2025 Outlook: Eurozone – Questioning When ‘Peak Pessimism’ May Come

Economic

Summary:

The eurozone has endured something of a torrid end to 2024, with downside growth risks having intensified, the domestic political backdrop having soured, and the disinflationary process back towards the ECB’s 2% target having progressed faster than expected.

Looking ahead, it seems somewhat unlikely that these themes will significantly shift moving into 2025, at least not in the early part of the year.

In terms of economic growth, risks to the eurozone outlook remain firmly tilted to the downside, while also being incredibly numerous in nature. From a geopolitical perspective, tensions in the Middle East, as well as the ongoing war in Ukraine, are both likely to pose relatively stiff headwinds, particularly with a sustainable resolution to either conflict seemingly not on the cards at present.

Meanwhile, the continued lack of a significant economic recovery in China will likely also pose significant headwind to the bloc, with the manufacturing and luxury goods sectors remaining the most exposed. While further Chinese fiscal stimulus is likely in 2025, measures thus far have been focused on providing support to financial markets, as opposed to putting a much-needed floor under the ‘real’ economy.

With this in mind, the economic outlook remains a dour one, with all three of the PMI surveys now residing firmly in contractionary territory, in the short term things could get worse before they get better.

2025 Outlook: Eurozone – Questioning When ‘Peak Pessimism’ May Come_1

Presenting further downside risks is the bloc’s political backdrop, which has soured significantly in recent weeks.

Next year, in February, Germany will head to the polls, after the recent collapse of the current governing coalition. While the SPD are unlikely to be returned as the largest party, there is every chance that they feature once again in a new coalition, likely led by the CDU, particularly if parties see a need to join another multi-party government in order to prevent the far-right AfD from achieving power. Nevertheless, the lead up to, and likely protracted negotiations after, the election will result in effective governmental stasis over the short-term.

Meanwhile, in France, the political backdrop is similarly tumultuous. PM Barnier’s decision to force through a Budget encompassing €60bln of spending cuts and tax hikes has led to a no confidence motion being tabled, which is near certain to pass. The likely toppling of the government, however, shan’t immediately trigger fresh elections, which can’t be legally held for another 12 months. Hence, further legislative logjam is likely, as the budget deficit continues on a path towards a whopping 6% of GDP, double the EU’s ostensible limit.

2025 Outlook: Eurozone – Questioning When ‘Peak Pessimism’ May Come_2

The dismal growth, and uncertain political, backdrops create something of a headache for ECB policymakers, who continue to lower rates in relatively predictable fashion, back towards neutral.

As is always the case, precisely estimating the neutral rate is a near-impossible task, though said rate is likely around 2% in the eurozone. With policymakers so far showing little desire to deviate from the current path of cutting by 25bp at every meeting, neutral is likely to be achieved next April. Consequently, debate among policymakers and market participants alike is set to turn to whether the ECB need lower rates below neutral, into outright ‘loose’ territory.

Such a scenario seems likely at present, not only in an attempt to prop up growth, and to somewhat insulate the bloc from political uncertainties, but also due to faster than expected disinflation, as price pressures return towards the ECB’s 2% target.

2025 Outlook: Eurozone – Questioning When ‘Peak Pessimism’ May Come_3

Though headline CPI ticked higher to 2.3% YoY in November, per the ‘flash’ reading, said increase was largely due to an increase in wholesale and consumer energy prices, which policymakers should look through. Instead, Lagarde & Co will continue focusing on core CPI, which rose 2.7% YoY over the same period, its joint lowest level since February 2022.

Risks, however, on the inflation front, appear firmly tilted towards a potential undershoot of the inflation aim, particularly as the economy continues to lose momentum, with recent weakness in the manufacturing sector now also becoming increasingly evident in the all-important services sector too.

Perhaps the biggest risk to the inflation, and growth, outlooks comes from the potential for another tit-for-tat trade war with the US. Incoming President Trump’s preference to impose tariffs apparently on a whim in order to bring trading partners to the negotiating table is well known, with China, Canada, and Mexico having already faced Trump’s ire, well before inauguration day.

It would be logical to expect that the EU become Trump’s next target, likely posing a further headwind to growth, but also bringing with it the possibility for a resurgence in price pressures, thus leaving ECB policymakers to grapple with a potentially stagflation-esque macro backdrop, particularly when the EU’s political leadership vacuum means any potential trade war is set to be prolonged.

2025 Outlook: Eurozone – Questioning When ‘Peak Pessimism’ May Come_4

At face value, none of this is particularly positive for eurozone assets. However, the key question with which market participants must grapple next year is one of when sentiment surrounding the bloc reaches a point of ‘peak pessimism’. A tell-tale sign of such a scenario would be stretched short positioning, and a blow-off bottom in the EUR/USD.

