty surrounding this scenario. But in our view, it will still proceed with modest easing followed by a long pause. Our scenario still calls for two cuts in 2025, but shifts them by one quarter (in September and December, vs June and September previously). After these two cuts, we expect the Fed to keep rates unchanged at a maximum upper limit of 4% throughout 2026. As for the ECB, although it refuses to rule out any future rate cuts, it may well have reached the end of its rate-cutting cycle, with growth expected to pick up and inflation on target. Of course, a deterioration in the economic environment would justify further easing: the ECB stands ready to cut rates if necessary.

    On the interest rate front, US interest rates are feeling pressure from (1) the risk of stubborn inflation and a fiscal path deemed unsustainable; (2) a compromised AAA rating; (3) fickle economic decisions; and (4) heightened investor concerns. Our scenario assumes a 10Y Treasury rate close to 4.70% at end-2025 and 4.95% at end-2026. In the Eurozone, with growth resilient and projected to accelerate, inflation on target and the ECB expected to have almost completed its easing, interest rates are likely to rise slightly and sovereign spreads to stabilise or even tighten. The 10Y Bund rate could thus approach 2.90% at end-2025 and 2.95% at end-2026. Over the same maturity, France’s spread relative to the Bund would hover around 60-65bp, while Italy’s would narrow to 90bp by the end of 2026.

    Lastly, the USD is continuing to lose some of its lustre. It has been under pressure from (1) Donald Trump’s volatile, unpredictable economic (and other) policies; (2) the deteriorated US budget outlook; (3) speculation about any official intentions to depreciate the currency; and (4) resistance from other economies. However, we continue to think it is too early to call the demise of the USD’s reserve currency status. We expect EUR/USD to reach 1.14 in Q425, before falling to 1.10 in 2026.

  • South Korea: does the election of Lee Jae-myung mark the end of the political crisis?

    Following a campaign blitz that lasted just under a month, 44 million South Korean voters cast their ballots on 3 June to elect the successor to Yoon Suk-yeol who was removed from office in April after several months of political uncertainty. Democrat Lee Jae-myung, who was defeated by Yoon in 2022, secured a landslide victory obtaining 49.2% of the votes, compared to 41.5% for Conservative Kim Moon-soo. 

    This result is the beginning of a new chapter following a particularly intense political crisis, without however providing a solution to the deeper fragmentations that run through Korean society. Despite the weariness generated by months of turmoil and a campaign that had little focus on fundamental debates, voter turnout was high at 79.4%. The handover of power took place the day after the results were announced. 

    An unprecedented political and institutional crisis

    First there was the declaration of martial law on 3 December1, which took everyone by surprise. Subsequent investigations showed that, far from being a moment of madness as initially thought, this decision was part of a more elaborate plan to give free rein to President Yoon, whose hands were somewhat tied by the turbulent coalition in place since the parliamentary elections in April 2024, which saw the Democratic Party increase its number of seats. Yoon also cited suspicions of electoral fraud and North Korean interference when justifying his decision. 

    Opposition MPs reacted immediately by demanding that the National Assembly lift the martial law. This was followed by several weeks of marked confusion, during which several proceedings were launched, both to remove President Yoon from office and to prosecute him on various charges (rebellion, abuse of power, obstruction) for which he theoretically risks the death penalty (still in force in South Korea, although no executions have been carried out since 1997)2. 

    Prime Minister and later acting President Han Duck-Soo, who was also suspended - for complicity - before being reinstated, ultimately resigned in April to launch a campaign for the presidency, but later withdrew from the race3. The Finance Minister Choi Sang-mok, who was appointed his successor in accordance with protocol when he was dismissed, and who should have taken over after his resignation, then also resigned, leaving the role of acting president to Education Minister Lee Ju-ho. Instability of a sort rarely seen. 

    Who is Lee Jae-myung, the new president?

    The Democratic candidate was the favourite in the polls and successfully managed to maintain his lead. A human rights lawyer from a working-class background, he began his career working in factories while studying for the - highly competitive in South Korea - university entrance exam. He entered the world of politics in the early 2000s, initially as Mayor of Seongnam, a city of approximately one million inhabitants in the province of Gyeonggi (south of Seoul) before being appointed province governor. 

