- United States: Secretary Bessent’s 3-3-3 paradox. Boosting real GDP growth to 3%, reducing the budget deficit to -3% of GDP and increasing oil production by 3mn barrels/day look like quite the plan. While the first objective seems easiest to achieve, the pledged tighter immigration policy and the fiscal consolidation needed to achieve the second one (1% of GDP per year) turns the first one to less than +2.5%. Meanwhile, already record-high oil production coupled with the industry’s significant challenges in increasing production (depletion of easily accessible resources, high capital costs, labor shortages, low investment profitability) gives little chance for this target to boost growth. Indeed, regulatory changes should offer some relief, but that should rather translate into substantial growth in LNG production (around 130mn tons per year by 2029, the equivalent of 2.8mn barrels of oil per day) rather than oil. For markets, achieving the 3-3-3 plan could mean a stronger dollar and lower rates, creating a net favorable environment for US equity (+5pps to 13% in 2025) and corporate credit spreads (-10bps spreads from current levels). But much will depend on how exactly inflation, growth and monetary policy would react to another oil production boom.
- France: Budget turmoil but no crisis. The far-right Rassemblement National party is threatening the government with a no-confidence vote over the 2025 draft budget bill, which means PM Barnier now has to find a compromise on the RN’s red lines on pensions, drug reimbursement and electricity. The most likely scenario is a less ambitious budget, with less savings than initially planned, bringing the fiscal deficit to -5.7% of GDP in 2025 and GDP growth at +0.9%. In case no budget is voted through 2025, high political uncertainty and automatic spending cuts would drag growth down to +0.2% and would bring the deficit at -5.8% of GDP. French bond spreads have surged to 90bps intraday this week, their highest level since 2012, while markets viewing the issue as a French domestic problem (more liquidity than default). French spreads should ease to around 75bps if a watered-down budget is passed (our baseline). In the downside scenario of a non-confidence vote, we could see a temporary breach of 100bps. Structurally, we see a medium-term widening of spreads by +10bps for every pp of additional fiscal deficit.
- Central Europe: Worsening competitiveness endangers trade hub ambitions. Tight labor markets and the lingering effects of the 2022-23 inflation shock have led to double-digit real wage increases – most notably in Bulgaria (+15% in Q2 2024), followed by Poland (+12%), Hungary and Romania (both at +10%). Despite a notable drop in inflation, government policies such as substantial minimum wage hikes are further fueling this trend. Labor costs have increased by +9.2% in Q2 2024 – the biggest jump since 2010 – while productivity has lagged behind, declining by -48% across the region. While CEE countries continue to attract foreign direct investment, labor cost competitiveness has consistently declined, with losses of -14% to -19% between 2022 and 2024, prompting Western European countries to reconsider their outsourcing strategies.
What to watch