Economic Focus

ECONOMIC FOCUS

A longer pause for the Fed

While inflation has fallen in 2024 in the main developed economies, it is once again showing signs of nervousness in the United States. There are two explanations for these tensions: still robust activity and fears about the inflationary effects of the new administration's measures. The Federal Reserve will likely wait for inflation expectations to moderate before changing its monetary policy. In Europe, on the other hand, inflation expectations remain well anchored and would allow central banks to continue easing their key rates.

First half of the year likely to be a continuation of 2024. The divergences observed in economic growth in 2024 should continue, at least during the first half of 2025. In the United States, the economy should continue to benefit from solid fundamentals (corporate profit margins elevated, healthy household balance sheets and high productivity gains). In the euro area, after flirting with recession at the end of 2024, growth is likely to remain marginally positive in the first half of the year. Nevertheless, the fall in inflation and the cut in key interest rates should encourage consumers to save less. Finally, in China, the difficulties in the property market are likely to persist, continuing to weigh on household consumption (real-estate being the households’ main asset) and therefore on the Chinese economy.

The second half of the year will depend on the direction of economic policy. After a busy electoral year in 2024, 2025 will be marked by the economic policy decisions of the new governments. The transition from campaign promises to their implementation is producing a great deal of uncertainty about both growth and inflation in the major economic areas.

United States: the risk of a return to inflation. The key source of uncertainty comes from the United States, with implications for the rest of the world. The timing, geographical reach and scale of any rises in US tariffs remain unknown. The same goes for migration policy. These two measures could potentially prompt a resurgence in US inflation, particularly with the US labour market still tight, and could also damage growth in targeted countries with a blowback impact on US growth if these countries retaliate.

Euro area: fiscal policy in question? In addition to the uncertainties surrounding US trade policy and Chinese demand, uncertainty over fiscal policy hangs over the euro area economy. The February 23 elections in Germany could result in either less tightening or a slight easing, via an increase in public investment. Finally, the European Commission could propose new European programmes to meet new challenges (US protectionism, Chinese competitiveness, the war in Ukraine, artificial intelligence, etc.).

China: new announcements to come. The Chinese authorities have once again pledged to act decisively to revive the economy, targeting the property, equity and consumer markets. Additional details should be unveiled early March but the uncertainties about the ability of the Chinese economy to rebound markedly persist.

Central banks: at different pace. Against this backdrop, the global monetary cycle also looks uncertain. The US Federal Reserve could remain in a wait-and-see mode for longer, with only a rate cut expected at the end of the year, if inflation expectations normalise. The European Central Bank (ECB) and the Bank of England are expected to continue to ease their monetary policy, with 3 cuts of 25bp expected in the coming months.

Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 28/02/2025 publication completion date. Past performance does not prejudge future performance. Investments may be subject to market fluctuations, and the price and value of investments and the resulting revenues may fluctuate downward and upward. Your capital is not protected, and original investments may not be recovered.