    He ran for president in the 2022 elections but was narrowly beaten by Yoon. Less than 250,000 votes separated the two men following a campaign that was marked by numerous clashes and aggressive verbal attacks from both sides. In January 2024, Lee survived an attempted assassination. As leader of the opposition, he was actively involved in the advancement of Yoon’s impeachment proceedings and was the natural candidate to represent the Democratic Party, which he has led since 2022. Threatened by legal proceedings - he is the target of investigations into false declarations, perjury and embezzlement of public finds linked to former local mandates - he benefited from a favourable court decision ruling that the trials would not be held before the presidential election. 

    With the Democratic Party still holding a parliamentary majority, Lee should have the flexibility and autonomy he needs to carry out his plans, at least until the next general election in 2028. 

    And the economy? 

    Externally, the uncertainty of customs duties...

    The Korean political crisis has occurred in a particularly uncertain external context, as South Korea is hit with “reciprocal tariffs” of 25% on all its exports to the United States (20% of total Korean exports). Although the country immediately announced its intention to negotiate with the United States, the multiple U-turns in the State’s governance since April have not allowed for high-level discussions on trade-related issues. 

    Negotiations are nonetheless underway, notably regarding Korea’s commitment to increase its imports of American liquefied natural gas (LNG). South Korea, which is highly dependent on its imports of fossil fuels (18% of total imports in 2024) does have some flexibility in terms of boosting its purchases of American gas ($7.5 billion in 2024, out of total LNG imports of $35 billion). The challenge is for South Korea to (in part) address trade imbalances with the United States, while Korea’s trade surplus has grown significantly since 2019 to reach a high of $55 billion in 2024. 

    Other areas of negotiation include a partnership with the US Navy in shipbuilding, as South Korea, the world’s second-largest manufacturer after China in terms of volume, is the leader in high added-value ships and LNG carriers in particular. A specialisation that is of obvious interest to the US, which is seeking to further increase its fuel exports. Lastly, the cost of the American military presence in South Korean is an important factor. 28,200 US soldiers are permanently stationed in the country’s military bases. South Korea has committed to paying $1.19 billion in 2026, an increase of 8.3% on 2025, but the cost of this presence is an issue regularly raised by Donald Trump. 

    Korean companies, and the Hyundai group in particular, have already announced substantial investments in the United States ($20 billion over three years for Hyundai), extending the trend for FDI initiated in 2020 and driven by the IRA (Inflation Reduction Act) and the American Chips Act, which led Korean conglomerates to take an American turn. The move could this time extend to vehicle manufacturers ($43 billion in exports to the US in 2024), while South Korea, as per the rest of the world, is hit with 25% customs duties in the automotive sector (vehicles and components). 

    Less of a hardliner than the Conservatives with regard to North Korea and China, Lee is also keeping his distance from the United States, which he had described as an “occupying force” during the last campaign and accused of de facto authorising Japan’s annexation of Korea in 1910 following the signature of the Taft-Katsura agreement. His attitude toward negotiations with the Conservatives could therefore be different, even though there is little doubt that he will try to defend the interests of national companies and the most exposed South Korean sectors, starting with the automotive and semiconductor industries.  

    Internally, fiscal stimulus

    Internally, Lee has announced a more expansionary fiscal policy via an amending budget that could be voted on over the coming weeks and would enable the funding of certain flagship measures on his agenda (child allowance, minimum wage for agricultural workers in particular). This additional budget could be as high as 20 trillion won (approx. $15 billion). The fiscal stimulus plan could total 210 trillion won over five years (the presidential term of office in Korea). With debt standing at 54.5% of GDP in 2024, the country still has some budgetary room for manoeuvre, which the Democrats intend to use. 

    The aim of this stimulus is to revive growth which has slowed significantly, with GDP even contracting (-0.3%) during Q1 2025, notably due to a sharp decline in investment. The growth forecast for 2025 is 0.8%, compared with 2% in 2024. 

    The markets had reacted to this political crisis, before being partly reassured by statements from the Finance Minister and the central Bank of Korea (BoK) who had confirmed that everything would be done to support the currency and liquidity level and avoid excessive volatility. Although the won has strengthened over the past month, the South Korean currency has been the worst performer since December 2024, a decline linked more to its domestic situation than the tariffs. In May, the won did fall below the symbolic mark of 1,400 to the dollar, after reaching almost 1,500 in December. 