Were such a scenario to come to pass, it would evidence a market that has priced an adequate degree of risk and negative catalysts, and one that would no longer be as sensitive to incoming pessimistic news flow as seen in 2024. One would expect that such a ‘peak pessimism’ point is reached before EUR/USD falls to parity, at which point the aforementioned crowded positioning would likely spark a rebound as shorts unwind. A potential scenario under which this could occur may come as a result of more substantial ECB easing being seen to underpin economic growth, and/or as a potential trade war fails to escalate to as significant a degree as markets currently expect.

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PIMCO

Economic

Political

In an extraordinary political comeback, former President Donald Trump secured a second, non-consecutive term in the White House – a feat only accomplished previously by President Grover Cleveland in 1893. Despite polls indicating an extremely tight contest, Trump won all seven swing states (albeit largely within polling margins of error) while outperforming his 2020 results nationwide to take both the electoral college and the popular vote.

President-elect Trump will return to Washington with a stronger mandate and with Republicans poised to control both houses of Congress – although with the reemergence of split-ticket voting, they are on track to have smaller majorities than Trump’s victory would indicate. The election flipped the Senate to Republican control, with a likely 53-47 composition that mirrors Trump’s initial Senate majority in 2017. In the House of Representatives, Republicans are expected to maintain a narrow majority, pending the results of a few undecided races, including several in California. Republicans may end up with one of the narrowest House majorities ever.

With taxes, deficits, and tariffs likely to dominate the discourse in Washington next year, these slim majorities in Congress could complicate Trump’s efforts to enact his agenda. The Senate provides a healthy cushion to get nominations confirmed, which only require 50 votes. Yet it falls short of the 60-vote, filibuster-proof majority needed to pass many bills. Trump may struggle to push proposed tax cuts through a divided chamber, although modest tax cuts are easier to pass via “budget reconciliation,” which only requires 50 votes in the Senate. The $2 trillion in proposed budget cuts championed by figures like Elon Musk would similarly require bipartisan support that may be hard to achieve.

What could President Trump do on his first day of office?

There is a range of unilateral actions the president could potentially take on day one:

Roll back President Joe Biden’s executive orders, including in the energy sector (e.g., the liquefied natural gas export ban and prohibitions of drilling on federal lands);

Announce new executive orders, including on the U.S.–Mexico border. Restricting migration and prioritizing criminal deportations are likely more straightforward than a broader deportation program, which would take time to establish and could require funds from Congress;

Impose tariffs on China using the existing Section 301 (of the Trade Act of 1974) investigation into China, which Trump used to impose China tariffs in 2018 and President Biden later used to increase those tariffs. Other potential tariffs on products or countries, however, would require an investigation process, which typically takes months.

Replace directors at federal agencies, should he want to, potentially including:

The Consumer Financial Protection Bureau and possibly the Federal Housing Finance Authority, which are structured as single directorships. The Supreme Court has said the president has the authority to fire directors of such agencies;

The Federal Trade Commission, where Director Lina Khan’s term expired at the end of September. President Trump could replace her with an existing Republican commissioner;

The Office of the Comptroller of the Currency, a key banking regulator.

In all cases, it will take time to nominate and confirm permanent directors, but temporary leaders can be placed in these agencies via different legal methods. While the market response to the election points to greater regulatory clarity, and a likely absence of new regulation, it’s worth noting that deregulation takes time, years in many cases.

What about fiscal initiatives?

For fiscal expansion – taxes and spending – President Trump will still have to go through Congress. This is where the likely narrow majorities could serve as a check.

Assuming Republicans keep the House, a full extension of the expiring Trump tax cuts is likely, but possibly only for a shortened period of time given already high deficits. We could see efforts to reduce spending marginally, but any large cuts will be challenging to get through the House and would be difficult to do via the budget reconciliation process (which only requires 50 votes in the Senate). Everything else likely requires 60 votes.

As we have been saying for months, the deficit was likely to be the biggest loser of the election, with neither candidate inclined to take steps to reduce the deficit and both likely to pass policies that would add to it. The debt ceiling, which will have to be dealt with later in the spring, will likely be lifted easily assuming Republican majorities in both chambers.

What about the Fed?

We don’t expect any changes at the Federal Reserve until 2026. Fed Chair Jerome Powell’s term ends in May 2026, and we believe his position is secure until then. The first Fed governor vacancy is not until January 2026. The president cannot fire a Fed governor without cause.

We believe there’s no question about Fed independence. The Fed is ultimately accountable to Congress – which created the Fed and established its mandate – and to the people. Its independence enables the Fed to enact monetary policy based on data, analysis, and judgment, free of political influence.

