According to Anton Brender and Florence Pisani, economists at Candriam, the inability of the French government to maintain a budgetary course may be a source of concern for the markets.
What will be the impact of the measures put in place by the new Trump administration not only in the United States but also elsewhere in the world? How can the euro zone adapt to very different growth rates from one country to another? Is the evolution of French debt a threat to the country and the stability of the euro zone? An update on these questions with Anton Brender, chief economist, and Florence Pisani, director of economic research at Candriam, who spoke this week in Geneva on the sidelines of a presentation on the prospects for 2025.
Among the factors that are most likely to affect the American economy next year, you mention the various measures announced by Donald Trump concerning immigration, customs duties, tax cuts and the elimination of Inflation Reduction Act. Concerning customs duties, you believe that the latest announcements made by the future Trump administration are more reassuring, while they are more worrying when it comes to immigration. Which of these two factors should be monitored most carefully?
Anton Brender (A.B.): You have to be attentive to both. Concerning immigration, the restrictions promised by Donald Trump could have significant consequences. The unemployment rate is still very low in the United States and growth in the working-age population would be practically zero without the contribution of immigration. Measures aimed at limiting immigration could therefore both slow down GDP growth a little but above all tighten the labor market and increase inflation. Completely stopping illegal immigration would lower the unemployment rate by 0.3 points. If we were to deport 1.2 million migrants in addition, the unemployment rate would this time fall by 0.8 points, which would necessarily lead to upward pressure on wages. Knowing which hypothesis is the most probable is difficult, we can just observe that the appointment of Stephen Miller, one of the “thinkers” of Donald Trump’s anti-immigration policy, as deputy head of the presidential Cabinet suggests that in this area, the policy will be firm.
What aspects should we pay attention to regarding customs duties?
A.B.: A possible tightening of pricing policy and the retaliation that this could entail will, initially at least, be a source of disorganization and uncertainty. Now, there are several different estimates on the impact of tariffs. The IMF has estimated the loss of global growth associated with a general 10% increase in customs duties at almost one point of GDP.
Today, no one really knows the extent of the tariff measures that will actually be implemented by the United States. The only sure thing is that they risk slowing down growth and pushing inflation upwards in the United States.
“The IMF has estimated the loss of global growth associated with a general 10% increase in customs duties at almost one point of GDP.”
Concerning China, whose GDP growth is expected to barely exceed 4% in 2025, you observe that the country is one of the rare large economies in the world which is in a situation of deflation. For other industrialized countries that suffered from high inflation in 2022 and 2023, isn’t it indirectly an advantage if that country can somehow export deflation?
A.B.: When inflation was still very high, this may have been the case: in the United States, consumer prices of goods which had risen sharply during the pandemic, are actually falling and imports from China have contributed to this. But with inflation in the prices of goods now under control, the effects of Chinese competition are less welcome and many countries are instead seeking to protect themselves from it.
Regarding the euro zone, you highlighted the great heterogeneity in the evolution of the economies of countries like Spain, which is booming, and that of Germany, which is growing very slowly. Isn’t it ultimately an advantage if a country like Spain partly compensates for the current weakness of Germany, whose economy was well below its potential growth in 2024?
Florence Pisani (F.P.): Of course, Spain alone cannot compensate for the current weakness of the German economy. If Spain is doing well, that’s good news for the country, but Germany’s problems remain. Its economic model is strongly focused on exports. Germany is driven by the growth of other countries. German industry is currently suffering from weak external demand, particularly from China. The automotive sector is also penalized by the arrival on the market of much cheaper Chinese electric vehicles. In total, the Federation of German Industries (BDI) has estimated the investments needed to be made by 2030 at 1,400 billion euros to make German industry competitive again.
“Currently, it is not so much the weight of the debt in France which is a source of concern for the rating agencies but rather the capacity of the French government to manage its primary deficit.”
If there is a positive aspect in Europe as we approach 2025, it is that inflation is no longer a concern. Isn’t this a reassuring point given the high debt of countries like France?
F.P.: Indeed, inflation is no longer the major problem at the moment. Prices of goods are practically no longer increasing in the euro zone. The prices of services continue to rise quite rapidly but the labor market is relaxing and wages, which explain a large part of the increase in the price of services, should now slow down. This should fairly quickly lead to a moderation of increases in the price of services.
There is a lot of talk about the cost of French debt at the moment. Should we be concerned that France’s government bond yields are higher than those of Greece?
F.P.: You have to put things in context. Many people are talking about the risks of a snowball effect which could be similar to that experienced by Greece in the early 2010s. At the time, however, the Greek economic situation had collapsed at the same time as the coup. the debt was increasing. This is not the case today in France. Certainly, France’s budget deficit is too high, close to 6% of GDP, but nominal growth remains significantly higher than the average cost of French debt. Currently, it is not so much the weight of the debt that is a source of concern for the rating agencies but rather the capacity of the French government to manage its primary deficit. Rather, it is the government’s inability to define and maintain a budgetary course that may be a source of concern for the markets. Moreover, France’s debt compared to its GDP is not higher than in the United States.
In fact, isn’t the emerging absence of government a reason to be concerned at the moment?
F.P.: Some countries, like Belgium for example, have already regularly been faced with an absence of government, sometimes for long periods. In France, such a situation is new – and it is also an aspect that was mentioned by the Standard & Poor’s agency during its last evaluation of the rating given to French debt. Once again, the important thing is that the next government manages to find a budgetary agreement and restore the country’s financial credibility.
The fact that the dollar has regained ground against the euro does not reflect this situation. Are we heading towards a return to parity between the euro and the dollar?
F.P.: What most often influences exchange rate movements between the euro and the dollar is the gap in expected monetary policies. It is well summarized by the gap between the two-year rates of the two economies: for several years, the price of the euro against the dollar has followed the evolution of this gap. In the United States, inflation will undoubtedly be higher than expected, which reduces market expectations of FED rate cuts. In Europe, a more depressed economic situation than expected risks leading to expectations of falling key rates. All this could push the euro towards parity.