    This situation should facilitate the decisions of the Bank of Korea, which has been committed since October 2024 to a more accommodating monetary policy and is planning further rate cuts before the end of 2025, to return to a key rate of around 2% (2.5% currently). Although inflation has risen sharply since the end of the year, it remains stable and could benefit from moderating global energy prices. 

    Our opinion

    The Korean elections have, as in 2022, highlighted the deep fractures in society. Gender divides, with a female electorate voting overwhelmingly in favour of the Democratic candidate, while the Conservative camp, represented by two candidates, attracted more male voters. Divisions regarding alliances, while the rapprochement with former enemy Japan, particularly regarding military cooperation, has not gained unanimous approval, but especially in terms of the line to be taken with the United States and China. Although there is a free trade agreement between the United States and South Korea, the latter likely did not expect such harsh treatment from a close ally. Although the country does have strong arguments to put forward (investments in Korean companies on American soil, possible increase in certain imports, military cooperation, partnership in the shipbuilding sector), it is also in the firing line due to its sectoral specialisations (automotive, chips, semiconductors) which are extremely strategic for the US and therefore risk being subject to specific tariffs, even if a global agreement is reached. 

    President Lee therefore inherits a still prosperous South Korea, but one that has been weakened by a political crisis that has revealed the limits of a total presidential system and an overly strong politicisation of the judiciary. Issues he has promised to tackle, a task that could prove itself more than complex, with an opposition that has taken the fall of its president very badly and will surely use all its options to complicate the affairs of the new government.

    1. See “Following his failed power grab, South Korean President Yoon escapes impeachment”, published December 2024
    2. See “K-Drama in Seoul”, published January 2025 
    3. See “ South Korea: what with fires, martial law and trade tariffs, the Year of the Blue Snake has not had the most auspicious start”, published April 2025 
  • Morocco: we can do it!

    Morocco is increasingly positioning itself as an anchor of stability in a region where stability is a differentiating factor. Covid, the global inflation crisis in food and energy prices resulting from the shock of the war in Ukraine, earthquake, repeated droughts… the past few years have not exactly been a bed of roses for the Moroccan government, which sound public policy management has nevertheless succeeded to maintain macroeconomic stability while protecting the monetary and public finance equilibria that underpin it. Meanwhile, Egypt and Tunisia remain mired in economic and financial crises which these shocks – most of them shared – are only irrigating. Algeria is stuck with a flagging rentier state model and Libya has yet to resolve its post-Arab Spring political transition.

    Unemployment: the price of stability?

    Morocco is steeped in a culture of stability which, looking beyond recent events and shocks, seems to be rooted in an older DNA, probably related to the country’s political structure and attachment to monarchy. However, as the economy slows, it has become legitimate to wonder whether this attachment to stability – a mark of trust for investors – has in some ways gradually become an impediment to economic vitality. Having averaged 4.3% over the period 2004–2014, growth has subsequently flagged, averaging 2.5% over the period 2015–2024 – as though standing still were the price of stability1. The country seems to be approaching a crossroads where it is becoming difficult to maintain this compromise. In its latest report monitoring Morocco’s economic situation2, the World Bank notes that economic growth is failing to create enough jobs. According to the institution, “over the past decade, the working-age population has grown by more than 10 percent, while employment has increased by only 1.5 percent”. Consequently, unemployment reached a record high of 13.3% in 2024, compared with 13% the previous year.

    Of course, the various shocks of the past few years have compounded the pressure. Water stress is a particularly significant factor, with the agricultural sector destroying jobs more quickly than other sectors can generate them in urban areas. In reality, though, this is merely exacerbating an underlying structural issue, in addition to which the agricultural sector is becoming less labour-intensive as its productivity improves, and the economy is transitioning towards services.

    Injecting some fresh momentum?

