It’s austerity time (again). The fiscal consolidation ahead will be the big elephant in the room as it will represent a drag on GDP growth of around -0.3pp on average until 2027 in both the US and Europe. Tax hikes, mainly on corporates, are more likely than spending cuts. In addition, quantitative tightening (QT) will transfer more than 3pps of debt/GDP per year to investors in Europe.
Inflation should reach the 2% target in H1 2025, allowing for a strong(er) easing cycle ahead. Inflation surprised on the downside during the summer and we expect sticky services inflation to soften slowly, driven by decelerating wages, while energy and goods will continue to drag inflation down. Oil prices should remain below 80 USD/bbl in 2025-26 in the absence of a stronger recovery in demand and no supply shock. Gradual central bank easing should continue until terminal rates are reached next year, with the Fed cutting down to 3.5%, the ECB to 2.25% and the BoE to 3.0%. Emerging market central banks will cautiously proceed with their easing cycles as portfolio inflows should pick up again on more favorable interest rate differentials.
Real wage growth revives consumers’ purchasing power, but excess savings continue to build up in Eurozone countries amid subpar confidence. Consumer spending has favored services over goods, but services sales in volume have started to slow amid high inflation. Some durable goods are likely to be replaced in the next quarters, especially in Europe, in line with the replacement cycle. Nominal wage growth is set to normalize by 2025 in line with the cooling down of labor markets once some corporates (mainly in food, auto, materials and machinery & equipment) reduce labor hoarding.
Restocking has started and is likely to be a tailwind for the global trade recovery. H1 confirmed the exit from 1.5 years of trade recession, and we expect the recovery to be more sustained going forward, along with the rebound in consumption. Overall, we expect global trade to increase by around +3% in 2025-26 in volume terms, but to remain below the long-term average.
Corporates are recovering by digging into inventories. In Q2, revenues and earnings growth were fueled by corporate destocking. The Europe-US divide persists; despite a slight improvement in corporates’ financials in Q2, Eurozone fixed capital investment fell to 7% below pre-pandemic levels and far behind peers such as the US and the UK. Major insolvencies continued to accelerate, mainly in retail, construction and services. Overall, we expect business insolvencies to rise by +10% in 2024 and by +1% in 2025.
Capital markets remain under the spell of central banks. Markets are now pricing a strong policy rate-cutting cycle for most Western central banks, dragging long-term government bond yields lower. This provides some tailwind to riskier investments, with government bond spreads in Southern Europe narrowing further. As we see slightly less easing by the Fed and the ECB compared to market pricing, we do not expect long-term yields to fall below current levels in the near term.
Risky assets at the mercy of political uncertainty. After a relatively weak Q2 earnings season, which has partially deflated some market imbalances (e.g. AI boom), market participants have quickly lowered expectations for corporates’ growth capabilities. Nevertheless, decent single-digit earnings and revenue growth, paired with declining financing rates, should help maintain a decent single-digit return profile over the next three years. However, still elevated (geo)political uncertainty will keep investors awake as periods of heightened volatility are to be expected.
Geopolitical tensions pose downside risks to our scenario. A potential surge in US protectionism if Donald Trump wins the US elections is the largest risk, along with high political uncertainty in major European countries (France, Germany, Belgium, Netherlands) as well as the ongoing conflicts in Russia-Ukraine and the Middle East, and tensions in the South-China-Sea and with Taiwan. Overall, our downside scenario translates to -1.5pp lower global growth and +1pp higher inflation, which would keep interest rates higher for longer.
