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Donald Trump is obsessed with the US trade deficit, which he blames on what he sees as unfair competition from surplus countries – such as China and Germany – at the expense of American interests. In his logic, protectionism and tariff barriers are a necessary and, as he sees it, effective lever for rebalancing bilateral trade. However, the trade war launched by Trump during his first term highlighted the limitations of this approach. Contrary to expectations, the trade deficit has not narrowed; if anything, it has widened. While tariffs may temporarily slow imports, they do not address the root of the problem, namely the structural domestic savings deficit. In other words, the United States is living beyond its means and must rely on foreign savings to maintain its standard of living.

The twin deficits – budget and external – have so far been financed without difficulty thanks to foreign investors’ sustained appetite for dollar-denominated assets. As issuer of the main global reserve currency – the dollar – and provider of risk-free assets – Treasuries – the US plays a central role in the international monetary system. This dominant position helps support global demand for dollar-denominated reserve assets, enabling the US to borrow from overseas investors on preferential terms. This is what’s known as the “exorbitant privilege” enjoyed by the US by virtue of its own currency being the international reserve currency.

However, this recycling of global savings in US markets hinges on the confidence placed in dollar-denominated assets. This confidence is sensitive to shared emotional dynamics: it can fluctuate with the perceptions and beliefs that influence investor behaviour. That means episodes of fear or doubt – linked to political instability, the risk of a budget crisis or a loss of US institutional credibility – could weaken this confidence, prompting investors to shun US assets or demand higher risk premiums and thus endangering the US’s ability to borrow more cheaply in international markets.

To illustrate this point, reactions to the tariff announcements on “Liberation Day” offered a glimpse of what might happen if confidence in the dollar were to erode. Traditionally, dollar-denominated assets serve as a safe haven at times of uncertainty, causing the dollar to strengthen and interest rates to fall. This time around, the opposite happened: the dollar declined and bond markets tightened, signalling the beginnings of investor panic. This growing distrust of dollar assets is a warning sign, made all the more worrying by the unpredictability of Trump’s actions and policies, which are hardly conducive to a lasting climate of confidence. In this connection, it’s worth remembering that around one third of market-tradeable US debt is held by foreign investors, which means any change in sentiment could have major repercussions.

Investors are concerned by Trump’s repeated attacks on the Fed’s independence. Subjecting monetary policy to that kind of pressure is liable to compromise its credibility, particularly if it results in artificially low interest rates out of step with prevailing economic conditions. Mounting inflationary pressures could then cause expectations to become unanchored, prompting investors to demand a higher inflation premium to make up for the erosion in the real value of their bond portfolios. 

Similarly, the weak dollar policy advocated by Trump – under the influence of his economic adviser Stephen Miran, now a member of the Fed’s Board of Governors – could undermine the dollar’s credibility as the international monetary system’s base currency. His proposed Mar-a-Lago Accord, inspired by the Plaza and Louvre Accords of the 1980s, aims to orchestrate a dollar depreciation while putting pressure on official creditors to invest in zero-coupon 100-year Treasuries. The possibility of this kind of disguised restructuring of debt risks compromising the attractiveness of dollar-denominated assets.

By dint of being pressured by the world’s leading financial power through policies of intimidation and even extortion, the US’s creditors could prove less inclined to cheaply finance American budgetary largesse. Rising risk premiums could jeopardise the sustainability of the debt trajectory, forcing the authorities to make unpopular political choices. Moreover, while the idea that there is no credible alternative to the dollar remains valid today, from a longer-term perspective it is more of a belief than a historical certainty: key currencies are not immortal. In any event, Donald Trump would do well to meditate on the commonsense principle that it’s always best to stay on good terms with one’s banker.

