- Eurozone: What are the reasons behind Southern Europe's remontada. Record-high tourism activity has been a major driver of the Mediterranean recovery, while core European countries such as Germany have been more exposed to the downturn in manufacturing. Resilient labor markets saw increased employment and recovering productivity per hour worked, which contributed to the solid economic performance. In addition, our estimates suggest that NGEU funds have contributed 1.0 and 1.2pp to growth from 2021 to 2024 in Italy and Spain, respectively, and we expect a similar impact for Portugal and Greece, both of which have already received more than 50% of the funds. Interestingly, although Spain has seen a strong recovery, the positive spillovers from NGEU have not yet translated into a greater investment activity. Looking ahead, we expect the growth gap between Southern and core European economies to narrow further as the longer-term effects of the NGEU program take hold, while the initial boost from investment spending begins to fade towards the end of the program.
- German elections: The budget math is not mathing. As Germany heads to the polls on 23 February, all parties are making big promises, including tax cuts, higher public investments and pension increases to stimulate growth, but these come with hefty costs. The necessary financing gap could be covered by debt-financed funds or increased tax revenues, but relying on growth alone is insufficient. To meet the financing needs, the economy would need an additional EUR388bn-EUR616bn of growth annually, a difficult task given the projected stagnation in 2025 (+0.23% potential growth over the next decade). For the moment, none of the parties have offered a compelling budget framework for Germany. Beyond fiscal consideration, the risk of a status quo bias for the future coalition is unfortunately high, when the German economy needs bold, visionary reforms and strong alignment across parties to stimulate and secure growth.
- US reciprocal tariffs: An eye for an eye? The US “Reciprocal Trade and Tariffs” risk raising the US global effective tariff rate by another +13pps, of which +8pps are due to the differential in value-added tax rates, +3pps to make up for the imbalance in non-tariff measures and +2pps for the differential in tariff rates. This would mean further tariff hikes of +12pps on China and +13pps on the EU, bringing us closer to our “full-fledged trade war” scenario where GDP growth would be chopped by -0.7pp in China and -0.8pp in the EU by 2026. Specific products and sectors could be caught in the crossfire, such as autos, pharmaceuticals and chips. Argentina, India, Brazil, Chile and Kenya would be hit the hardest, with tariff hikes ranging from +23pps to +34pps. Taiwan, the UAE, Switzerland and Singapore would be the least affected (between c.+1pp and +5pps). While some trade partners may have until April to provide concessions and try to strike deals with President Trump, others may not be so lucky and will likely retaliate against the US.
What to watch
The reasons behind Southern Europe's remontada, budget math is not mathing ahead of Germany’s elections and the US’s “eye for an eye” trade policy