More than ever, the outlook depends on the turn taken by US geopolitical and economic policy. Assumptions about the scale and timing of the measures to be taken by the new administration mean that, in the US, the economy is likely to remain resilient, but there will also be renewed inflation, modest monetary easing and upward pressure on long-term interest rates. Moreover, these measures are only one explanation for the sluggish recovery in the Eurozone, which is likely to be below potential.

Drawing the contours of the US (and therefore global) scenario requires making assumptions about both the scale of the measures likely to be implemented and their timing, depending on whether they fall within the prerogatives of the president or require the approval of Congress.

As far as tariffs are concerned, Donald Trump's threats look like extreme pressure tactics. They call for an ‘intermediate’ scenario consisting of substantial increases, without however reaching the campaign proposals. Tariffs would thus rise to an average of 40% for China, from Q225, and to an average of 6% for the rest of the world, phased in over the H225. Aggressive fiscal policy, favouring tax cuts and maintaining extremely high deficits, would be implemented later: its effects could become apparent from 2026. In terms of immigration, restrictions could be applied from the start of the presidential term. They would be followed by a very sharp slowdown in immigration flows and, if deportations are to be expected, they would be ‘selective’ as opposed to a massive and indiscriminate removal of millions of people. Finally, deregulation, of which the energy and financial sectors would probably be the main beneficiaries, would spread its ‘benefits’ throughout Trump’s term in office.

Taken as a whole, these policy orientations should be favourable to growth. However, if the expected positive impact of aggressive fiscal policy and deregulation exceeds the negative impact of tariffs and immigration restrictions, it will follow. Given the resilience of the US economy, which is still expected to outperform forecasts to grow by around 2.7% in 2024, this suggests that growth will remain strong, albeit slightly weaker. Because of a few vulnerabilities (low-income households & small businesses are more exposed to high interest rates), our scenario assumes a slowdown to 1.9% in 2025, before a recovery to 2.2% in 2026: a development that should be accompanied by a revival in inflation. The end of the disinflationary path to the 2% target is the most difficult, and customs duties could put pressure on prices in a range of 25-30bp. Total inflation could therefore fall back to around 2% next spring, before picking up to around 2.5% by the end of 2025 and remaining there in 2026: the potential for monetary policy easing will be very limited. 

In the Eurozone, the acceleration in growth over the summer gives reason to hope that the recovery will be only a modest one and that it will still be below potential and below the pace that will benefit the US. While the upturn in household consumption recorded over the summer augurs slightly stronger growth, the latest information on investment does not augur a marked acceleration. Falling inflation, which will boost purchasing power, but also a rebuilding of real wealth, implying a reduced savings effort, and lower interest rates, which will help to restore purchasing power for property: the ingredients are there for a continued recovery in household spending. But only at a very moderate pace, as fiscal consolidation and global uncertainty are likely to encourage a continued high savings rate. Our scenario therefore assumes a modest acceleration in consumption to 1.1% in 2025 and 1.2% in 2026, after 0.9% in 2024. After a sharp fall in 2024 (-2.1%), investment in 2025 is likely to remain penalised by the transmission delay of monetary easing but above all by weak domestic demand and growing uncertainty over foreign demand. Investment is expected to grow by just 1.5% before firming slightly in 2026 (2%). 

The Trump administration’s policies would have a moderately negative impact on growth in the Eurozone, in the short term primarily due to uncertainty. Furthermore, the monetary and fiscal policy mix remains unfavourable to growth, with the key rate returning to neutral by mid-2025, while the ECB’s balance sheet reduction continues to be restrictive. The forecasts therefore put growth on a very soft acceleration trend, rising from 0.7% in 2024 to 1.0% in 2025 and then 1.2% in 2026: potential growth should be reached, but the output gap, which is slightly negative, should not yet be closed, while the growth gap with the US economy is expected to widen.  
In EMs, if it were not for the difficulties associated with Trump 2.0, the situation would be improving: lower US key rates favouring global monetary easing, loosening pressure on EM FX and, more generally, on external financing for EMs; domestic growth buoyed by falling inflation and rate cuts; still buoyant exports to developed countries (primarily the US). But the effects of these supporting factors are likely to be undermined by the plausible repercussions of the measures taken by the new US administration. In addition to the tariffs likely to make EM exports more expensive and more limited, there will be less monetary accommodation in the US and a possible reduction in US military and financial support for Ukraine, fuelling geopolitical uncertainty in Europe. It is therefore preferable to be a large country with a low degree of openness, such as India, Indonesia or Brazil, a commodity-exporting country or an economy that is well integrated with China, which is preparing for the Trump storm. 