    Lately, though, there’s a sense that something is changing, that tectonic plates are shifting. The government’s reform plan – the New Development Model3 launched in 2021 – is based on a clear-eyed diagnosis highlighting institutional bottlenecks that need to be removed and reforms needed to untangle knots that are constraining growth. Ultimately, then, the World Bank’s report, which focuses on reforms to the business climate, is reassuring: overall, it is aligned with what the reform plan aims to achieve (improving the regulatory environment, incentivising the formalisation of the economy, removing barriers to competition, overcoming challenges to education, making public services more efficient, etc.). And the early results are beginning to make themselves felt. The economy is shifting firmly towards exports: over the period 2021–2024, exports of goods and services on average accounted for 41% of GDP, compared with 33.5% over the period 2016–2020. This is a sign that the country has awoken to its geo-economic strengths at a time when global production chains are being reconfigured. Of course, this means it is even more exposed to European growth, in particularly cyclical sectors (such as automotive, aerospace, electronic components and tourism), but also in strategic ones (Morocco’s high reserves of phosphate mean it plays a key role in global food security). However, none of this has so far moved the needle on unemployment. How, then, should this challenge be addressed in the short-to-medium term?

    When economic interests and feminism align

    Taking a closer look, it is not only along the urban/rural axis that unemployment figures diverge. Female unemployment is increasingly acting as a brake on overall momentum. 

    Moreover, one trend highlighted by the World Bank is more surprising: while development indicators have improved in Morocco – in particular, the fertility rate is falling and women’s education is improving – women’s share of the labour market has plummeted from 30% in 1999 to 19% in 2024. This is one of the lowest levels in the world. It is therefore obvious that targeting the issue of women’s employment is one of the most effective keys to addressing the issues of Morocco’s stagnant growth and unemployment. 

    Here again, the economic transition and water stress are aggravating this structural challenge: agriculture is by far the sector that employs the most women. This means it is even harder for urban jobs to make up for the destruction of women’s jobs in agriculture: women in urban areas are hit harder not only by sectoral segregation and working conditions incompatible with parental responsibility but also by social norms around gender roles. This latter issue is particularly interesting: while the World Bank’s report includes the usual recommendations – for example increasing access to childcare solutions and adapting working hours and arrangements – it also offers a foretaste of a forthcoming study of the impact of gender social norms on women’s employment in Morocco.

    Ladies, we love you

    This forthcoming study used survey-based methods to gather empirical data quantifying the impact of social norms on structural constraints on women’s employment in Morocco. And, since the resulting figures are tangible and economic studies produced by such an institution are respected, we cannot resist giving you an early sneak peek of some salutary findings. First of all, ladies, we have allies: 81% of those surveyed said they were in favour of women working. Fair enough… but this falls to 62% when it comes to women working late, 61% for married women, 54% for women working in the absence of financial necessity and 21% for women working with a child under three years of age. Given that, what difference will childcare solutions make? But there is another even more striking finding. The initial figure of 81% (in favour of women working) reflects a shift in social norms: at the individual level, people are receptive to change. What is slower to shift, however, is perceptions of societal change: only 56% of respondents said they thought the community shared their opinion. In other words, the biggest obstacle to women working is fear of being judged by the community. Targeted information campaigns coupled with school-based interventions to change gender norms could prove essential in addressing Morocco’s growth and unemployment challenge.

    Our opinion

    Something is changing in Morocco. This is undeniably the case when you look at recent economic trends. Despite an attachment to stability that has long seemed opposed to economic vitality, the country has embarked on a programme of reforms that is seemingly beginning to bear fruit. It is attracting investment and focusing on exports. There are reasons to be optimistic about the growth outlook, especially with the authorities demonstrating that they know how to manage shocks. Yet there is one indicator that is going against the tide: unemployment. It reached a record high of 13.3% in 2024 and is pursuing a worrying trajectory. In its most recent “Morocco Economic Monitor” report, the World Bank emphasised that growth in the labour force far outpaced the rate of job creation. And, while the recurring, violent shocks of the past few years have added to the pressure, they are merely exacerbating an underlying structural problem. Although Morocco has initiated reforms, there remains an effective solution to accelerate growth and reduce unemployment in the nearer term: attack structural constraints on women’s employment. Morocco has one of the lowest women’s participation rates in the world, and female unemployment far exceeds men’s, notably as a result of gender social norms. This is how feminist causes are increasingly aligned with economic necessity. Morocco need not look too far afield to find a most striking example: in the much more conservative Saudi Arabia, the one thing that has had the biggest impact on reducing unemployment over the past few years is quotas for women’s employment.