Bottom line

President-elect Trump will return to office with a solid mandate and, in many ways, will be less encumbered by the political considerations of having to run for office again (he cannot run for a third term without changing the U.S. Constitution). However, what look to be narrow congressional margins – potentially historically narrow in the House – could be a check on Trump’s agenda, fiscal and otherwise. Regardless, the end of this election cycle brought welcome clarity as the outcome was quickly evident without prolonged uncertainty.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Devin

Economic

For many of the world’s leading public pension and sovereign funds, so far the 2020s won’t be remembered as the fondest of times. These are long-term investors who typically try to see through the ebb and flow of external influence. They are stewards of public money whose horizons should be far into the distance, rather than underneath their noses.

The triple impact of the Covid-19 pandemic, the return of inflation and conflict arising from heightened geopolitical tensions ripped up the typical public fund’s playbook. But while the last of these factors remains in play, the easing of concerns about inflation is allowing these influential investors to go back to a more risk-on, long-term approach.

This is a key message that emerges from OMFIF’s Global Public Funds 2024 report, informed by surveys, discussions or contributions from 28 global public pension and sovereign funds with more than $6.5tn in assets under management. Over the long term, our survey shows these investors are assessing the impact that technological change – such as the growth of artificial intelligence – will have both on the way they manage their portfolios and risk assessments internally, but also on how it will affect the markets they invest in.

Investment strategies and appetite for risk

Geopolitics continues to have a major bearing on how they view their investments. Concerns about the impact of tariffs and protectionism loom large. Where three years ago China was considered to be the leading developing market for investment opportunities, not a single survey respondent put China at the top of its list this year. Instead, India is now clearly the emerging market destination of choice for these asset owners, selected by 58% of respondents.

A more risk-on approach implies a shift from fixed income into public equities, and that is evident in this year’s survey. But there is a more fundamental shift – away from liquid, public markets and instead into illiquid, private markets.

Infrastructure, private credit, unlisted equities and real estate are four of the top five sectors where funds are increasing allocations over the next 12 to 24 months. This speaks to the role of many public funds as active owners: they believe that they can have more influence on the future performance of an investment as a direct investor, perhaps with a say on management or board composition, or via allocating funds to private equity firms.

Equally, the fast-growing interest in private credit markets indicates a willingness to forgo liquidity for improved returns. And with interest rates likely to fall or at least remain stable, funds see investments in areas such as infrastructure and real estate as a source of positive returns to their portfolios.

Transition finance and sustainable investment

One area in which global public funds are certainly spending a lot of time and resources in considering their long-term investment approach is sustainable finance. With more than $30tn of investable assets between them, public pension and sovereign funds could provide a large chunk of the capital needed to help the global economy meet its net-zero goals.

Funds are playing an active role in developing approaches to transition finance, subject to the need to provide fiduciary returns to their stakeholders. At the same time, these stakeholders in many cases are urging those that manage their assets to transition away from dirty or hard-to-abate industries.

OMFIF would like to thank all of the funds that gave us their time to share their investment approaches and their trust in our work. And we express our gratitude to the many funds that took part in our events and research throughout 2024. Our work in this area will expand in 2025, and we look forward to continuing to spotlight the approach of these hugely influential investors.

Source:Clive Horwood

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Brookings Institution

Economic

By law, the president nominates a Fed chair and two vice chairs for four-year terms. They must be confirmed by the Senate for those positions in a vote distinct from their confirmation as members of the Fed Board of Governors. Jerome Powell was confirmed for a second four-year term as chair on May 12, 2022. Philip Jefferson was confirmed as vice chair on September 7, 2023. He succeeded Biden pick Lael Brainard, who left the Fed in early 2023 to head the White House Council of Economic Advisers. Michael Barr, another Biden nominee, was confirmed as vice chair for (bank) supervision on July 13, 2022, succeeding Trump pick Randal Quarles.

The other Biden choices for the Fed board were Lisa Cook, confirmed by the Senate in May 2022 and then confirmed a second time in September 2023 for a term that expires in 2038, and Adriana Kugler, confirmed in September 2023 for a term that expires in 2026.

The president and Senate have no say in picking presidents of the 12 regional Fed banks—they’re chosen by their private sector boards of directors, subject to the approval of the Fed Board of Governors in Washington.

Presidents of the regional Fed banks can serve until they’re 65—unless appointed after turning 55, in which case they can serve for a maximum of 10 years or until they’re 75, whichever comes first. For instance, Mary Daly, appointed on October 1, 2018, at the age of 55, falls into the second category, which means her term is up in October of 2028. Neel Kashkari, the youngest of the current regional presidents, can serve through 2038. Esther George of the Kansas City Fed retired in early 2023 after reaching the mandatory retirement age; Jeffrey Schmid succeeded her. James Bullard of the St. Louis Fed resigned in summer 2023, before his mandatory retirement date, to become dean of Purdue University’s business school; Alberto Musalem succeeded him. Loretta Mester of the Cleveland Fed reached mandatory retirement age in June 2024; Beth Hammack succeeded her. (As Kaleb Nygaard has documented, this retirement rule dates to a 1936 decision by the Board of Governors.)

