The Decisive | Season 4 Ep.1 - A Mid-Year Check-In on the Global Economy

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Kristen Hallam:

You're listening to The Decisive Podcast—Insights and analysis to empower confident decision making. Welcome to the Decisive Podcast brought to you by S&P Global Market Intelligence. I'm your host Kristen Hallam. The following episode, our first of season four, is taken from our July 22 webinar in which our team of economists take stock of their predictions for 2025, now that we've entered the second half of the year. Ken Wattret, our Vice President of Global Economics, provides an overview and moderates the discussion, which features Ben Herzon, co-head of US Economics; Hanna Luchnikava-Schorsch, head of Asia Pacific Economics; and Diego Iscaro, Head of Europe Economics. Ken, Ben, Hanna and Diego will discuss our forecasts and what's driving them, highlighting global macroeconomic trends and risks. Spoiler alert: Uncertainty, particularly around trade policy and fiscal sustainability, remains a defining theme across all regions. 

And now over to Ken to kick things off.

Ken Wattret: 

We'd like to begin today by taking a brief look at some of our economic predictions for 2025. We passed the halfway point of the year and I'm pleased to say many of our predictions are on track. This includes a moderation of US growth, though without a recession, and continued struggles for Europe's three largest economies, Germany, France and the UK. We'll come back to those issues in a short while. Our prediction of more divergent national inflation dynamics has also started to become apparent, with disinflationary forces very much evident in mainland China, moderation of price pressures evident in the euro area and other parts of Western Europe. But in contrast, we're now seeing more signs of tariff related price pressures in the U.S. It's taken a while for those effects to show up in US consumer price data for various reasons, as we'll discuss, but it's now beginning to appear. We also have focused a lot on divergence elsewhere. The US Federal Reserve's concerns over a renewed pickup in US Inflation has led, as we were expecting, to a divergence of US and European monetary policies, the ECB, for example, halving its policy rates relative to their post pandemic peak at the same time as the Fed's easing cycle has paused.

This is a major break from the norm, with changes in eurozone policy rates historically lagging those in the US. We also highlighted the prospect of divergence between the two major subcomponents of core inflation rates, with moderating inflation rates for services expected to offset the ongoing rise in core goods inflation rates. And this is indeed happening in many economies around the globe, leaning down on core inflation rates. Overall, we expect these trends to continue. Our long-standing call for US dollar depreciation has also come to fruition, although the decline was more pronounced than we'd expected over the first half of this year. Developments which we hadn't predicted include the resilience of mainland China's economy in the first half of the year, although we are still expecting slowdown. More on that in a short while. And also the breadth and magnitude of central bank rate cuts we've seen in some emerging economies, which we think is linked in part to the plunge in the US dollar. 

Now, of course, one of the recurring themes over the year to date has been the unusually high level of uncertainty. And this is particularly the case for trade, where measures of U.S. trade policy uncertainty have hit unprecedented heights amid a deluge of tariff announcements, changes, modifications, and so on. Now, there has been a moderation in those measures of trade policy uncertainty in the last couple of months, but uncertainty still remains rather elevated. And a more general point that we've been emphasizing is that uncertainty is not confined to trade policy. There's a more uncertain geopolitical environment. And many of the economic anchors that we became accustomed to prior to the COVID-19 pandemic and that increase in geopolitical uncertainty have become more unpredictable and less stable. Now, with all this in mind, we decided to devote most of today to answering the key macroeconomic questions which we are regularly hearing from you.

And we'll start with Ben and the U.S. Ben, as I mentioned, one of our key views has been for a weakening of US growth, but without a recession occurring, despite lots of speculation of recessions from many other economists. Can you talk us through the expected drivers of the US slowdown and which areas of the economy we expect to weaken most? 

 

Ben Herzon:

Sure, I'd be happy to, Ken. So with respect to the drivers of the slowdown in growth, the biggest driver is fallout from implementation of tariffs. So implementation of tariffs has led to concern about inflation, especially at the Fed. Indeed, in our forecast, we have core PCE inflation rising from about 2.7% currently to a peak of 3.6% by late this year. So concerns about inflation and about inflation expectations becoming unanchored have left the Fed in a pause. It's paused its easing cycle that it began last fall. And as a result of this pause, borrowing costs are elevated. So this is weighing on inflation interest sensitive sectors of the economy, such as housing and business, fixed investment. 