In China, the last Politburo meeting concluded in December with a commitment by the authorities to implement a “more proactive” fiscal policy and a “sufficiently accommodating” monetary policy, to revive domestic demand and stabilise the property & equity markets. A period of trade tensions is looming and, apart from restrictions on exports of critical products (including rare earths), the tools of retaliation are limited: it is difficult to react by boosting the competitiveness of exports (the CNY is already historically low) or by reciprocally increasing custom duties, which would risk penalising already very fragile domestic consumption. The authorities’ intentions to provide more vocal support for domestic demand are commendable, but the effectiveness of this strategy will depend on household confidence: the rebound cannot be decreed, and our scenario continues to predict a slowdown in growth in 2025.

The market’s hopes of bold monetary easing have been refuted and are no longer on the agenda, particularly in the US. In an economy assumed to remain ‘resilient’, with inflation around 2% and then likely to pick up again, the easing would be modest. After a total reduction of 100bp in 2024, the Fed could ease by a further total of 50bp, taking the Fed Funds rate (upper limit of the target range) to 4.00% in H125 before pausing for a prolonged period.

As for the ECB, with inflation in line with target and no recession in sight, it would continue its moderate easing via its key rates, while extending its quantitative tightening. After its four 25bp cuts in 2024, the ECB could cut rates by 25bp at the January, March and April meetings, then maintain its deposit rate at 2.25%, ie, very slightly below the neutral rate estimate (2.50%).

Everything points to a scenario of a modest rise in interest rates. Given the economic scenario (limited slowdown in growth and moderate inflation concentrated at the beginning of the period) and modest monetary easing followed by an earlier pause, US interest rates could fall slightly in H125 before recovering. 10Y Treasury rates would move within a range of 4.20-4.50%. The new rate forecasts are higher than the previous ones and envisage a 10Y rate approaching 4.50% at the end of 2025 and around 5.00% at the end of 2026.
In the Eurozone, several factors point to a scenario of a slight rise in sovereign interest rates: market expectations of a bold monetary easing, where a correction could lead to a recovery in swap rates; an increase in the volume of government securities linked to the ECB's reduction in the size of its balance sheet (quantitative tightening) and to still-high net issuance; and a diffusion of the rise in US bond yields to their European equivalents, expected at the end of 2025 and in 2026. While the German economy (where early elections are due to be held in February) continues to suffer, and the political situation in France struggles to become clearer, ‘peripheral’ countries have seen their good economic results (notably Spain) and their political stability (this applies to Italy and Spain) rewarded by a significant tightening of their spreads against the German 10Y rate in 2024: they should benefit from the same support in 2025. Our scenario therefore assumes German, French and Italian 10Y rates at 2.55%, 3.15% and 3.55% respectively at the end of 2025.

Finally, for the USD, several positive factors, including the currency’s attractiveness in terms of yield, have already been factored into its price. As a result, our scenario assumes that the USD will remain close to its recent highs throughout 2025, without overshooting them for long. 

Due to latest political developments and recent soft data (BdF survey, PMIs etc.), we are currently reviewing into details our forecast for France. The final and official version will be published in CASA Eco next ‘World scenario’ that will be published on 20 December. In this paper, we introduce some key preliminary figures that we obtained, the main news is the downward revision of our growth forecast from 1.0% to 0.8% for 2025.

