Economy

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The policy package, focusing on trade, immigration, fiscal measures, and deregulation, is projected to amplify US growth, inflation, and interest rates beyond current consensus forecasts. However, its effects on other nations, particularly China and the Euro area, are expected to be less favorable.BofA notes that the anticipated policies include trade tariffs on China, tightened immigration controls, debt-financed tax cuts, and sweeping deregulation in key sectors like financial services and energy. These moves aim to stimulate US economic activity but could exacerbate the US current account deficit.“Ironically, the described policy mix will not do much to reduce the US current account deficit, which responds to a macroeconomic saving-investment imbalance,” economists led by Claudio Irigoyen said in a note.“Most likely, the current account deficit will widen as long as the rest of the world remains willing to finance it.”While the US is projected to emerge as a beneficiary of Trumponomics 2.0, the ripple effects are expected to strain other economies. BofA identifies China and the Euro area as the most vulnerable to the resulting shifts in global financial conditions and trade flows.The Euro area is grappling with structural challenges and weak demand, while China faces cyclical pressures compounded by property market struggles and youth unemployment.“Instead of retaliating significantly, we expect China to undertake sizable fiscal easing to cushion the shock,” economists noted.“Tariffs on USMCA members look unlikely. Overall, we forecast higher real rates, a strong dollar and lower oil.”The impact on emerging markets (EMs) is expected to be mixed, BofA says. Nations like Mexico, Vietnam, and India could benefit from supply chain realignments triggered by US-China trade tensions.Conversely, commodity exporters might suffer from lower oil prices, a dynamic influenced by uncertain production levels in Saudi Arabia and Iran.”The fortunes of commodity exporters will depend on the trade-off between the negative tariff and interest rate shocks and the positive reflationary effect of potentially significant fiscal easing in China,” the bank’s team explains.BofA also highlights risks tied to the policy trajectory, including potential trade wars and geopolitical instability. While a focus on pro-growth measures could elevate global output, aggressive protectionism risks triggering economic slowdowns.“Hawkish US protectionist policies could trigger a full-fledged trade war if other countries retaliate in kind, potentially leading to a global slowdown,” BofA cautions.“A significantly worse stagflationary scenario would entail a global slowdown in the US and the rest of the world coupled with the decision to significantly increase the US deficit financed with some sort of financial repression. Finally, a worsening of geopolitical tensions would add insult to injury,” it continued. More

Key insights from their latest research suggest a year defined by divergent trajectories across the Euro area, the UK, and individual member states.In the Eurozone, growth is projected to hover around 0.9% in 2025, underpinned by mild cyclical recovery driven by consumption. This recovery benefits from the ongoing disinflation process, which supports real wage gains, albeit only until the latter half of the year. However, business investment is expected to remain subdued due to heightened trade uncertainties and constrained medium-term demand. The European Central Bank is anticipated to continue its rate-cutting cycle, with the deposit rate potentially falling to 1.5% by September 2025, as the ECB grapples with weak economic momentum and persistent inflation undershooting its targets.Inflation in the Euro area is forecasted at 1.6% in 2025, reflecting the impact of lower energy prices and a subdued demand environment. Analysts believe this will further manifest as a chronic output gap and an overly restrictive policy mix. Despite these challenges, the possibility of a pan-European fiscal policy overhaul or a German-led rethink could offer upside potential, though these remain uncertain given the region’s current political and economic climate.The UK’s economic trajectory reveals a slightly different narrative. Growth expectations for 2025 stand at 1.5%, bolstered by fiscal easing measures introduced in the October 2024 budget. However, inflation risks persist, with projections suggesting inflation will remain above target until mid-2026, driven by wage growth and policy-related pressures. The Bank of England is expected to proceed cautiously with rate cuts, aiming for a terminal rate of 3.5% by early 2026. Meanwhile, risks related to potential US-imposed tariffs and global trade uncertainties could further complicate the outlook, impacting trade and consumer sentiment.On a country-specific level within the Euro area, Germany and France face particular challenges. German growth forecasts have been downgraded to 0.4% in 2025 due to ongoing fiscal rigidity and labor market pressures, while in France, political uncertainties surrounding the budget could exacerbate economic fragility. Italy and Spain show relatively stronger performance, with Spain continuing to outpace other major economies in the region, due to government spending and tourism, although its long-term fiscal challenges linger. More