    1. See Maroc : la croissance, au cœur des enjeux de réformes, September 2024.
    2.  “Morocco Economic Monitor: Prioritizing Reforms to Boost the Business Environment”, World Bank, winter 2025.
    3. The New Development Model: Releasing energies and regaining trust to accelerate the march of progress and prosperity for all”, General Report by the Special Commission on the Development Model, April 2021.
  • China and the United States: the need for de-escalation

    Just over a month after Donald Trump’s announcement of 34% “reciprocal tariffs” on all Chinese imports triggered an intense stand-off, the time has come to de-escalate. 

    Following very high-level negotiations, notably involving US Treasury Secretary Scott Bessent and China’s Vice Premier with responsibility for the economy He Lifeng, said to be close to President Xi Jinping, the two countries said they were lowering their additional import tariffs for 90 days, from 145% to 30% for the US and from 125% to 10% for China. They also committed to continuing talks on their economic and trading relationship. 

    The US and China are heavily interdependent

    Even before announcing that they were lowering their import tariffs, the two camps had granted exemptions on some products, highlighting the many sources of dependency that exist between their economies. 

    To understand these decisions, we need to look at the structure of US-China trade. 

    A few preliminary figures: in 2024, the United States imported Chinese goods worth $439 billion and exported goods to China worth $131 billion. China accounted for 13% of US imports and 7% of exports. Meanwhile, the US accounted for 15% of China’s exports and 6% of its total imports in 2024. Although US-China trade has fallen in both value and market share terms since 2018, the use of “backdoor” countries (particularly Mexico and Vietnam) suggests that, in reality, there has been little change in the overall level of interdependence between the two countries. 

    The US depends on China for mass market consumer goods (electronics, plastic items like toys, textiles and footwear, sporting goods and furniture) where production is not very capital-intensive but is relatively labour-intensive. It seems highly unlikely that these industries will be relocated to the US, where manufacturing costs would be much higher. When it comes to the value chain for electronic devices – notably computers and smartphones – where there are no alternative options in the short term, the Trump administration was quick to make concessions. Tariffs would have been passed straight on to end consumers, with an immediate effect on inflation. Even before official negotiations began, around 20% of total US imports from China were covered by exemptions. 

    One might, however, assume that the efforts made by major US companies in the sector – chief among them Apple – to decouple will continue, though it seems delusional to think that a network of subcontractors as dense as that offered by China might emerge in Vietnam or India (the two countries best placed to pick up production sites), and that’s without even considering quality in terms of logistics and transport and connectivity infrastructure available in China. The US had already undertaken to diversify its supply sources over the past few years, looking to South Korea and Taiwan for high value-added components and to the rest of Southeast Asia for less tech-intensive products.

    Meanwhile, Chinese exemptions covered sectors in which China is still somewhat behind the technology curve and is currently working to catch up: semiconductors, spare parts for aviation (particularly aircraft engines) and cutting-edge medical equipment. The rest of China’s imports from the US mostly consist of agricultural commodities (soybeans, maize and cotton) and energy commodities (oil, LNG and propane) where there are numerous diversification options that China has already begun to explore, notably with Brazil. This means the volume of imports covered by China’s exemptions was much smaller: around 10% of total imports from the US.

    The final lesson is that the rest of the world is right to be worried: in the short term, Chinese exporters cannot afford to lose the volumes represented by US orders and will have to find other ways to move those volumes, either to the US via backdoor routes or to other countries. Conversely, it will take a lot of deals with the rest of the world for American farmers to be able to sell as much as they were able to in the Chinese market.

    What should we take away from this first phase of negotiations?

    In reality, the first lesson comes from the previous phase in the trade war: trade tariffs become rigid once they have been in place for a while, and it is difficult to restore them to their original levels. Despite the Phase One trade deal signed at the end of Trump’s first term following two years of steadily rising tariffs, the latter have never returned to their pre-2018 levels. Nor did the Biden administration question these levels. Although the level of these latest tariffs suggested that negotiations would take place quickly, there is nevertheless a risk that, even after negotiations, tariffs could remain persistently higher and would have to be absorbed by businesses or consumers in what would be a negative-sum game for both sides. 