For more than a month now, the residents of New Delhi – India’s overpopulated capital, home to more than 30 million people – have been suffocating under a cloak of pollution. The city’s air quality index has reached an all-time high, rising well above the 400 mark beyond which prolonged outdoor exposure becomes dangerous to the human body. 

The city’s hospitals have also reported a huge surge in the number of consultations for pulmonary infections and respiratory difficulties. Pollution is estimated to be responsible for around 12,000 deaths a year in New Delhi, equivalent to over 10% of all deaths in the city. The authorities are in denial, stubbornly claiming that “there is no conclusive data available to establish a direct correlation of death exclusively with air pollution”.

Behind this spike in pollution are fires deliberately lit by farmers in the north of the country to burn crop residues after harvest and prepare the ground for subsequent crops – a practice that is strongly discouraged because of its severe environmental impact, but which the authorities have not failed to regulate. Then there is pollution arising from the construction sector, the burning of fossil fuels and, of course, extremely heavy traffic.

These episodes underscore India’s extreme vulnerability to climate issues. Eighty of the world’s one hundred most polluted cities are in India, which is seventh on the list of countries most exposed to extreme weather events, particularly those involving rain (floods and droughts) and heat. 

The long road to transition

India is already the world’s third-largest emitter of greenhouse gases, though it has the lowest emissions per capita of any G20 country. Despite efforts to invest in renewable energy, particularly solar and wind energy, the country remains heavily reliant on coal (which accounted for 75% of its energy mix in 2023), which contributes to fine-particle emissions and thus to pollution. At COP26 in Glasgow in 2021, India committed to meet 50% of its energy requirements from renewable sources and install 500 GW of renewable energy capacity by 2030. This is an ambitious bet but not an impossible one: in 2024, renewable energy capacity has risen by 24.2 GW year on year to 203.2 GW. 

The transition will also mean growing electric vehicle (EV) sales – another priority for the authorities. While sales of new EVs have risen over the past two years, up from 1.75% of all vehicle sales in 2021 to 6.4% in 2023, they are still well short of the government’s 2030 target of 30%. For the time being, sales are mainly concentrated in motorcycles, more affordable to Indian consumers. But the sector is supported by a policy of substantial subsidies designed not only to help people buy new EVs but also to expand domestic production capacity, buoyed by Indian manufacturer Tata Motors, the undisputed leader, with a market share of over 70%. 

The role of agriculture

This view of a modern country racing to develop renewable energy and clean transport must not be allowed to obscure the other face of India – that of a still underdeveloped and mostly rural country.

The challenges involved in energy transition are also intimately linked with agriculture, which continues to play a central role in India, where 64% of the population still lives in rural areas.

With India’s population exceeding China’s in 2023, some states – particularly in the east of the country – already face very high levels of water stress. Agricultural yields are still well below those of the main cereal-producing countries: the sector, which still employs 43% of the population, remains heavily reliant on manual labour and is dominated by very small farms (averaging one hectare), most of them family-owned and often operating at close to subsistence levels. Because India is so densely populated – China, for example, has three times the amount of land per capita – this presents a huge productivity challenge. 

Above all, harvests are heavily dependent on the monsoon, the timing and magnitude of which are increasingly unpredictable. Rainfall in the 2023 monsoon season was below the historical norm, notably in the east of the country, as a result of the El Niño weather phenomenon. Conversely, India has this year benefited from the influence of La Niña. This has meant a fairly satisfactory summer monsoon season (July to September), which accounts for 70% of India’s total rainfall, though still with significant variations between regions.

Harvests, and thus food prices, are at heart of many of India’s economic challenges. Among the key demands of India’s farmers are guaranteed agricultural prices and their expansion to cover more crops. Their anger boiled over into months of protests in 2021 and again in 2024, just a few weeks before the general election in which Narendra Modi’s party would significantly underperform, notably in the heavily agriculture state of Haryana.

The consumer price index is also dominated by food products, which account for 46% of items making up the index. In the past, periods of inflation have primarily been triggered by shortages of the “TOP” vegetables (tomatoes, onions and potatoes), which are staples of Indian cuisine, and some cereals (rice and wheat). 

