Economy

“An already high deficit will force compromise on tax cuts and spending pledges, and we think corporate tax cuts are unlikely in the absence of much higher tariff income,” the team led by Jason Draho said in a note.The U.S. government deficit currently exceeds 7.5% of GDP, while the debt-to-GDP ratio has climbed past 120%.UBS notes that while a debt crisis is not imminent due to the reserve currency status of the U.S. dollar and deep capital markets, “the U.S. government does not have an unlimited borrowing capacity.”To stabilize the debt-to-GDP ratio, strategists believe measures such as entitlement reform, financial repression, or higher taxes will likely be required.A Republican-controlled Congress, despite holding the Senate, House, and Presidency, is expected to face hurdles. Thin congressional majorities and fiscal hawks within the party may challenge expansive fiscal policies.UBS highlighted that “high deficits” are now a significant constraint. For example, the additional cost of Trump’s proposed tax and spending policies is estimated at $7 trillion over 10 years, potentially rising to $15 trillion in a more aggressive scenario.“With today’s much higher budget deficits and narrow majorities, we think Congress is likely to be reticent to approve measures which would widen the deficit further,” strategists note. “In fact, some members of the administration have spoken about lowering the deficit-to-GDP ratio to 3%.”Interest rates are another challenge, as higher rates have pushed government debt service costs beyond defense spending levels. UBS expects a modest decline in borrowing costs but notes risks from inflationary pressures, tariff policies, and changes in the Federal Reserve’s Treasury holdings.The bank sees Republicans likely pursuing fiscal policies through reconciliation, a process allowing budget changes with a simple Senate majority. This could include border security initiatives and attempts to extend provisions from the 2017 tax package.However, extending personal income tax cuts for a full decade would cost $4 trillion, a burden UBS believes might be mitigated by limiting the extension to shorter terms. As UBS explains, limiting the time horizon could reduce the cost to $1.3 trillion for a five-year extension.“Shortening the time horizon on personal tax cuts could also help Republican leaders stay below an agreed-upon cumulative deficit target and help fund other policy pledges, like corporate tax cuts, lifting the State and Local Tax (SALT) deduction, and retaining the higher estate-tax exemption,” strategists explain.Efforts to offset fiscal measures are also constrained. Tariff revenue, while politically attractive, is unlikely to fill the gap. UBS notes that even imposing a 10% universal tariff would generate only $2 trillion over 10 years, and such a move would likely dampen both domestic and global economic activity.Similarly, spending cuts or efficiency gains would offer limited relief, with UBS describing such measures as akin to “looking for coins in the couch cushions.”As President-elect Trump begins his second term, UBS highlights growing concerns over America’s fiscal health. With government debt exceeding 120% of GDP and interest costs consuming 13% of revenues—the highest among developed nations—the continuation of rising deficits is deemed unsustainable.UBS believes that while immediate risks of a debt crisis are low, unchecked fiscal imbalances will constrain the government’s ability to respond to future economic shocks. Achieving long-term debt sustainability will likely require a mix of higher growth, lower rates, and structural reforms, including financial repression, entitlement changes, and tax increases. More

Analysts have revised their projections for the U.S. Federal Reserve policy, removing a previously anticipated rate cut in January. The terminal rate is now expected to fall within the 3.5-3.75% range, compared to earlier estimates of 3.25-3.5%. The brokerage anticipates the next 25 basis-point cut to occur in March, followed by additional reductions in June and September.U.S. economic performance is projected to continue outpacing its developed-market peers, supported by robust real income growth and superior productivity gains. Goldman forecasts U.S. real GDP growth at 2.6% year-over-year in 2025, alongside a gradual decline in the unemployment rate to 4.0% by year-end. Core inflation is expected to ease to 2.4% by December, driven by softer shelter costs and wage pressures, despite upward pressure from tariff adjustments.Globally, Goldman Sachs expects a year-over-year real GDP growth rate of 2.7%, underpinned by increases in disposable household incomes and easing financial conditions. However, structural issues in the Eurozone and China could dampen momentum. In the Euro area, real GDP growth is forecasted at a modest 0.8%, constrained by high energy costs, competitive pressures from China, and fiscal consolidation. The European Central Bank is expected to continue rate cuts through mid-2025, potentially reaching a policy rate of 1.75%.In China, the outlook remains cautious despite recent policy easing. Real GDP growth is expected to slow to 4.5% in 2025 due to weak consumer demand, challenges in the property sector, and higher U.S. tariffs. Long-term risks are amplified by unfavorable demographics and the global trend of supply chain diversification away from China.Geopolitical developments, including U.S. tariff policies under the new administration and ongoing uncertainties in the Middle East and Ukraine, remain critical factors to monitor. Analysts note the potential for major impacts on European and Chinese economies if across-the-board tariffs are implemented.The updates underscore a complex global economic environment where growth opportunities are tempered by persistent structural challenges and geopolitical uncertainties. More

