- Eurozone: Confidence is key (to unlock consumption). Private consumption is still lagging behind economic growth, despite declining interest rates and recovering real wages. In fact, savings rates are on the rise – unlike those in the US, which have fallen below pre-pandemic levels – and savings intentions are also at historic highs. Inflation is one of the biggest culprits, having eroded financial asset gains and leading to the lower interest rates that have dragged down house prices. French households have been squeezed the most: Their net financial assets grew by just +1.5% since the end of 2019, while in Germany this figure is +6.0% and in Italy and Spain +7.4% and +11.8%, respectively. Meanwhile, US households have seen net financial assets grow by +10.7% in the same period. With persistent uncertainty, especially over the upcoming German election and ongoing French political turmoil, alongside an impending fiscal consolidation and a normalization of wage growth, savings intentions are unlikely to come down in Europe. Against this backdrop, Eurozone policymakers and political leaders need to push a credible plan to address the cyclical and structural challenges.
- ECB: Rate cut number four ahead amid gloomy outlook. At its next meeting on 12 December, we expect the ECB to cut the deposit rate for a fourth time this year to 3.00%. Recent economic data has surprised to the downside, with leading indicators struggling against the backdrop of a weak German economy and looming US tariffs from the incoming Trump administration. Given the dim outlook, which will hit consumer and business confidence, we have once again lowered our expectations for the terminal rate to 2.0% and sped up the cutting path to a meeting-by-meeting approach. Meanwhile, inflation concerns have taken a back seat: The second uptick to 2.3% y/y in November can largely be attributed to base effects while services inflation – long regarded as a sticky problem – has sequentially fallen to the lowest value since 2021.
- The CORE problem for European automakers (consumption, oversupply, revenue, energy transition). In recent weeks, the auto sector has been in the news for all the wrong reasons. Some of the largest original equipment manufacturers (OEMs) are facing a serious profitability squeeze (-20-40% this year) as market demand for new vehicles has stagnated (+1%) and Chinese competition has intensified in the premium market. But the list of problems is even longer, covering production capacity and product mix (German OEMs have 2x more inventories than peers); low competitiveness in electric vehicles; ineffective pricing and geographic dependency. Green regulation is also looming, with the risk of heavy sanctions if carmakers do not reduce emissions by -15%, and a new wave of protectionism could put roughly 20% of estimated EBITDA at risk for the biggest OEMs in 2025.
What to watch