Nor can the political importance of food prices be overstated. In 1998, a sharp rise in onion prices cost the Bharatiya Janata Party (BJP) the local elections in New Delhi. Highly volatile food prices make the central bank’s job more complicated: adjusting base rates and injecting liquidity have little impact on vegetable and cereal prices. The Central Bank of India is even considering targeting only core inflation to exclude food prices. In October, inflation quickened to 6.2%, driven by food inflation (13.5%), with vegetable prices rising fastest.

Our opinion

The reality of climate change is catching up with India and could perhaps constitute the most significant risk factor facing the country. Air pollution is making cities – particularly the capital, New Delhi – less and less liveable. And, as each monsoon season rolls around, unpredictable rainfall patterns plunge India into uncertainty: when will the rains come? Will there be enough rainfall… or will there be too much, with fatal consequences? Will it be evenly spread around the country? The importance of agriculture and the influence of harvests on income, prices and consumer spending still profoundly shape the Indian economy, making growth potentially highly volatile. In recent years, harvests have been increasingly affected by extreme weather events.

Seen against this backdrop, the authorities’ response has been lacklustre: while the emphasis has been on renewable energy and developing the production and sale of clean vehicles, too little is still being done to combat pollution arising from other sectors, most notably agriculture and construction. And, when it comes to the health consequences of pollution, which already costs the people of New Delhi around ten years’ life expectancy, one might be forgiven for thinking the government’s attitude sometimes smacks of denial.

After weeks of waiting, the Chinese authorities outlined the fiscal component of the stimulus package designed to support an economy that is struggling to extricate itself from the real estate crisis in which it has been stuck for the past two years. 

In September, the governor of China’s central bank was first to announce a series of monetary easing measures, triggering high levels of market volatility as initial enthusiasm about the eagerly awaited response from the authorities gave way to disappointment over the lack of a fiscal component. The measures announced, mainly targeted at the real estate sector, included a cut in the reserve requirement ratio for banks, a reduction in residential mortgage rates (on both existing and new loans), a cut in the central bank’s key interest rate and the creation of a fund to help listed companies buy back their own shares to support their valuations. 

This time around, announcements focused on local authorities, which epitomise many of the aberrations inherent in China’s growth model. Forced to compete with one another by a Communist Party that puts future decision-makers to the test by giving them more and more responsibility at the provincial level, local authorities have been incentivised to invest huge amounts – including during cyclical slowdowns such as in 2009 and 2015 – to develop infrastructure, sometimes in an uncoordinated fashion, and to support state-owned companies that are not always profitable. Above all, they have been complicit in the real estate model, securing their slice of the speculative pie. Since local authorities derive a large proportion of their income from sales of land to developers, their revenue has fallen sharply over the past two years as the number of construction starts has slumped. 

Local government debt – a “grey rhino” of which local authorities are well aware but which is increasingly hard to measure – was becoming a growing concern. Constrained by debt ceilings at odds with Beijing’s demands in terms of growth and infrastructure finance, China’s cities and provinces had increasingly made use of external financing vehicles, creating ad hoc structures to finance various types of infrastructure (roads, transportation, energy, etc.), some backed by state-owned companies and others not. As a result, it had become increasingly difficult to calculate total debt and, above all, to know who would be lender of last resort in the event of a default. The new measures are thus aimed at giving local authorities a bit more breathing room. They will be allowed to issue up to €780 billion-worth of bonds over three years so as to bring some of their hidden debt back onto their balance sheets. A further €520 billion – once again in the form of bond issues – has also been allocated to local authorities to finance new projects. 

These announcements are good news for local government, which will regain some room for manoeuvre after several tough years. However, they do not tackle the structural problems inherent in the Chinese economy, which lie behind this excessive local government debt. Market reaction to the announcements has been rather tepid – at any rate much more so than after the September and October announcements. But the authorities have not ruled out the possibility of further measures and are no doubt also keen to maintain some room for manoeuvre.

