Scenario Eco - Uncertainty comes at a cost

Video editorial - Uncertainty comes at a cost
Michala Marcussen - Group Chief Economist

Why are global equity markets rallying in the face of heighted uncertainty?
As 2024 draws to a close, we observe a contrast between numerous news headlines flagging uncertainty and global fragmentation, while at the same time global equity markets continue to rally, albeit with a few exceptions.
There are certainly numerous sources of uncertainty heading into 2025. Top of the list is the question of just how the incoming Trump Administration will tackle a wide range of issues on both the domestic and international front.
For now, the market seems to be giving the new US administration the benefit of the doubt, factoring in tax cuts and deregulation, while at the same time assuming that the bark will be worse than the bite when it comes to trade tariffs and stemming immigration. On this later point, it is worth recalling that a sizeable chuck of US growth outperformance can indeed be traced back to the sizeable increase of immigration observed in recent years. This is true both on the demand side, with higher consumption, and on the supply side with increased labour supply keeping wage-price spirals in check.
It is nonetheless worth recalling that the starting point for the second Trump Administration is very different from that of the first one; interest rates are higher and so too is government debt, we have just come out of an inflationary period leaving the Fed more vigilant on these risks, tariffs on China are today around 20% compared to 3% when Trump last came into office and the World is a more fragmented place and climate risks have increased.
The path to successfully steering the US economy is undoubtedly much narrower and to our minds, there are numerous downside risks to growth and upside risks to inflation. This also means that policy room at the Fed is likely much reduced. On the list of positive factors for markets in 2024, it is worth recalling rate cuts from the major central banks (and the anticipation that this will continue in 2025) has also been a source of support for equity markets.
One of the equity market exceptions is France, what can we expect to see in 2025?
The political situation in France has indeed weighted on both the real economy and on the CAC40. Uncertainty comes at an undeniable cost to the economy, and however we twist the equation, rebuilding public finances comes at a near-term cost, albeit with significant long-term benefits. French long bond yields have already traded through Spain and are now trading close to Greece. Failure to secure a credible sustainable public finance trajectory could see French spreads widen further and trade closer to Italy. Higher yield spreads entail tighter credit conditions and weigh on corporate investment, jobs and housing alike.
The new government clearly faces a challenging situation, not least as the starting point has already weakened. Consensus now sees French GDP growth at below than 1% in 2025, compared to the 1.3% this summer.
Can we hope for a new impulse from Europe?
The Letta and Draghi reports have listed many good ideas on how to unlock European competitiveness. On positive point, Europe does not lack ideas; trouble is that many of the innovative companies that start in Europe often end up looking outside the region to secure their future development and growth. This is what we need to change and while recent progress has been disappointing, hope is that a changing World order will push Europe to the realisation that its needs to leverage its potential to secure growth and protect its social welfare models.