It's not just tariffs themselves that are weighing on the economy, it's uncertainty about tariff policy. So what's happening is businesses are delaying investment plans while they wait for this uncertainty to become, to get sorted out. So that's so follow from tariffs is one of the big drivers of the slowdown. There's also diminished fiscal tailwinds. So the Inflation Reduction Act included incentives that led to a surge in spending on manufacturing structures. But that spending has already peaked and is no longer a source of growth. Moreover, the One Big Beautiful Bill act rescinds most of the tax credits that were responsible for the strength in the sector. So going forward, we expect spending in the sector to diminish.

So this is no longer a source of growth and that's contributing to slowdown. Now, another factor that's contributing to the slowdown is the diminished fiscal wind from infrastructure spending. So in recent years in infrastructure spending was boosting growth, but spending there has plateaued and is no longer a source of growth. Finally, we do expect equity gains to slow. In the forecast last year, the S&P 500 rose 23%. Over the first half of this year, it rose five and a half percent. So it's really slowed down a lot. And going forward, we expect equity values to give back the gains that they experienced over the first half of this year. 

This flattening of equity values is expected to weigh on consumer spending through wealth effects. Now, there's a few factors that are contributing to our forecast of weakness in equity values going forward, but the most important one is that at least from the perspective of our modeling, stocks are currently in the aggregate are overvalued. So, summarizing, the areas of softness in our forecast are consumer spending from flattening equity values on business, fixed investment structures and state and local infrastructure spending.

 

Ken Wattret:

Thanks, Ben. So you've mentioned various headwinds to growth. Could you clarify therefore, why we've taken the view that a U.S. recession is not the most likely outcome? And what would the key indicators be that would signal a rising risk of recession? 

 

Ben Herzon:

Okay, so as to why we're not forecasting recession, so here's how we're thinking about it. We're looking at the current situation in a recent historical context. So recent recessions have shared—They're all unique in their own way, but they've shared two common threads. One is there's been a shock. And second, there's been some underlying fragility or an imbalance that has helped propagate or magnify the shock and turn it into a recession. So we have a shock, and it's a big one. We have an historic increase in tariff rates and we have historically elevated levels of uncertainty, trade policy and other types of uncertainty. 

So there's a shock in place, but it's really hard to identify an underlying fragility or imbalance that would be sufficient to propagate this shock into a recession. So for now we are sticking to the forecast of soft growth, but no recession. So the key indicators that we're looking for that would signal a recession is what we're looking for renewed financial stress. Like we're looking in measures of risk spreads, credit spreads. We're looking at readings on consumer and business sentiment to see if they turn down the, you know, these measures bottomed in April, but they since recovered. We already saw in the beginning of April that, that markets did not have an applied for the reciprocal tariffs that were briefly implemented in early April. So we'll see what happens on August 1st, which is sort of the deadline for, for new tariffs to go into effect. Those tariffs do go into effect.

We'll, we'll have to see how, how markets react. 

 

Ken Wattret:

Thanks, Ben. So talking of tariffs, another key view as being that US Inflation would pick up again due to policy shifts particularly related to tariffs. Does the absence of a major pickup in US Inflation so far challenge that view? And if not, when do we expect higher inflation to become more evident? 

 

Ben Herzon:

So I don't think the absence of a pickup of inflation to date challenges this view because we think we understand the factors that have prevented inflation, a pickup of inflation, and we, and we understand those factors to be temporary. So let me tell you what I'm, what I have in mind. The first factor is that businesses rushed to import and stockpile commodities ahead of tariffs so that they could hold the line on raising prices. So that's, you know, that's one reason we're not seeing prices pick up yet. But once they exhaust these stockpiles, they will be in position to have to purchase, tear up commodities and they will at that point will likely have to pass through these higher costs into prices. Now the second factor that we think has prevented a rise of inflation is that we believe businesses have, you know, generally been, have in the ad rate have been holding off on raising prices in response to these higher costs and taking a hit in profit margins to avoid losing market share. I think there's a limit to how long this can go on. At some point we think that businesses are going to have to pass these higher costs into prices. 