    The second lesson is that, while the US has come out of this phase of negotiations with its image tarnished, it is perhaps China that has more to lose in the long term. In this poker game, the Trump administration is playing with a number of handicaps of which China is well aware. First, the markets, and particularly the bond markets, have already made known their profound opposition to trade tariffs, prompting the initial climb-down by the US administration. They might perhaps be willing to tolerate additional tariffs of 10% on the rest of the world and 30% on China, but not much more. 

    Second, American households have shown that they are much less resilient than their Chinese counterparts. The Democrats paid a heavy price for the increase in inflation between 2021 and 2023. Over the same period, Chinese households were facing an unprecedented real estate crisis that directly affected the value of their assets as well as huge job losses triggered by both the Covid crisis and regulatory changes in the new technologies sector. Because authoritarian regimes are not subject to the same electoral pressures, they are sometimes in less of a hurry to arrive at a deal. Xi Jinping, a child of the Cultural Revolution, often points out in his speeches that you sometimes have to endure difficult times in order to win battles.

    Trump, meanwhile, values rapid deals and resounding wins. While maintaining additional tariffs of 30%, compared with 10% for China, allows him to save face, what remains of his credibility in negotiations – already seriously dented by the bizarre method used to calculate reciprocal tariffs – has been somewhat eroded.

    Lastly, China’s foreign trade figures for April defied all forecasts. Exports were up 8.1% year on year and the trade surplus climbed to a new high of $1.1 trillion. Chinese exporters have admitted to using backdoor routes to get their products into the US, but there is no denying that these numbers, published the day before negotiations were due to begin, put China in a strong position. 

    In the medium term, though, China has more to lose from a genuine reconfiguration of value chains. Moreover, its priority was undoubtedly to secure the best deals in relative rather than absolute terms. China found itself in the extremely complicated position of being the only country to face additional import tariffs of 145%, while tariffs on the rest of the world had gone back down to 10%. 

    As we saw, China alone opted to up the stakes, while other countries immediately set about negotiating without hitting back or, in the case of the European Union, with targeted retaliatory measures. Isolated by punitive tariffs, China would have struggled to persuade the rest of the world to form a united front. During his travels in Malaysia, Vietnam and Cambodia, Xi Jinping did not manage to secure a firm commitment from those countries, despite their closeness, to condemn the US’s stance and rally to China’s side. The fact that tariffs on its products are now closer to those applied to other countries means it now has more cards to play. 

    Being the only country subject to 145% tariffs meant China was exposed to the risk of large-scale relocation of production sites. As we have seen since 2018, it is fanciful to imagine that the US can quickly and simply reduce the Chinese value-added content of its imports. The fact remains that, at a time when China faces fundamental questions about its growth model, with domestic demand still not able to take over from investment and foreign trade as the key driver of the economy, the prospect of losing production sites – and thus the associated jobs and economic activity – would have been hard to swallow.  

    In addition, China has little to offer in purely commercial negotiations with the US. The Phase One deal led neither to a rebalancing of trade nor to an increase in Chinese imports. On the contrary, China continues to pursue its threefold goal of diversifying critical imports (mainly commodities) and securing its independence in strategic areas while maintaining its export market share. These goals are far removed from – if not irreconcilable with – those of Trump, who is seeking both to expand markets for American businesses and to use import tariffs to fund his domestic policy of tax cuts.

    Our opinion

    The pause in the escalating trade war between the two camps is but one phase in the US-China clash. Each of the parties is well aware that it cannot remain as dependent on its strategic rival. For the US, this means finding new distributors in the rest of the world on equivalent price terms to those offered by China. For China, it means continuing the race to catch up in areas where it still lags behind the technology curve, with the aim of throwing off the shackles placed on it by the US in an attempt to slow it down. 

    In this clash, which for the time being is a lose-lose situation, the issues at stake in negotiations are many and varied. Trump has made no secret of his willingness to weaponise trade tariffs to exert pressure beyond the confines of trade. China is thus in his sights not only for its unfair trade practices but also for its role in the fentanyl crisis as an exporter of chemical components needed to make the drug. Rare earth mining and refining, integrated circuits, next-generation chips and microprocessors, market access, intellectual property protection, the yuan exchange rate: all these can and surely will be the subject of fresh talks. Re-escalating tensions cannot be ruled out, particularly if Trump feels that Chinese concessions are not commensurate with the “super deal” he hopes to strike. The negotiations are only just beginning.