After press reports of their stock market trading raised eyebrows, Boston Fed President Eric Rosengren retired, citing health issues, on September 30, 2021, nine months earlier than his mandatory retirement, and Dallas Fed President Rob Kaplan retired on October 8, 2021, four years before his mandatory retirement date, because “recent focus on [his] financial disclosure risks becoming a distraction to the Federal Reserve.” The Boston Fed subsequently named Susan Collins as its new president, and the Dallas Fed named Lorie Logan.

Presidents of the 12 regional Fed banks are up for reappointment every five years. The Fed Board of Governors in Washington could replace any of them, though it hasn’t ever done so.

Who Has to Leave the Federal Reserve Next?_1

The Fed governors in Washington serve fixed 14-year terms that are staggered; one term expires every two years. If a governor leaves before his or her term is up, the successor completes their term. Governors filling unexpired terms can still be appointed to a new one, meaning that they can serve for more than 14 years. Only two Fed governors, however, have served for more than 14 years in the past half-century of Fed history. The median term length is a little over five years. By law, the president cannot remove a governor except “for cause,” a legal term that means he would have to show that the person had done something wrong.

Who Has to Leave the Federal Reserve Next?_2

Two of the current members of the Fed Board of Governors were initially appointed by Donald Trump (Bowman and Waller). Powell was originally appointed to the Board by Barack Obama in 2012 and was first named chair by Donald Trump. Powell’s term as chair expires in May 2026, and Michael Barr’s term as vice chair ends in July 2026. Philip Jefferson’s four-year term as vice chair expires in September 2027.

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IFS

Economic

Introduction

Healthcare is the Scottish Government’s largest area of spending. The NHS Recovery, Health and Social Care budget is plannedto be £20.6 billion this year, around one-third of the total Scottish Government budget – and close to half of day-to-day spending on public services. Decisions about health spending are therefore crucial for the upcoming Scottish Budget, as they influence how much money is available for other public services and how much needs to be raised through devolved taxes.

One of the key priorities of the Scottish Government is ‘ensuring high quality and sustainable public services’. In this comment, as part of our wider work in advance of the 2025–26 Scottish Budget, I update our analysis of Scottish NHS performance from earlier this year. I first show that hospital activity remains substantially below pre-pandemic levels. I then show that various measures of waiting time performance have worsened over the last year.

Throughout, I compare NHS performance in Scotland with performance in England. Scotland has long spent more publicly on healthcare per person than England, though this gap has closed substantially over the last two decades. Health services in both Scotland and England were similarly affected by the COVID-19 pandemic, and so England is an important benchmark against which to assess the performance and recovery of the Scottish NHS.

NHS activity

Let us first examine how NHS activity (i.e. the number of patients receiving treatment) has changed over time in Scotland. Figure 1 shows how various measures of NHS activity have changed relative to the final quarter of 2019 (the last full quarter unaffected by the COVID-19 pandemic). Panel A shows four important types of hospital activity: day cases (procedures delivered within a day), elective inpatients (pre-planned procedures delivered with an overnight stay), emergency inpatients (emergency patients admitted to hospital) and outpatient appointments (treatment or assessment in a clinic that only takes a short time to complete). Panel B repeats this analysis for two experimental measures of primary care activity: direct contacts (direct contact between clinical staff and patients, such as in-person and telephone appointments) and indirect contacts (including prescription management, interactions with hospitals, test results and administration).

NHS Recovery in Scotland is Lagging behind England’s_1

NHS Recovery in Scotland is Lagging behind England’s_2

Panel A shows that all four types of hospital activity fell sharply during 2020 as the NHS prioritised capacity to treat COVID-19 patients. Although activity has recovered somewhat in subsequent years, the numbers of patients treated by hospitals for most types of activity remain substantially below pre-pandemic levels. In the latest available data, for April to June 2024, overall acute hospitals in Scotland delivered 15% fewer elective inpatient admissions, 9% fewer emergency inpatient admissions and 6% fewer outpatient appointments than in October to December 2019. An exception is day cases, where hospital activity has increased substantially over the last year, and was almost the same (0.3% higher) in April to June 2024 as pre-pandemic. Nonetheless, total inpatient and day case activity was 6% lower in April to June 2024 than in October to December 2019. At the rate of increase in activity seen over the last year, it would take another two years for inpatient and day case activity to just return to pre-pandemic levels, and three years for outpatient activity.