In an international environment that is still as anxiety-provoking as ever, uncertainties remain, numerous and multifaceted. Nevertheless, hoping that those emanating from US economic policy will calm down (and that at least tariffs will stabilise), the scenario is staying the course. It is characterised by a slowdown without recession in the US, followed by an acceleration in 2026, a continued recovery in the Eurozone thanks to investment support and, while China in the grip of ‘involution’ is seeing its growth performance erode, an ‘emerging universe’ that continues to show unprecedented resilience.

In the US, the first half of the year was turbulent in terms of both sentiment and growth: after having been lulled by the successes promised by the ‘US exception’ and the privileges offered by the status of the USD, investors expressed their disaffection at the end of the sensational ‘Liberation Day’.  From an economic point of view, in anticipation of aggressive tariffs, imports jumped in Q1, before falling sharply: they weighed on growth before providing support. After falling by 0.6% in Q1 (annualised quarterly variation), GDP grew by 3.8% in Q2.

And yet, the broad outlines of our US scenario, based on the foreseeable timetable of the Trump administration's radical economic decisions, have not changed: a slowdown this year (aggressive tariff increases, anti-immigration policy, inflation), then a slight rebound next year (support provided by the One Big Beautiful Bill Act, deregulation). Our scenario thus assumes average annual growth of 1.7% in 2025, down significantly from 2.8% in 2024, before an acceleration to 2% in 2026. The current deceleration is accompanied by a weakening of the labour market. While the pace of job creation is slowing, layoffs remain moderate, as are the upward pressures on the unemployment rate. The latter could reach a peak of around 4.5% by the end of the year.

Despite the still limited adjustment in the labour market, attention has recently focused on the growing vulnerability of employment, to the point of overshadowing concerns about inflation. However, tariffs, at their maximum impact point, would add nearly 80bp to the increase in prices over one year. The impulse would be largely temporary but could drive headline and core inflation towards 3.2% by the end of 2025. Inflation would still significantly exceed the 2% target at the end of 2026: our forecasts place core and headline inflation at around 2.9% and 2.7% respectively. It is therefore bold to assume that the Fed will neglect the inflation component of its mandate in favour of the employment component alone.

In the Eurozone, despite the reluctance of consumption and a more unfavourable external environment, the recovery continues. Echoing US behaviour, sustained growth (2.4% in annualised quarterly variation), fuelled by a rebound in exports in Q1, was followed by a sharp cooling, which nevertheless left growth in positive territory (0.4%) and offered a comfortable carryover. Even if the repercussions of tariffs (ultimately less aggressive than feared) continue to weigh slightly on Q3, progress already achieved now allows us to expect GDP growth of 1.3% in 2025, the pace of which should be maintained in 2026.

Past resilience is related to domestic demand: it has weakened but is at a slightly higher pace than its long-term trend, and investment, in particular, has weathered uncertainty well. As for the scenario of maintaining growth at its potential pace, it is based, above all, on investment, driven by European funds, defence spending and the German recovery plan. In contrast, the impact of the Turnberry trade agreement, concluded this summer between the EU and the US, would be marginally negative, subtracting 0.1ppt from growth in 2026 compared to our previous scenario.

In a context that should have clearly weakened them, the economies of the ‘emerging bloc’ continue to hold up well. They are benefiting from the disaffection with the USD, which is easing pressure on their currencies and interest rates (local and USD), from disinflation and from the good performance of their labour markets. Their growth could thus approach an average of 3.9% in 2025 and 2026: a good performance that should not lead one to underestimate (or even to forget) the fragilities. These economies remain exposed to a potential market shock, they face a downward trend in their average growth and will have to adapt to a new competitive environment while dealing with the Chinese trajectory: the risks linked to the phenomenon of ‘involution’ go beyond China alone and fuel the fear of deflation exported to Asia.

