Horizon Q1│2025 - Economics
Reading time:10 MIN
In a nutshell
US: Trump is back.
Europe: Germany puts the brakes on the eurozone.
Inflation: The last few metres are the hardest.
Monetary policy: the easing is coming to an end.
US: Trump is back
The US economy remains very robust and is hardly losing any momentum. GDP growth in the third quarter was an annualised 2.8%, and thus again well above the trend growth rate of around 2.0%. The economy was driven by continued solid private consumption, exports and government spending. Although the labour market, which was still clearly overheated at the beginning of 2024, cooled noticeably over the course of the year, there was no slump. The unemployment rate has even fallen again recently and, at just over 4%, is still at a low level by historical standards. At present, therefore, it looks as if the US economy will experience a very soft landing. Re-elected US President Donald Trump could even provide further growth impetus in the coming year through tax cuts and deregulation. However, if he introduces high tariffs on imports from China and other countries, this would drive up prices in the US and fuel inflation. The fact that the affected countries would in all likelihood respond to US tariffs with countermeasures would also have a negative impact on the US economy. Trump is also planning to significantly tighten immigration policy. From an economic point of view, this would exacerbate the labour shortage that is already being felt in many areas. This would further drive up inflation and reduce US growth potential in the medium term. Overall, we therefore expect a certain economic boost for the US in the coming years as a result of Donald Trump’s return, with GDP growth rates above the 2% mark. In the medium to long term, however, trend growth in the US is likely to suffer from the planned measures.
Economic indicators in the US are significantly stronger than in Europe
Purchasing Managers' Indices, overall index in index points, growth threshold = 50 points
Political uncertainties in Germany and France
The eurozone economy was surprisingly able to grow by 0.4% in the third quarter compared to the previous quarter. Growth was once again very uneven. While the growth rate in Spain was 0.8%, the German economy was only able to grow by 0.1%. The leading economic indicators for the eurozone suggest that growth will slow towards the end of the year. Sentiment is particularly poor in the two largest economies in the eurozone, France and Germany. In both countries, political uncertainty is dampening economic development. While the future is wide open in France following the fall of the government, the coalition of the traffic light system in Germany has collapsed and new elections are scheduled for 23 February.
New elections in Germany open up opportunities for growth
The eurozone will only be able to get back into its stride once the largest member state returns to a growth path. The German economy has been treading water for three years now. There are many reasons for this. On the one hand, global demand continues to weaken, which hits Germany particularly hard as an export nation. In addition, Chinese products are increasingly competing with German products in global markets. The labour shortage and excessive bureaucracy are also having a negative impact. The fact that the coalition government has spent more time arguing than implementing necessary reforms has paralysed the German economy in recent quarters. The new elections on 23 February 2025 therefore also offer the opportunity to end the political uncertainty and tackle overdue reforms. At present, there are many indications that a grand coalition will be re-established. In the coalition negotiations, the SPD could possibly wrest a reform of the debt brake from the CDU in order to create scope for urgently needed public investment and additional defence spending. In return, the SPD would then have to make concessions on economic and social reforms. All in all, a package could be put together that would give the German economy a slight tailwind.
Cautiously optimistic outlook for Germany and the eurozone
A number of factors, including the recovery of the German economy, suggest that the eurozone economy will pick up in the coming year. Consumer spending is likely to increase due to the fact that wages have been rising faster than prices for some time. In addition, the measures taken by China to support its economy and the growth impulses triggered by Trump in the US will boost foreign demand. The recent depreciation of the euro against the US dollar will also have a positive effect on exports. In addition, the interest rate level, which is likely to fall further in the coming months and thus make investments more attractive for companies again, is also contributing to the cautiously positive outlook. A ceasefire in Ukraine would further improve sentiment. By contrast, the biggest risk for the economy in the euro area comes from possible US tariffs.
Core inflation has recently moved sideways
Year-on-year increase in consumer prices in %
The last few metres are always the hardest for central banks
The significant decline in inflation rates enabled the Fed and the ECB to start lowering key interest rates in 2024. However, they have recently made little progress on both sides of the Atlantic in combating core inflation excluding energy and food. The ECB will therefore only support the economy in the eurozone with small interest rate cuts of 25 basis points. We expect three further steps and foresee the deposit rate at 2.25% at the end of Q2 2025. In the US, by contrast, Donald Trump’s return to the White House has significantly complicated the situation for the Fed. This is because Trump’s plans to loosen fiscal policy, impose extensive tariffs and severely restrict immigration would, if implemented, drive up inflation. This would likely force the Fed to lower key rates more cautiously and by less than we had previously expected. We therefore now expect the Fed to lower key rates only once in the first quarter of 2025, leaving the key interest rate range at 4.25% to 4.50%.
Growth and inflation forecasts
Autor
Dr. Felix Schmidt
Senior Economist