Despite Republican control of both chambers of Congress, UBS notes that the dynamics of high deficits, narrow congressional margins, and rising debt-servicing costs will likely limit expansive fiscal initiatives.UBS projects that the fiscal deficit will remain elevated, constrained by a combination of economic and political factors. The federal deficit currently exceeds 7.5% of GDP, and the government debt-to-GDP ratio has surpassed 120%, raising serious questions about sustainability. While the U.S. benefits from its reserve currency status and deep capital markets, analysts caution that borrowing capacity is not infinite.Although Trump has laid out ambitious tax cuts and spending promises, UBS anticipates that slim Republican majorities in Congress will pose challenges. The report flags that fiscal hawks within the Republican Party could obstruct expansive tax and spending plans, particularly given the significant costs involved. Extending personal income tax cuts from the 2017 Tax Cuts and Jobs Act would alone cost an estimated $4 trillion over ten years. UBS suggests that such measures might be limited to shorter horizons or require offsets like increased tariffs.Trump’s campaign trail promises include significant increases in border security spending and the extension of tax cuts. UBS analysts predict these proposals will face resistance from both fiscal conservatives and Democrats. Additionally, high interest rates further complicate the fiscal landscape. Net interest payments on U.S. debt have already surpassed defense spending, marking a significant shift in budget priorities.UBS emphasizes that while a U.S. debt crisis does not appear imminent, the long-term trajectory is troubling. Current projections suggest that U.S. debt-to-GDP will climb to 132% by 2034 under existing trends, with deficits expected to remain above 7% of GDP over the next decade. Efforts to stabilize the debt-to-GDP ratio will likely require difficult choices, including entitlement reform and potential tax increases. However, political resistance to these measures remains strong.UBS analysts propose several potential strategies to address the mounting fiscal challenges the U.S. faces under the Trump administration. One approach involves limiting the extension of the 2017 tax cuts to a shorter time frame. Instead of a ten-year renewal, a five-year extension could mitigate fiscal pressure by reducing the projected revenue loss. This more measured approach might help balance other fiscal priorities without significantly expanding the deficit.Another avenue being explored is the use of tariffs to generate additional revenue. A particular focus has been on tariffs targeting China, given bipartisan support for a tougher trade stance. While tariffs could offer a financial boost, UBS cautions that this method carries significant economic risks, including potential retaliation and reduced global trade activity, which could ultimately strain the U.S. economy.Lastly, the concept of financial repression is highlighted as a means of managing debt costs relative to GDP growth. By maintaining artificially low interest rates and implementing regulatory measures to ensure institutional purchases of government bonds, the administration could contain debt servicing expenses. Such strategies, UBS notes, could offer short-term relief, but they also underscore the complexities of navigating long-term fiscal sustainability in an environment of elevated debt levels. More

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Barclays (LON:BARC) analysts on near-total visibility into commodities crossing U.S. borders, said Mexico’s growing prominence as the U.S.’s largest trading partner raises concerns about the impact of potential import duties.The 2019 U.S.-China trade war serves as a reference for possible challenges. Analysts note declines in domestic rail and trucking volumes, as well as contractions in global freight markets, during that period. While tariffs could disrupt trade with Canada and Mexico, trade among North American partners expanded under the prior U.S.-Mexico-Canada Agreement.Tariff escalation with China would likely hit global freight providers and Western railroads hardest, particularly those reliant on grain exports. Broader actions affecting Europe or North America could disrupt ground-based transportation sectors like trucking and railroads.Consumer goods remain a focal point. Electronics, accounting for one-third of U.S. consumer goods imports, are primarily sourced from China and Mexico. Apparel and footwear imports have shifted significantly from China to Southeast Asia in recent years. Companies like Ralph Lauren (NYSE:RL) have reduced reliance on China, with sourcing dropping to single digits as of late 2024.Industrials also face risks. Sectors heavily reliant on imports from Mexico, China, and Canada include automotive components, HVAC equipment, and power tools. Companies like Stanley Black & Decker (NYSE:SWK) and Rockwell Automation (NYSE:ROK) may see pricing pressures, while net exporters like Honeywell (NASDAQ:HON) and 3M could fare better.European logistics companies, too, have exposure to trans-Atlantic and trans-Pacific trade lanes. Potential disruptions, such as port strikes, could amplify challenges for global supply chains. More

The ban, part of a broader plan to make schools safer, will come into effect early next year, Prime Minister Edi Rama said after meeting with parents’ groups and teachers from across the country.”For one year, we’ll be completely shutting it down for everyone. There will be no TikTok in Albania,” Rama said.Several European countries including France, Germany and Belgium have enforced restrictions on social media use for children. In one of the world’s toughest regulations targeting Big Tech, Australia approved in November a complete social media ban for children under 16.Rama has blamed social media, and TikTok in particular, for fuelling violence among youth in and outside school.His government’s decision comes after a 14-year-old schoolboy was stabbed to death in November by a fellow pupil. Local media had reported that the incident followed arguments between the two boys on social media. Videos had also emerged on TikTok of minors supporting the killing.”The problem today is not our children, the problem today is us, the problem today is our society, the problem today is TikTok and all the others that are taking our children hostage,” Rama said.TikTok said it was seeking “urgent clarity” from the Albanian government.”We found no evidence that the perpetrator or victim had TikTok accounts, and multiple reports have in fact confirmed videos leading up to this incident were being posted on another platform, not TikTok,” a company spokesperson said. More

The backing from Macron, who is visiting Ethiopia after a stop in Djibouti, comes after Ethiopia and International Monetary Fund reached an agreement last month on the second review of a $3.4 billion financing programme.”Thanks to your commitment to the reform programme you are leading, we aim to complete the restructuring of this 3 billion-euro debt in the next few weeks,” Macron said during a joint press conference with Ethiopian Prime Minister Abiy Ahmed.He added that France fully supports the discussions underway with the IMF, highlighting a key meeting scheduled for mid-January. More