Trump: the calm before the storm

Indeed, there were rumblings that the dates of the Politburo’s Standing Committee meetings and the date of the announcement were not chosen arbitrarily, and that the Chinese authorities were waiting for the outcome of the US election so they could adjust the amount of stimulus accordingly. 

While the authorities might be glad about Donald Trump’s return to power from a geopolitical perspective, his economic programme could, if implemented, considerably destabilise the Chinese economy. The initial raft of nominees to the coming Trump administration offer little reassurance. Marco Rubio is tapped to become Secretary of State (America’s chief diplomat, equivalent to France’s Minister for Foreign Affairs). 

Rubio is well known for his very tough stance on China – a stance he held long before the issue moved high up the agenda in Washington. During Trump’s first term, it was Rubio who defended the rationale for a subsidised US policy better equipped to compete with the Chinese economy, laying the groundwork for what would become the Inflation Reduction Act and the CHIPS Act. Rubio is also behind a bill aimed at blocking imports of Chinese goods produced using forced labour and another aimed at controlling the spread of batteries that use Chinese technology. 

Similarly, the nomination of Robert Lighthizer, who could be asked to once again serve as US Trade Representative, would be very bad news for China. It was Lighthizer who introduced the first measures raising import tariffs on Chinese products and negotiated the Phase One agreement with China. 

At last week’s China International Import Expo in Shanghai, Premier Li Qiang defended international trade and spoke out against protectionism; he also said China would be willing to open up more to foreign investment and enter into new free trade agreements. 

It must be said that the prospect of 60% tariffs on all exports (compared with a current average of 17%, on around 60% of products) would be disastrous for China’s export sector, especially if such tariffs also came with tighter controls on the value-added content of goods exported by third countries (particularly Mexico and Vietnam – see article “Asie – Trump 2.0, ou l'ère de la grande incertitude commerciale”, published 8 November 2024). 

And China cannot really be said to have honoured its commitments under the Phase One agreement, buying far less than the additional $200 billion of US exports it undertook to purchase over two years. While the US’s bilateral trade deficit with China has shrunk, the same can certainly not be said of the total deficit or the true extent of America’s reliance on Chinese inputs, which is probably unchanged. This will give the new Trump administration ammunition to adopt an even tougher stance than during the first trade war.

How much leeway does China have?

In reality, not much. The Chinese authorities will want to do everything they can to avoid such an outcome, which will mean negotiating as much as possible with the Trump administration ahead of time. If the threatened import tariffs are indeed put in place, China could react in a number of ways. 

The riskiest option would be to adjust the exchange rate so that higher import tariffs are partly absorbed by improved price competitiveness. This is what happened after Trump hiked import tariffs during his first term. The yuan depreciated, triggering the ire of Donald Trump, who was already accusing China of currency manipulation. If this were to reoccur, especially at a time when the Chinese currency is already historically cheap – cheaper than it was over the period 2018-2020, the US could put China back on its currency manipulator list, which would expose it to fresh sanctions. 

Another option would be to retaliate by imposing tit-for-tat import tariffs on US products. This is something China also did between 2018 and 2020. But expanding and hiking import tariffs, notably on agricultural products, would be an inflationary move in an environment where household consumption is already sluggish and companies have accepted – or been forced to accept – a substantial squeeze on their profits and margins. It’s also hard to imagine China committing to increase imports of US products: which products? And in response to what demand?

Our opinion

With this latest package, the Chinese authorities have essentially recognised the prevailing reality, acknowledging that provincial debt levels were becoming a problem that risked severely destabilising the Chinese economy. This time around, the approach has been more flexible than that adopted for property developers, who were subjected to red lines (on liquidity and solvency) that prevented them from renewing their borrowing facilities and ultimately precipitated the real estate crisis. As generous as the amounts involved are ($1.4 trillion), they remain paltry compared with the accumulated stock of hidden debt, estimated by the IMF at $8.4 trillion, equivalent to just under 50% of GDP. 