In a Monday note, Yardeni Research highlights the many moving parts shaping this administration’s economic policies and their potential impact on the Roaring 2020s, an era of remarkable growth and resilience for the US economy and stock market.The backdrop for this analysis is extraordinary. Despite major challenges, including a pandemic, geopolitical crises, and aggressive Federal Reserve rate hikes, US real GDP and the S&P 500 have both reached record highs.Federal spending, which remains heavily stimulative, has been a significant driver. Since 2022, government outlays on healthcare, Medicare, and Social Security rose by $623 billion to a record $3.3 trillion.“There was a big drop in government spending on income security by $806 billion to $0.7 trillion, but that was almost completely offset by a $139 billion increase in defense spending to a record $0.9 trillion and, even more significantly, by a $510 billion increase in net interest outlays to a record $0.9 trillion,” Yardeni explains.Under Trump 2.0, fiscal policy could remain expansionary or turn restrictive. Tax reforms, a hallmark of Trump’s first term, are set to deepen. The corporate tax rate may drop further to 15%, with additional cuts to individual taxes on tips, overtime, and Social Security.While these measures could widen the federal deficit, Trump’s administration aims to counterbalance them through deregulation and higher tariffs, potentially raising $400 billion to $800 billion in revenues.“That’s assuming that these higher tariffs don’t reduce imports significantly or start a global trade war,” Yardeni emphasizes.Deregulation is another key element. Reducing the federal government’s size may shrink payroll employment but could lower operational costs for businesses. However, contentious policies like deportation may reduce the labor force, creating inflationary pressures unless offset by productivity gains.Energy policies aimed at boosting oil and gas production could keep energy prices in check.The administration also faces risks, particularly from “Bond Vigilantes.” If fiscal policies appear unsustainable, bond yields could surge, undermining economic momentum. Federal Reserve Chair Jerome Powell has warned that fiscal policies must address the unsustainable path of federal debt, a challenge that Trump’s team will need to navigate carefully.Despite these complexities, Yardeni Research remains cautiously optimistic. They project that Trump 2.0 might boost productivity, sustain economic growth, and keep inflation in check. The administration’s success in balancing fiscal discipline with growth-oriented policies will be key.“Our base case for the remainder of the decade, with Trump 2.0 running Washington over the next four years, remains the Roaring 2020s,” the market research firm said.While the road ahead is fraught with “known unknowns,” the US economy has repeatedly shown resilience, thriving even amid Washington’s meddling. Whether Trump 2.0 bolsters or disrupts this momentum remains to be seen. More

SAO PAULO/BRASILIA (Reuters) -Brazil’s currency rebounded on Friday from record intraday lows after congressional leaders said they would put the brakes on government income tax reform, and the finance minister stressed that fiscal commitment goes beyond a new spending cuts package.”We won’t be able to do everything that needs to be done with a silver bullet. This set of measures is not the grand finale of what we need to do,” said Minister Fernando Haddad at an event hosted by banking lobby group Febraban.Later, in an interview to Record TV, he said the government could resume discussions for new fiscal measures in two or three months if needed.Investors have been doubtful about the scope and effectiveness of the measures presented by President Luiz Inacio Lula da Silva’s administration this week to slow down expenses to sustain a fiscal framework passed last year.Brazil’s gross public sector debt rose to 78.6% of gross domestic product in October from 78.2% in September and economists say it is on a path to hit 91% by 2030, fueling market skepticism about the framework’s ability to stabilize it.Haddad said on Friday at the event that no one in the government was trying to sell fantasies or magic, emphasizing a firm commitment to slashing the primary budget deficit.Before his remarks, Lower House Speaker Arthur Lira and Senate head Rodrigo Pacheco said that broader income tax exemptions proposed by the Lula administration were a topic for the future, and the near-term focus would be on passing spending cuts.The Brazilian real, which in early morning weakened to a record low of 6.11 per dollar following a two-session sell-off, pared losses and ended the session to trade slightly down, but still marking a fresh closing record ever at 6 per greenback.Lira said on social media that fiscal responsibility was a “non-negotiable” for the lower house, while Pacheco in a statement said a potential income tax reform would only go through if there was fiscal room.”The remarks by the heads of both houses of Congress are extremely relevant and indicate that there is an effort to regain some of the trust that was lost in the process,” analysts at brokerage XP (NASDAQ:XP) said.FX JITTERS The government on Thursday detailed a package announced a day earlier aimed at achieving more than 70 billion reais ($11.8 billion) in savings over the next two years.But the measures failed to ease market fiscal concerns amid rising mandatory expenditures growth, leading to a sharp decline in Brazilian assets.Following an over 20% decline of the real year-to-date, incoming central bank governor Gabriel Galipolo said on Friday that the monetary authority does not target or defend any specific exchange rate level, intervening only in cases of “market dysfunction.”Speaking at the same event as the finance minister, Galipolo, the current central bank monetary policy director, added that the exchange rate is floating, which is important for absorbing shocks.The market had expected the fiscal package to focus exclusively on spending cuts, consistent with previous statements by Haddad, who had indicated that changes to income tax rules would only be presented next year. But the government unexpectedly announced an income tax reform, raising the exemption threshold to 5,000 reais ($842) per month from 2,824 reais, while compensating for the revenue loss with higher taxes on those earning over 50,000 reais. “What weighed heavily was the indication of including the income tax reform alongside the package,” said Daniel Leal, strategist at BGC and former coordinator of public debt operations at the Treasury.”The market fixated on the signal of more fiscal stimulus,” he added.Haddad said at the event on Friday that the Lula administration was “aligned” with Lira and Pacheco on the fiscal issue, and reiterated that any income tax reform would only be voted on by lawmakers if it proved to be fiscally neutral.The government stressed that spending control measures would ensure 327 billion reais in savings from 2025 to 2030, with Congress expected to approve them later this year. More

