Three Questions for 2025

Many investors are counting on a low “transformation rate” from D. Trump’s electoral platform to implementation, considering that adverse market reactions to policy announcements would quickly trigger some recalibration. Yet, the experience from Trump’s first mandate does not point to such an “error correction” mode. Unfavourable market reactions to some aspects of his policies – trade war, containment of “Big Tech – did not sway Trump’s stance at the time. A “mellowing” from the platform is not necessarily the natural slope. Political constraints may be better predictors of how the campaign pledges will shape actual policies. From this angle, the new episode of government shutdown drama in December was informative: the President-elect is already squeezed between an active minority of fiscal hawks in his own party and a Congress majority which has not renounced its pro-spending proclivities. This suggests that a significant additional drift in the deficit, as tax cuts are unlikely to be offset by spending restraint, remains the most likely scenario, justifying the additional rise in long-term yields of the last few weeks.

How China responds to the new US administration is another key question. The shift to supporting consumption in the definition of the fiscal stimulus is welcome, but many announced measures remain vague and unquantified. Skewing the allocation of productivity gains towards wages is what the country needs right now, but this may be difficult to deliver for businesses amid deteriorated prospects.

The issue for Europe this year is how the new awareness of the widening gap relative to the US, prompted by the Draghi report, can elicit action rather than feed the general gloom. Popular support for EU institutions has improved after the slump of the last decade, and this could be leveraged to trigger another step of fiscal integration. More political consistency across the member states could be the result on potential early elections in Hungary. Yet, getting a decisive impulse from Germany will be difficult, even after a change in coalition, given the political and institutional constraints there. Finally, getting more momentum at the European level will remain daunting without a domestic political clarification in France, possibly at the cost of another election which itself carries additional risks.