  • Gulf States – Oil: navigating back to basics amid stormy seas

    On “Liberation Day”, the Gulf States were relatively spared by the threat of trade tariffs. However, there are other channels through which “Trump risk” can be transmitted. In particular, over the past few weeks oil prices have reflected global turbulence triggered by a cardboard chart held up on live TV at the beginning of April, combined with deeper uncertainty over the global balance between supply and demand. But amid the innumerable attempts at quantification and prediction, which areout of date within 24 hours and needconstant updating in light of this or that new event, has anyone evaluated the cost of the amount of collective intelligence expended on trying to keep up with the latest up-to-the-minute news? The reality is that, when an economy is dependent on commodities, all of its variables are exposed tovolatility in their prices. Fundamentally, then, the assessment of a country’s risk should not change because of market turmoil; rather, it should reflect the country’s ability to resist it. This would help reduce agitation. Fortunately, there is a practical tool for just that purpose: the fiscal breakeven. But this analysis does not necessarily fit neatly inside the box of a uniform indicator: sometimes various forms of rigidity make the wealthy Gulf States more vulnerable to storms than they appear. 

    An oil market rocked by events and a geopolitical shift within OPEC+

    The first week of April was a memorable one for oil. The announcement of harsher than anticipated trade tariffs, while expected, exacerbated doubts over global growth and, by extension, demand for oil. Less than 24 hours later, OPEC+ caught the market off guard when it issued a press release announcing plans to accelerate the unwinding of voluntary production cuts, by increasing the May output to three times the amount originally planned. The first concern is that this could reflect the group’s growing difficulty in agreeing on how to fulfil its role as an oil price regulator. Indeed, some of its members (notably Iraq and Kazakhstan) have significantly exceeded their production quotas, suggesting that cooperation is difficult. Under this scenario, the surprise increase in May is an attempt by the group to realign itself by giving these countries room to offset their overproduction – a test of the group’s unity. But the timing of the OPEC+ release, the day after reciprocal tariffs were announced, also raises questions about the American president’s influence over the organisation and its de facto leader, Saudi Arabia. One of his constant refrains has been a desire to keep oil prices low. But the potential levers of influence are a matter of pure speculation: is this a quid pro quo for Saudi Arabia’s positioning as host diplomatic of negotiations over Ukraine? Is it the part the Gulf States have agreed to play to avoid Israeli or American military intervention in Iran’s nuclear programme? Or is it progress on a nuclear cooperation deal with the United States that is in the balance for Saudi Arabia? Whatever the reasons behind it, if US influence were to dominate the decisions of OPEC+, this would only weaken the group’s cohesion and increase volatility in a market that is trying to digest its decisions while swimming against the tide.

    Quiet militancy vs. breakeven as an analytical tool

    Amid this turbulence, the breakeven – the oil price needed to balance an oil-exporting country’s budget – is a useful thing to calculate. It is a quick, simple and comparable entry point for analysing how resilient economies are to oil price shocks: the more a country’s breakeven exceeds the current price, the more room that country has to maintain its fiscal policy, without additional trade-offs, in the face of oil shocks. However, its analytical power is sometimes overused to the point where it leads to false conclusions. 

    Firstly, breakeven analysis makes no distinction between the types of fiscal spending covered by oil revenue. It thus does not take into account how much flexibility a budget has to adapt to a potential shock. The example of Saudi Arabia is instructive in understanding this. Calculating the fiscal breakeven between 2018 and 2024 shows a deterioration in the budget’s sensitivity to an oil shock. What appears more interesting, however, is that the share of the public sector wage bill – difficult to adjust in the event of a shock – covered by non-oil revenue increased substantially over that same period. Secondly, the breakeven is a static measurement that reflects the procyclicality of fiscal policy. This means that, when a government reduces its discretionary spending in response to a shock, or increases discretionary spending when prices are high, the breakeven changes. However, in the absence of budget reform, this does not translate into greater or lesser resilience to shocks. In short, while the breakeven is a useful measure, on its own it is insufficient and perhaps even misleading. In any event, it should only be considered as part of an evolutionary and structural analysis. And even that is not enough: the effective rigidity of a given type of expenditure varies from country to country depending on how much compromise the political system will tolerate and how attached the population is to this or that expenditure – i.e. depending on the social contract. Beyond relative wealth, then, understanding these rigidities is key to evaluating a country’s strengths and weaknesses in the face of an oil shock.