Above all, the new package does not address the country’s structural problems. What can be done to provide the provinces with new sources of income when land sales will probably never return to pre-crisis levels? How can capital allocation be improved when funds tend to disproportionately support state-owned enterprises, sometimes kept alive as zombie companies? What can be done to limit competition and foster cooperation between provinces so as to optimise infrastructure construction and avoid creating stranded assets, particularly in the area of energy (solar panels, coal-fired power stations)? And lastly, but perhaps most importantly, how can the authorities be sure this package goes far enough to re-instil the necessary confidence in households still cautious about spending? Singles’ Day – China’s equivalent of Black Friday – this year highlighted the intensity of the price war being waged by Chinese retailers desperate to move their stock at any cost. Tellingly, even Apple is giving discounts on its latest iPhone model, while French luxury leather and cosmetics brands are reporting a downturn in the Chinese market after years of exponential growth.

Against this backdrop, Trump’s return to office will be a further challenge. Over the past four years, China’s economic model has become even more reliant on foreign trade, which serves to offset weakness in its domestic market. The introduction of fresh import tariffs would be a major blow to Chinese industry, which is already wrestling with overcapacity issues. The odds are that China will seek to negotiate with the new administration to avoid a trade war. It remains to be seen what concessions it might be willing to make.

Despite a slight slowdown, economic activity continued to grow in France in Q2 2024, up 0.2% after 0.3% in Q1. The mid-year carry-over effect on growth thus stood at 0.9% for 2024. 

Third-quarter growth is expected to be strong, boosted by the Olympic and Paralympic Games, ahead of a negative backlash in the fourth quarter. Growth for full-year 2024 will come out at 1.1%, stable compared with the previous year. Growth would be driven primarily by foreign trade and public spending, with private domestic demand (excluding stocks) expected to stagnate.  Inflation should fall to an annual average of 2% as measured by the consumer price index (CPI), after 4.9% in 2023. Growth is expected to decline slightly in 2025, to 1%. Growth would then be supported in particular by the increase in household consumption generated by disinflation, with CPI inflation expected to decline to 1.1% on an annual average. Economic activity should also be fuelled by the rebound in private investment owing to the delayed effect of the decrease in key interest rates and structural needs stemming from the digital and ecological transitions. However, foreign trade is not expected to contribute to growth in 2025. Growth would also be adversely impacted by fiscal efforts as public administrations spend slightly less and slow down their investment. The public deficit is expected to reach 6.1% of GDP in 2024 before falling back to 5.5% of GDP in 2025. 

In a still uncertain context, Italy's performance, compared to other countries in the Eurozone, appears rather positive. With a GDP increase of 0.2% in the second quarter compared to the previous quarter, the Italian economy is growing at the same pace as the French economy, despite a less favourable carryover (+0.6% in 2024), and is performing better than Germany, where GDP decreased by 0.1% over the quarter. However, in the third quarter of 2024, several signs of a slowdown persist. The labour market may provide some support, with the unemployment rate stabilised at 6.2%, but consumption and investment prospects are expected to remain weak.
Household consumption growth, after a slowdown in the second quarter, is expected to maintain a modest pace in the third quarter. Spending on goods, particularly durable goods, could stagnate, while services are expected to continue growing moderately. Household caution, which contributes to a high savings rate, could limit the recovery of consumption, despite a slight increase in expected real wages.
Regarding investment, the outlook looks set to remain uncertain. The end of the Superbonus incentives is expected to weigh on residential construction, while industrial investment, although supported by measures such as the Transition Plan 5.0, could be affected by ongoing economic uncertainty. Lastly, exports look set to continue suffering from sluggish international demand, particularly in the intermediate goods and automotive sectors. 
In 2025, although the decrease in rates may provide some support to growth, the positive effects of monetary easing will be partially offset by the expected correction in the construction sector. In this context, activity is expected to continue growing at a moderate pace over the forecast horizon, with 0.8% anticipated for 2024 and 2025.