The NHS in Scotland has taken steps to reduce demand on hospitals, which may partly explain why activity has not recovered to pre-pandemic levels. For example, the Centre for Sustainable Delivery (a national unit commissioned by the Scottish Government to improve Scotland’s healthcare system) aims to eliminate 210,000 unnecessary outpatient appointments this year. The Scottish Government also wants to reduce what it sees as unnecessary hospital admissions for older people. But alongside these efforts, the Scottish Government has many other objectives to increase hospital activity – for example, by using National Treatment Centres to deliver 20,000 extra surgery procedures. The Scottish Government’s NHS Recovery Plan, published in 2021, aimed to increase inpatient and day case activity to 15% above pre-pandemic levels by 2024–25. The Scottish NHS is far from achieving this target, and Audit Scotland has warned that it is not being transparent about performance.

Although the number of patients treated in hospital is lower, the average length of stay in hospital has risen since the start of the pandemic. This means that the overall number of inpatient hospital bed days is almost the same (0.7% higher) as pre-pandemic in Scotland. Higher length of stay could be driven by patients requiring more complex treatment than pre-pandemic, and therefore might suggest that hospitals are providing more healthcare than activity numbers alone would indicate. This may be in part because of the continued presence of patients with COVID-19 in hospital, a driver of higher average length of stay in England earlier in the pandemic. But higher length of stay could also be driven by challenges with system flow, in particular delays in discharging patients who are medically ready to leave hospital. In September, there was an average of 1,968 beds in the Scottish NHS occupied by adults who could not be discharged, compared with 1,521 in September 2019.

One factor unlikely to explain the failure of acute hospital activity to return to pre-pandemic levels is a shortage of staff. NHS staffing in Scotland is much higher than pre-pandemic. For example, the NHS in Scotland has 13% more consultants (senior doctors) and 12% more nurses and midwives in June 2024 than in June 2019. As we discussed in our previous report, this provides suggestive evidence that the labour productivity of hospitals in Scotland is substantially lower than pre-pandemic, as is also the case in England. Rather than staffing, it may be that a lack of available hospital beds is preventing further increases in inpatient activity in Scotland (the number of acute hospital beds is 5% higher than pre-pandemic, though the total number of hospital beds is 1% lower than pre-pandemic).

Hospital activity remains below pre-pandemic levels in Scotland, but this is not the case in England. As we have recently reported, NHS hospital activity in England is now substantially above pre-pandemic levels. For example, in April to June 2024 (the latest period we have data for Scotland), the number of elective admissions delivered in the English NHS was 8% higher than pre-pandemic, the number of emergency admissions was 2% lower and the number of outpatient appointments was 11% higher than in October to December 2019. Taking all of this together, hospital activity in both Scotland and England is increasing, but Scottish activity remains substantially below pre-pandemic levels. This is despite the fact that hospital activity in England has been reduced by frequent and widespread industrial action, which has not occurred in Scotland.

Measures for primary care activity are experimental. But they suggest that primary care activity in Scotland has recovered by more than hospital activity (Panel B of Figure 1). In the latest available data, for July to September 2024, GP practices in Scotland delivered 8% fewer direct contacts than pre-pandemic, but they delivered 16% more indirect contacts. The primary care sector therefore seems to have recovered better from COVID-19 than hospitals, although appointments remain below pre-pandemic levels.

NHS performance

NHS activity is an important measure of how well the health system is performing and how well it is translating its resources – staffing, beds, funding, and so on – into healthcare outputs. But what matters for a person needing treatment is the ease of accessing treatment and the quality of the treatment they receive. While it is hard to measure the quality of treatment in general, one important measure of NHS performance is how long patients need to wait for treatment.

Table 1 therefore shows how a range of NHS waiting times measures have changed over time in Scotland and England. The first column for each nation compares current performance with pre-pandemic performance, while the second column of each pair shows how performance has changed over the last year.

Starting first with changes since the start of the pandemic, NHS performance is currently worse than pre-pandemic across all measures considered in Scotland. The elective waiting list is higher (having risen from 362,000 in December 2019 to 725,000 in September 2024) and waiting times are longer. For example, the share of patients waiting less than four hours at A&E is lower (falling from 81.6% in December 2019 to 65.9% in September 2024). The same is also true in England – across all measures considered, performance is worse than pre-pandemic.

There is a clearer difference between Scotland and England when it comes to performance over the last year. In Scotland, almost all measures of NHS performance have worsened over the last year. For example, the elective waiting list has continued to grow (from 692,000 in September 2023 to 725,000 in September 2024), and the share of patients waiting less than four hours at A&E has fallen slightly (from 66.5% in September 2023 to 65.9% in September 2024). The only measure considered that has improved in Scotland is for diagnostic tests, where the share waiting six weeks or less has risen (from 49.8% in September 2023 to 53.6% in September 2024). But in England, most measures have improved over the last year. For example, a smaller share of patients are waiting more than four hours at A&E, a larger share of patients are being treated within 62 days for cancer, and a larger share of patients are receiving diagnostic tests within six weeks.

