- Germany: From belt-tightening to big spending? The Union and SPD have proposed a bold step to create fiscal space by exempting defense spending >1% of GDP from the debt brake and establishing a EUR500bn special infrastructure fund over ten years, marking a shift toward a looser fiscal stance. If implemented quickly, the proposed fiscal package of +2% of GDP could pull Germany out of stagnation in the next two years, potentially raising GDP by +0.5% in 2025, +2.1% in 2026 and +2.4% in 2027. Risks include higher inflation, while deficits could rise to -3.5% and debt to 68% of GDP by 2027. Markets have reacted with historic moves as the German 10y yield rose by the most in 30 years, surpassing 2.9%. This move can be seen as pro-growth as opposed to a credit-risk move as it was largely driven by higher real yields, soaring equity prices and a stronger euro. Overall, the proposal is an important step in creating fiscal flexibility, but Germany still urgently needs structural reforms in pensions, decarbonization, labor markets, taxes and innovation to secure future growth.
- Q4 corporate earnings season: The Transatlantic gap widens. A challenging global environment did not stand in the way of overall growth in Q4 2024 (revenues: +2.6% y/y and EPS: +10.7%), but cyclical sectors continued to struggle (e.g. paper, transport equipment, textiles). US firms are still outshining the rest of the world (EPS: +17.1%), driven by a strong consumer spending, fast technological adoption and the strong competitive advantage of lower energy costs. But the real challenge lies ahead as tariffs kick in. The Q1 2025 earnings forecast for US companies has been cut to +8.0% from +12.8% in December. Meanwhile, though European companies managed to record modest revenue growth after six consecutive quarters of declines, earnings projections for Q1 2025 have been revised down to just +0.9% (vs. +7% one year ago) amid looming tariffs and mounting regulatory pressures.
- China: On the brink of a lasting turning point. Since mid-January, China has become the best performing major equity market (+13.1% YTD), though onshore and offshore markets tell a different story. For the bull market to last, fundamentals will need to recover further but the earnings picture remains weak, particularly amid rising uncertainties over US tariffs and heightened geopolitical tensions. Ultimately, the outlook will depend on whether the fiscal package of RMB2.9trn announced at the Two Sessions is enough to revive demand. It is slightly smaller than what we had expected, but authorities have clearly sent the signal that more can be expected. Early signs of stabilization in household consumption are emerging, but more stimulus is needed to effectively brighten the outlook this year. Chinese authorities have kept the GDP growth target for 2025 unchanged at “around 5%”, and we expect +4.6% in 2025 and +4.2% in 2026 for now, assuming that the policy mix will be eased accordingly to mitigate the negative impact of the trade war.
What to watch
Germany’s big spending, the Transatlantic gap persists in corporate earnings and China’s turning point reinforced by stimulus