In China, the persistent weakness in consumption, the prolonged correction in the real estate market and overcapacity in various sectors (steel, electric vehicles, solar or electronics) continue to fuel deflationary pressures, particularly visible on producer prices, which could fall by 2.6% in 2025. This phenomenon, called ‘involution’, is now officially ‘denounced’ by the authorities, who want to curb excessive price competition and tackle overcapacity. The first impact of the ‘anti-involution campaign’ was to reduce the fall in producer prices, without any major stimulus effect on demand. Even if support measures are being stepped up, many of them are structural reforms and their positive impact on inflation will not be felt immediately. Inflation is expected to remain almost non-existent at 0.1% in 2025, before rising to 0.6% in 2026. Due to the increase in US tariffs, the persistent weakness of domestic demand and despite various shock absorbers (reorientation of Chinese exports, resilience of global demand, support provided by the policy mix), growth is expected to continue to slow from 5% in 2024 to 4.8% in 2025 and 4.4% in 2026.

On the monetary policy side, this is not the time for relaxation. In the US, the resilience of inflation is likely to disillusion the proponents of rapid and massive monetary easing. In the Eurozone, inflation towards target and the recovery, albeit modest, argue in favour of a status quo, followed by tightening, albeit still a long way off. Anxious to avoid second-round effects, the BoE could postpone its next rate cut. As for Japan, while moving away, rate hikes remain on the agenda.

Specifically, in the US, our scenario is for a further cut before the end of the year, lowering the upper bound of the Fed Funds rate range to 4%, at which point the Fed is expected to pause throughout 2026. This scenario is quite far from that of the market (which anticipates 110bp b of cuts by the end of 2026) and considers, in particular, that the checks and balances seem sufficient to allow the Fed to resist the pressure of the Trump administration. As for the ECB, in June it lowered its deposit and refinancing rates to 2% and 2.15% respectively, levels at which it is expected to maintain them before raising them slightly, when the economic improvement poses a risk of inflationary pressures. This increase would only take place after the recovery is over, and therefore not before the end of 2026 at the earliest.

Interest rates are expected to come under moderate upward pressure. In the US, the possible resurgence of inflationary concerns and disappointed hopes of massive monetary easing could result in a modest rise in interest rates coupled with a flattening of the curve. Encouraged by European growth that is more resilient than expected, then supported by fiscal expansion in Germany, this movement is expected to spread to the Eurozone.

In our US scenario, the yield on 2Y Treasury bonds, which has room to rise, is expected to reach 3.70% by the end of 2025. Also at the end of 2025, the 10Y yield on US Treasuries would be at 4.30%, but the 30Y rate (4.85%) would struggle to cross the ‘psychological threshold’ of 5%, thanks to demand from pension funds. The German 10Y yield (Bund) is expected to reach 2.80%. The revamping of the hierarchy between Eurozone sovereigns would continue with a spread against the Bund of 50bpfor Spain, on the one hand, and 75bp for France and Italy, on the other.

Finally, weighed down by a wave of disenchantment in the wake of the sensational ‘Liberation Day’, as well as by certainly exaggerated expectations of monetary easing, the USD suffered. While capital inflows to the US have not dried up and the easing is likely to be less than expected, the USD could ‘smile again’. However, patience is needed before the EUR depreciates: our scenario assumes that the EUR against the USD would be close to recent highs at the end of 2025 (1.17), before falling in 2026 (towards 1.10 at the end of the year).

Growing global imbalances now pose a risk to global economic and financial stability. These imbalances are reflected in persistent divergences between countries’ current account balances, with large deficits in the United States but surpluses in China and Europe. Although they point to divergences in trade balances, these imbalances act like a mirror, mainly reflecting structural disparities between savings and investment levels. The global accumulation of these imbalances exposes the financial system to the risk of a crisis in the event of a sudden reversal, as has happened in the past. 