This therefore suggests that hospital performance is still worsening in Scotland, while it is improving in England.

NHS Recovery in Scotland is Lagging behind England’s_3

Conclusion

Performance in the Scottish NHS remains below pre-pandemic levels across many measures. Even more concerningly, many measures of performance have continued to worsen over the last year. In large part, that is because most NHS hospital activity remains far below pre-pandemic levels, far from the ambitious targets in the Scottish Government’s 2021 NHS Recovery Plan. Since hospitals are overall treating fewer patients than pre-pandemic, with only slow improvement over the last year, it should come as little surprise that waiting times are not improving. Indeed, across most measures of waiting times, performance has worsened over the last year.

One reason for this failure to increase hospital activity above pre-pandemic levels is that average length of stay is much higher than pre-pandemic. This might reflect the increased complexity of the patients that hospitals have to treat, including the continued presence of patients with COVID-19 in hospitals. But the failure to increase hospital activity likely also reflects challenges in discharging patients. However, it is likely not explained by a shortage of staff – the NHS in Scotland has many more staff than pre-pandemic (though the increase in staff since the start of the pandemic in Scotland is smaller than that in England).

The pattern in the English NHS is different. In short, while performance in both countries is below pre-pandemic levels (and lower than governments and populations would like it to be), things are, if anything, still getting worse in Scotland, whereas they have started to improve in England. Many types of hospital activity in England are now higher than pre-pandemic, though still far from recovery targets, and most of the performance measures considered here have improved over the last year. In England, there has been a large focus from both the previous and the current government on improving NHS performance and productivity. Similar focus is needed in Scotland.

Looking ahead to the Scottish Budget, the key question is to what extent this poor NHS performance will force the Scottish Government to prioritise further increases in health spending relative to other services. Then, aside from any funding decision, there remains the ongoing challenge of ensuring that money is spent well, staff are deployed effectively, and productivity in the NHS is enhanced – all essential if waiting times are to be reduced.

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ING

Economic

Since 1999, the EU and Mercosur (comprising Argentina, Brazil, Paraguay, Uruguay, and since 2024, Bolivia) have been negotiating a trade agreement. While an agreement in principle was reached in 2019, EU members refused to ratify the deal.

Today at the Mercosur Summit in Uruguay, attended by EU Commission President Ursula von der Leyen, the agreement took a significant step closer to finally coming into effect, with both EU and Mercosur states signing the deal.

Trade agreement to slash tariffs, saving EU companies €4 billion annually

The trade agreement foresees the following (amongst other factors):

Tariff reductions: The agreement will remove over 90% of tariffs on goods exchanged between the two blocs, saving EU companies around €4 billion worth of duties each year. For some products, duties will be phased out over longer periods to provide companies in Mercosur countries with a sufficient amount time to adapt.

Easier market access: Elimination of non-tariff barriers, discriminatory tax treatments, and the facilitation of trade in services.

Sustainability: Provisions to ensure that trade does not come at the expense of environmental and labour standards.

If approved by the EU member states and the EU parliament, this would create one of the largest free trade zones in the world. The EU and the five Mercosur states together make up 20.2% of global GDP, with the EU contributing the lions share with 17.4% (Brazil: 2.1%, Argentina: 0.6%, Uruguay: 0.1%, Paraguay and Bolivia: 0.04% each).

In terms of population, the trade deal would unite 730 million people (450 million in the EU), or about 8.9% of the global population. While goods trade between the two blocs is still relatively small, totalling €109.4bn in 2023, the EU is Mercosur’s second-largest trade partner for goods, following China and ahead of the United States. Conversely, Mercosur ranks as the EU’s tenth-largest trade partner for goods. When it comes to trade in services, the EU has exported €28.2bn to Mercosur, while Mercosur exported €12.3bn to the EU in 2022. The trade deal is expected to significantly boost goods trade between the two regions.

Trade in goods between the EU and Mercosur

EU and Mercosur seal Agreement Following Decades-Long Negotiations_1

The pain and gain of some of the main sectors involved

But here’s the catch, and the reason why the agreement hasn’t been signed in five years – it faces significant opposition. France and Poland, amongst others, are openly opposing the trade deal. Meanwhile 11 countries – Germany, Spain, Portugal, Sweden, Denmark, Finland, Croatia, Estonia, Latvia, Luxembourg, and Czechia – recently called for the swift conclusion of the deal in a letter to the President of the Commission. Germany, for example, sees Mercosur as a key market for its auto exports. Currently, average car tariffs on imports into Brazil, for instance, stand at 35% compared to an import tariff of 10% in the EU.