“I would like to see what kind of momentum the fiscal 2025 shunto (spring wage negotiation) creates,” repeating his intention to keep a close eye on wage moves, Ueda told the Nikkei in an exclusive interview.He also said “there is a big question mark left on the outlook for U.S. economic policy,” suggesting the central bank will avoid rushing to rate hikes as President-elect Donald Trump takes office in January, the report said.The BOJ will scrutinise its policy at its Dec. 18-19 meeting, when some analysts expect it to hike rates from the current 0.25%. More

TOKYO/BENGALURU (Reuters) -Bank of Japan Governor Kazuo Ueda said the timing of the next interest rate hike was “approaching” as the economy was moving in line with the central bank’s forecasts, the Nikkei newspaper reported, leaving open the chance of a December rate increase.He, however, also said the BOJ wanted to scrutinise developments in the U.S. economy as there was a “big question mark” on its outlook, such as the fallout from President-elect Donald Trump’s proposed tariff hikes, according to the Nikkei.”We can say it’s approaching in the sense that economic data are on track to meet our forecasts,” Ueda told Nikkei in an interview conducted on Thursday and published on Saturday, when asked whether the timing of the next rate hike was nearing.”We will adjust the degree of monetary easing at the appropriate time if we become confident” that underlying inflation accelerates toward the BOJ’s 2% target in the second half of its three-year projection period from fiscal 2024 to 2026, Ueda said.The remarks reinforce growing market expectations that the BOJ will raise its short-term policy rate from the current 0.25% as soon as its next meeting on Dec. 18-19.The yen jumped on Friday after core inflation in Japan’s capital accelerated in November, as markets stepped up bets of a December rate hike. Traders now see a 60% chance of a hike next month, having been undecided before the data.In the interview, Ueda said wage growth, the pass-through of wage hikes to prices, and the strength of consumption were key factors in the BOJ’s decision on how soon to raise rates.Regular pay has recently been rising at a year-on-year pace of 2.5% to 3%, which is roughly consistent with consumer inflation moving around 2% in the long run, Ueda said, adding it was important for this trend to continue.The outcome of next year’s annual wage negotiations between firms and unions is key, he said. “While it will take a bit more time to confirm the momentum (of next year’s wage talks), we don’t necessarily have to wait until everything becomes clear.”Rising labour costs from higher wages are pushing up the price of services on a business-to-business level, though some data suggest the pass-through to consumers remains weak, Ueda said, adding that he wanted to watch developments carefully. Ueda emphasized that if the Japanese yen continues to depreciate after the country’s inflation rate surpasses the annual 2% target, it could pose a potential threat to the central bank’s economic projections and warrant a response.The weak yen, which heightens inflationary pressure by pushing up import costs, was among the factors the BOJ explained as leading to its decision to raise interest rates in July.The BOJ ended negative interest rates in March and raised short-term rates to 0.25% in July on the view Japan was making progress towards durably achieving its 2% inflation target.Ueda had repeatedly signalled readiness to hike rates again if the economy moved in line with the bank’s forecast, though he has dropped few clues on how soon that could happen.Just over half of economists polled by Reuters expect the BOJ to raise rates again at its Dec. 18-19 meeting. More

(Reuters) -Canada’s main stock index extended its November gains on Friday, moving to a new record high, with technology and industrial shares rising as investors welcomed greater clarity about the economic outlook following the outcome of the U.S. election.The S&P/TSX composite index ended up 104.48 points, or 0.4%, at 25,648.00, eclipsing the record closing high it posted on Thursday. For the month, it was up 6.2%, its fifth straight monthly gain and the largest since November last year.”We’ve climbed that wall of worry,” said Greg Taylor, portfolio manager at Purpose Investments.”There was a lot of nervousness heading into the (U.S.) election and now we’ve got at least more clarity with what’s going on. We’ve got more confidence that there’s going to be some more growth aspects in the U.S. and that should help earnings as the economy keeps going and regulation falls back.”U.S. President-elect Donald Trump has pledged to cut taxes and loosen business regulations.While those measures could boost the economy, the potential for higher fiscal deficits under the Trump administration, as well as inflationary tariff and immigration policies, could reduce prospects for Federal Reserve interest rate cuts and raise long-term borrowing costs, say analysts.”The big thing everyone is going to be watching is just what happens with (bond) yields and the (U.S.) dollar going forward, because if yields and the dollar keep going higher that’s going to be a pretty big headwind,” Taylor said. The Canadian dollar posted its third straight monthly decline against its U.S. counterpart in November as Canada’s economy grew just 1% in the third quarter, prompting investors to raise bets on another outsized interest rate cut from the Bank of Canada.The technology sector added 1% on Friday and industrials were up 0.5%. Seven of 10 major sectors ended higher. More