Before the 2008 crisis, global excess savings – often referred to as a savings glut – contributed to an across-the-board decline in interest rates. This environment encouraged undue risk-taking as well as the excessive accumulation of debt, driven by a wave of unbridled financial innovation intended to push back the traditional limits of borrowing. This mechanism fuelled huge real estate and credit bubbles, which were notably at the heart of the subprime crisis. The roots of the eurozone sovereign debt crisis also lay in imbalances within the zone, with southern European countries building up large external deficits financed by excess savings in northern European countries looking for lucrative investments. This model, built on growing imbalances, fell apart when these capital flows came to a sudden stop amid a climate of increased distrust towards heavily indebted countries, Greece being a case in point. 

It is thus critically important to identify the specific causes of each country’s external imbalances so they can be addressed with minimal disruption.

From this perspective, Donald Trump, long preoccupied – not to say obsessed – with the US trade deficit, appropriately diagnosed it as an anomaly to be corrected. However, he is mistaken about the remedies: protectionism and tariff barriers will do nothing to resolve the US savings deficit that is behind the country’s trade imbalance. There is simply no denying it: Americans are living beyond their means. Consumers are overspending while the government deficit deepens. This combination of low private savings and high public dissaving leads to a structural savings deficit whereby the country is unable to fund its investments, thus chronically fuelling its external deficit. Rebalancing the external accounts means reducing the public deficit – a direction diametrically opposed to the one taken by Trump with his One Big Beautiful Bill Act and its huge tax cuts. Any deepening of the public deficit will worsen external imbalances and thus entail greater reliance on foreign savings. 

On the other side of the looking-glass, China has a large current account surplus as a result of its export-led economic model, supported by structurally high private savings. In the short term, with consumer spending weakened by the real estate crisis, Chinese growth continues to depend on external demand. Looking further ahead, putting the model on a balanced and sustainable footing will require boosting domestic consumption, supported by an increase in social safety nets and public services, so as to reduce the need for precautionary savings. This shift to a more self-sustaining and independent growth model should help shrink external imbalances and reduce excess savings to be invested in foreign markets. 

The eurozone is the other major region with persistent external surpluses, mainly driven by Germany’s large trade surpluses. While private savings are plentiful and budget deficits are generally under control (except in France), the eurozone is mainly afflicted by a lack of investment and innovation, making it vulnerable in the face of Chinese and US strategic ambitions. If it is to stay in the race for power and regain its strategic autonomy, Europe must invest heavily not only in the defence and energy sectors but also in digital infrastructure, cutting-edge technologies and the industries of the future. In this regard, Germany’s unprecedently large stimulus plan could kick-start a rebalancing by putting domestic savings to work in investments targeted at reinventing its economic model. At the European level, beyond the idea of mutualising future debt, the creation of a savings and investment union appears essential if the European Union is to finance collective investment efforts from its own funds rather than seeing its capital flood into US markets.

This interplay between savings surpluses and deficits appears to offer a logical or coherent explanation for the persistence of global imbalances. Donald Trump would nevertheless be well advised to be very careful how he handles the United States’ creditors, who, faced with his threats of intimidation and extortion, could decide to prioritise rebalancing their internal finances over continuing to fund US debt. That kind of financing freeze would force the US to make painful adjustments, not without risks to global financial stability.

Chinese growth is slowing down and consensus remains sceptical about the government's official targets (5% in 2025). Far from the promises of rebalancing, the economy is increasingly shifting towards an export-driven industrial model rather than domestic consumption. Deflation, a consequence of structural imbalances (demographics, overcapacity, real estate crisis), is weakening corporate profitability and consumption and weighing on potential growth.

The state remains at the heart of the productive model, its upgrading, its successes as well as its excesses and sluggishness, but it distorts the economy by favouring supply over demand and supporting a model that creates overcapacity, which the world views with increasing mistrust. Faced with the looming trade war, China will have to fight to maintain its market share and, above all, overcome a technological blockade imposed by the United States in key sectors where it remains dependent.

The energy transition is accelerating for ecological, geopolitical and economic reasons, but is hampered by the pursuit of quantitative growth. Despite its manufacturing performance, the future of the Chinese model remains uncertain, against a backdrop of statistical and political opacity.

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”.

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.