Food and agri – mixed reactions

Food and agri products represent the biggest part of the EU’s imports from Mercosur, with total a total import value of 23 billion euros in 2023 (42% of total imports). The agreement will facilitate trade growth due to a mix of larger import quotas as well as reduced and removed tariffs and duties on products like beef, poultry, sugar and soybeans. That's stirring discontent among EU beef, poultry, sugar beet and soybean farmers, given that their Mercosur counterparts can operate at lower costs.

Other companies in the food sector are more supportive. This is either because they can benefit from lower input costs, like confectionery and soft drinks manufacturers, or because the deal creates better market access for European cheese, beer, wine and spirits exporters.

For EU consumers, we would argue that any deflationary impact on food prices will be difficult to spot. Firstly, quotas will likely be expanded over multiple years to avoid market distortions. Secondly, quotas will be larger but they still represent only a small portion of total EU consumption. Thirdly, the costs of these products make up only a part of the final price that consumers pay. In the case of a premium steak bought in a restaurant, factors such as labour costs are also an important part of the equation.

Automotive – slashing the barrier could be positive for European exporters

A trade agreement between the EU and Mercosur countries could bring some light to the darkness for the struggling European car industry. Current tariffs of up to 18% on autoparts and even 35% on cars are obviously not very beneficial for export propositions. EU countries exported €1.1bn of passenger cars to Brazil, the bloc’s largest market, in 2023 and Germany was responsible for almost 60% of this. Altogether – and including the largest category automotive parts – EU countries exported almost €5bn worth of vehicles and automotive parts to the Mercosur member states.

Including Bolivia, the Mercosur members produce just about as many cars as their domestic sales annually, but a significant chunk of this is exported to the rest of South America as the continent hardly has any other production sites outside of Brazil and Argentina. South America has a production deficit of about 30%, making it dependent on car imports. South American car markets therefore provide more growth opportunities than the sluggish European home markets.

Driven by high import tariffs, European manufacturers like the Volkswagen Group and Daimler Trucks have established their manufacturing sites on the continent. A reduction in tariffs could boost production in Europe, where occupancy rates are currently low.

Critical raw materials – a key element in the deal

While critical for the EU’s economic future, raw materials like lithium are making less headlines in the coverage of the free trade agreement. That’s surprising, given that a) the EU is very dependent on China for critical raw materials, b) countries like Argentina, Bolivia and Brazil hold large reserves of some of these critical raw materials and c) EU demand for these materials is expected to massively increase.

We've previously written about how demand for lithium batteries (which power electric vehicles and energy storage) is set to increase 12 times by 2030, while the bloc’s demand for rare earth metals, used in wind turbines and EVs, is set to rise five to six times by 2030. It may be difficult to quantify the exact economic value of having better access to these materials through closer ties with Mercosur, but we believe this particular element carried a lot of strategic weight for the EU Comission when striking the deal – especially as diversification or sourcing and securing supply is currently top of mind.

More farmers’ protests loom as EU-Mercosur agreement nears completion

The signing of the trade deal is expected to spark new protests from farmers – particularly those in France – who strongly oppose it. This response will mostly be borne out of a fear that the elimination of tariffs will lead to a substantial inflow of cheaper South American agricultural products, particularly beef, with products not meeting Europe’s stringent environmental and food safety standards. French President Emmanuel Macron might even face stronger pressure at home, given that he was unable to stop this deal and that it looks unlikely he'd sign the Treaty in the current political situation in France.

In Poland, the Netherlands and Austria, farmers fear that the deal will lead to unfair competition, doesn’t meet the EU’s environmental ambitions, and contributes little to GDP for some member states. The expected GDP boost for the Netherlands is only 0.03% in 2035, compared to a GDP gain of 0.23% for Spain, for example.

The ratification process could fail again

If the trade agreement is signed in its current form, i.e., a ‘mixed’ agreement including both trade and non-trade measures, it would necessitate approval from the European Parliament as well as all national parliaments. It would also require ratification by all 27 EU member states. While the EU can negotiate trade agreements on behalf of its members with a qualified majority, any agreement involving shared competence between the EU and its member countries must be ratified by each member state. Remember that also the Canadian-European Trade Agreement (CETA) has not been ratified yet by all member states.

To avoid repetition of the CETA experience, the EU could therefore split the agreement into two parts: the pure trade agreement and the non-trade measure part. For the pure trade part, a qualified majority vote would be required instead of approval from all 27 members, meaning that at least 15 EU member states representing 65% of the EU population would need to approve. Consequently, at least four member states representing 35% of the EU population would be needed to block the deal. The same procedure had been in place for the tariffs against electric vehicles made in China.

A beacon of hope amid global protectionism

This agreement comes at a time when the world is facing increasing protectionism, with US President-elect Donald Trump returning to the White House. He has made no secret of his fondness for tariffs. However, protectionist tendencies are not solely limited to Trump.