    A tentative diagnosis to reduce turbulence

    For Bahrain, there is little doubt: the country has no room to withstand another prolonged oil shock. The country’s debt reached 123% of GDP in 2024, and its ever higher cost only adds to the budget’s rigidity in the face of shocks. This reflects a social contract aligned with the rentier states of the Gulf1 but without the resources to back it up: in reality, Bahrain produces little oil. Its political structure makes reform particularly challenging. It is the only Gulf State to have experienced an “Arab Spring” uprising in 2011; this was mostly quelled by repression, though the regime never fully regained its legitimacy. However, unless the country transitions its model – which is politically difficult to do – its trajectory does not appear sustainable and could yet deteriorate more quickly in the event of an oil shock.

    Kuwait, meanwhile, stands on firm ground, underpinned by an exceptional store of wealth built up over decades2. This means that, from a sovereign risk perspective, the country can weather numerous storms. However, if we consider flows rather than stocks, its recurring deficits indicate that revenue no longer covers the growing fiscal cost of its welfare state model, now the most generous of any Gulf State. Paradoxically, though, the thing that has made Kuwait’s system rigid to reform is the fact that, unlike other Gulf States, it allows for political consultation through an elected parliament. This regularly crystallises individual interests that run counter to proposed government reforms. In May 2024, Emir Mechaal decided to temporarily suspend parliament. While this resolves the deadlock, it does so at the expense of Kuwaiti political tradition. The country’s fragility in the event of an oil shock is more about whether the government has the legitimacy to impose challenging reforms without parliament.

    Oman’s sovereign profile3 has significantly improved recently, to the point where the country has regained its investment-grade rating. Of course, favourable oil prices since 2022 have helped. But the most important thing is that, since 2020, Oman has embarked on an ambitious programme of institutional reforms and deftly used surplus revenue to reduce its debt. Recent reforms suggest that there is greater political will to deconstruct rentier dynamics. Nevertheless, rigidities remain, notably in the labour market, reflected in continuing high unemployment that could, in the event of a lasting oil shock, test the resilience of reforms and thus the budget’s flexibility to adapt.

    Saudi Arabia has placed a different bet. The divergence between its demographic trajectory and its oil rent was always going to lead to an unsustainable social contract. Rather than gradually dismantling distribution channels (subsidies, reduced public employment), which would primarily affect the middle class (a uniquely Saudi reality), the Kingdom has set out to transform its social, societal and economic model: to inject fresh momentum by transitioning its social contract. It has already managed to restructure its budget, leaving more room to invest in diversification. However, this is perhaps a specific case where capital investment, normally considered less rigid (because it can be adjusted in the event of a shock), becomes more rigid. If the government is no longer able to deliver on all its promises, its Vision 20304 plan could lose momentum and be forced to stabilise around a more precarious interim equilibrium. 

    Qatar and the United Arab Emirates still have plenty of room for manoeuvre – enough not to call into question their rentier-based social contract. The political equilibrium is thus strong enough to support economic transition. If the Emirates wish to go beyond Dubai’s model as a hub for diversification, the “moonshot” strategy of moving into cutting-edge sectors carries risks, but the resources to finance such a strategy, notably through a myriad of very well endowed sovereign wealth funds, appear secure. For Qatar, the North Field expansion will boost its revenue, particularly over the period 2026-2029, buying it some time. But the risk is that it will lag behind when it comes to diversification, which could ultimately force it to undergo riskier shock therapy.

    To find out more, read the full article, Pays du Golfe – Sous la houle pétrolière, cap sur les fondamentaux, dated 25 April 2025.

     

    1. No direct taxes on the population, free utilities, subsidised basic products and public sector employment for the population.
    2. Net public assets of around 500% of GDP and net external asset of 650% of GDP. See article Koweït – Le temps des arbitrages ? dated 20 February 2025.
    3. See article Oman – Laboratoire fiscal de l’après-pétrole ? dated 10 October 2024.
    4. See Can Saudi Arabia afford its ambitions? dated 26 September 2024.
  • French deficit and politics: too late to get out of the woods?

    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

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