“2025 is going to be all about on the implementation of Trumponomics. US economic exceptionalism is set to persist, but as Republicans look to the midterm elections, risking another inflationary shock it wouldn’t be wise. Our key themes for 2025 also include the impact oftechnological innovation and growing concerns about debt sustainability sovereign”. This is the opinion of Vincent Chaigneau, head of research at Generali Investmentswhich identifies the four factors that will drive the coming year.
The Trump unknown
The first of the factors will be the coherence of political action of Donald Trump’s second term with his electoral programs:
- deregulation (banks, energy, etc.)
- tax cuts
- duties
- immigration.
“2024 was very intense on the electoral front – underlined the analyst -. Inflation and inequality have been key factors in the poor performance of incumbent governments (USA, UK, France and even Japan). Trump’s policies will not address this last point (corporate tax cuts will support high net income margins). But you might think twice about inflation.”
“Our base scenario predicts modest gains in the US dollar from already high levels. But one very aggressive policyespecially on tariffs, could exacerbate the strength of the dollar and threaten financial stability. Instead, a constructive “great agreement”. with partners would cause the dollar to retreat.” Chaigneau suggested.
Inflation and productivity
The second factor will be inflation. The Generali Investments economist points out that although inflation rates have gradually eased from the peaks of 2022 (9% in the United States, >10% in the euro area), “price increases in services complicate the last mile towards the 2% targets, as the Wage growth slows slowly. This keeps the upside risks for 2025, particularly in the United States, where growth is still robust.” “Trump’s plans for tariffs, tax cuts and immigration restrictions add medium-term risks. However, in the euro area, the inflation risk now appears bilateral,” he added.
The productivity gap
The third factor is ithe transatlantic productivity gap which has expanded, with annual earnings over the period 1995-2020 in the euro area (1.0%) equal to only half those of the United States (2.1%). “A little one European recovery is feasible in the short term, as euro area productivity is more cyclical and a slight recovery in 2025 will help. However, in the long term, the United States seems much better equipped to collect the fruits of AI and further deregulation, as Europe continues to strive to achieve a banking union and a single market for services as key steps to promote innovation and improve competition,” underlines the analyst.
Debt sustainability
Finally, the fourth factor will be determined by government bonds that they have become cheaper over the last two years, on a spread swap basis, on both sides of the Atlantic. “This reflects many factors, including the large increase in public debtthe QT (Quantitative Tightening) and the restrictions on bank balance sheets. The steepening of the yield curve through the rate cutting cycle could support the trend and keep government bonds relatively cheap,” Chaigneau argues.
