EME Macro/Strategy: macro all-in-one – the Year-Ahead issue

This week, we discuss the key factors that we expect to shape the economic recovery in the year ahead, and we put forward our amended projections, in light of the recent US presidential election result. Our inflation and GDP forecasts are, on average, below the consensus, except for the US, Greece and Türkiye (to some extent).
Europe is at a frail juncture. The data in money and credit developments confirm that the monetary easing is beginning to work through the economy. The labour market is holding on more than what history would suggest, but it is weakening, and our central scenario is that the Euro area will see a mild rise in the unemployment rate, going forward. Incoming US President Trump has made it clear that tariffs will increase when he takes office, so the EU will be affected negatively, via direct trade disruptions and an indirect hit to confidence, at a time when the European industrial sector is at its weakest point in years.
Ultimately, the EU has the tools to offset external shocks, but the political landscape and the current administrative barriers suggest, to us, that the implementation of an appropriate policy response will not materialise quickly. Importantly, the Central Banks continue to operate in a context of positive real interest rates and, given the current remarks, it does not appear likely that we will return to negative real interest rates in 2025/2026E. These three factors – the labour market, confidence and interest rates – are constraining the lending and GDP growth outlook, going forward.