This week, Beijing announced export bans on key minerals such as germanium and gallium in retaliation against US controls on semiconductor technology. Additionally, new tariffs worth $18bn on Chinese products will take effect in January 2025 and 2026. Elsewhere, the EU has also stepped up its protectionist measures against China this year – and Mercosur countries aren’t holding back either. Brazil introduced import tariffs on electric vehicles (BEVs) of 10% at the start of the year, climbing to 18% in July and up to 35% in 2026.

A trade deal between these two economic blocs would be welcome amid a global climate engulfed by a new era of protectionism, and would be significant step towards ongoing trade liberalisation. However, the likelihood of success remains slim – and we're interested to see whether free trade supporters can prevail over the protectionists this time around.

Source:ING

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Turkey's inflation rate came in at 2.2% in November, higher than the market consensus (1.9%) and our call of 1.8%. However, the annual figure has maintained its declining trend and fell to 47.1% from 48.6% a month ago as a result of favourable base effects (inflation stood at 3.3% in November 2023). Cumulative inflation reached 47.1% vs the Central Bank of Turkey's revised 44% forecast for the whole year.

PPI stood at 0.66% month-on-month, showing a drop to 29.5% year-on-year from the month prior, and this was driven by energy prices. While the data implies a notable weakening in cost pressures in the second half of this year – which is also attributable to supportive currency developments – global commodity prices, particularly oil prices given the current geopolitical backdrop, will likely remain the key determinant of the PPI trend in the coming period.

Core inflation (CPI-C) came in at 1.5% MoM, the lowest monthly reading since late 2021. It moved down to 47.1% on an annual basis, supported by the relatively slow-moving FX basket and increasingly benign PPI outlook. Going forward, pricing behaviour and inertia in services remain key risk factors for the pace of Turkey's disinflation process.

Inflation outlook (%)

Source: TurkStat, ING

Regarding the underlying trend, TurkStat will release seasonally adjusted (sa) headline CPI and core indicators tomorrow. An early analysis reveals that the underlying trend of inflation should maintain its gradual improvement in November driven by both goods and services. As an additional note, with the release of the latest inflation report, the CBT dropped its previous emphasis on an inflation path based on the quarterly average of monthly inflation rate (sa) as an indicator for a significant and sustained decline in inflation. However, according to new projections, the Governor sees the rate dropping below 1.5% MoM in seasonally adjusted terms in the third quarter of 2025, which implies a significant delay; this level was the call for the last quarter of 2024 previously. It's expected to decline further to slightly above 1% MoM in the fourth quarter of 2025.

In the breakdown:

The food group turned out to be the major contributor to the headline rate once again with 1.23 percentage points. Compared to the same month last year, unprocessed food inflation recorded a strong increase (9% vs 0.3% in 2023) with the highest November figure in the current inflation series, driving the upward move in food inflation. Processed food prices, on the other hand, showed a deceleration (1.6% vs 4.9% last year). Accordingly, monthly food inflation at 5.1% was one of the key factors contributing to a higher-than-expected increase in November.

This was followed by housing, with a 0.4ppt contribution reflecting the continuing impact of rent increases. The pace of these increase has dropped, however. According to the MPC minutes, leading indicators suggest that monthly rent inflation will decelerate in December as well.

Household equipment was the third largest contributor, pulling the headline rate up by 0.21ppt.

As a result, goods inflation inched down to 39.0% YoY, while core goods inflation – a better indicator for the trend – recorded a slight increase to 28.9% YoY. Services, which are less sensitive to currency movements but more heavily impacted by domestic demand and minimum wage increases, maintained their downtrend to 67.9% YoY with continuing signs of improvement.

Annual inflation in expenditure groups

Source: TurkStat, ING

Overall, the tightening in financial conditions and monetary policy has now started to contribute to the return to the disinflation path, and will likely continue in the period ahead. Last month, The CBT's communication suggested that we are nearing a gradual rate-cutting cycle, implying that a December move may be a real possibility. The revised guidance also tied rate cuts to both realised and expected inflation, suggesting that the central bank will closely watch ex-ante and ex-post real rates. Accordingly, we expect a 250bp cut from the bank this month – though we do not rule out a smaller move, especially given the higher-than-expected November figure signalling ongoing challenges to disinflation efforts.

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EU and Mercosur seal Agreement Following Decades-Long Negotiations

Trade agreement to slash tariffs, saving EU companies €4 billion annually

Trade in goods between the EU and Mercosur

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Food and agri – mixed reactions

Automotive – slashing the barrier could be positive for European exporters

Critical raw materials – a key element in the deal

More farmers’ protests loom as EU-Mercosur agreement nears completion

The ratification process could fail again

A beacon of hope amid global protectionism

Source:ING

Food Prices Drive A Higher-than-expected Rise In Turkish Inflation

Inflation outlook (%)

Source: TurkStat, ING

Annual inflation in expenditure groups

Source: TurkStat, ING

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