Also, if you alluded to this, while headline inflation in the June CPI report was tame, when you look through the details of the report, there were several detailed commodities that showed large price gains that were surely tied to tariffs. The examples include windows and floor coverings, household appliances, video and audio products, toys like these all showed very large price gains. It's just that there were other parts of the report we did see price gains yet. So as to when we expect these price gains to start showing up, you know, we will be looking at the July CPI report and we're expecting to see a more broadly based set of price gains in that report.

 

Ken Wattret:

So it's just a matter of time. Okay, so another issue that we highlighted in our 2025 outlook was that concern over fiscal developments would rise in the US and other major economies which are running persistent large budget deficits, very large in some cases, and already have elevated public sector debt burdens. How worried are you about a possible debt crisis given the recent approval of the budget bill? 

 

Ben Herzon:

So I'm a bit concerned. The budget bill has now codified into law policies that we expect will set budget deficits on track to reach 6 to 7% of GDP over the next 10 years. Now, our baseline forecast is that the US economy can withstand such elevated deficits, but there are risks that it can't. For example, if investor confidence in the US Government's ability or willingness to repay its debt begins to falter, we couldn't see increases in term premia that would spread into weakness in equity values and the general deterioration in financial conditions that would by themselves weigh on the on US Economic growth. To remedy this situation, Congress would be forced into a fiscal adjustment that along with worsening financial conditions, could send the US economy into a recession. 

 

Ken Wattret:

I guess a bit more of a tail risk, relatively low probability, very high impact if it materializes. Thank you, Ben. So why don't we widen the geographical coverage a little at this point and bring in Hanna to talk about APAC and emerging economies more generally. So if we go back to the topic of growth slowdowns, despite much speculation about mainland China's vulnerabilities, its growth performance during the first half of the year was more resilient than we and many others had expected. Do we retain our view that the economy will still lose momentum? And if so, when and why? 

 

Hanna Luchnikava-Schorsch:

Thanks, Ken, and hello everyone. So, yes, in short, we still expect China's economy to slow. We did see economic growth higher than we initially anticipated during the first quarter of the year. In fact, we have seen that in the first half of the year, the first quarter came up above the government's target of 5% at 5.4% year on year and the second quarter slowed, but only slightly to 5.2%. And there are several factors which contributed to this growth, and the strongest of that has been unprecedented rise in China's exports to regions outside of the us. If you look at China's trade surpluses with the US versus the rest of the world, the trade surplus with the rest of the world has risen particularly strong after the fourth quarter of last year, whereas the same is mirrored in the US trade deficits with mainland China and with the rest of the world, which basically signals to us that China has been redirecting its trade from the US to the rest of the world, particularly to the ASEAN countries and the rest of the Asia Pacific region. Some of it has been also a result of front loading which happened early in the year, so mostly first quarter of the year, but even again contributing to the front loading which is happening from other markets as a result of it. The trade, overall merchandise trade from China actually remained relatively resilient, with merchandise exports growing at around 6% year on year during the first five months of the current year, despite the fact that merchandise exports directly to the US has fallen by almost 10% during the same period of time. 

And then of course, not to forget that the Chinese government has been also implementing additional stimulus measures to prevent a sharp slowdown and to support domestic economy, particularly on the demand side. All the measures that have been implemented so far in terms of expanding fiscal deficit, issuing bonds, implementing the programs of trade-ins and equipment upgrading, all of it so far contributed to supporting growth. But at the same time, why we are still expecting that there will be a slowdown in the second half of the year is that mostly all of these factors will become a drive in growth, particularly with trade, where the effects of front loading will reverse. And there will be a correction not only to the US where we have already seen construction, but also to the rest of the world where demand will also slow. Obviously, the trade truce which we have seen as a result of negotiations between China and the US in June, are yet to be agreed and finalized by August 12th. And this is also the deadline which leaves us a significant amount of uncertainty going forward. We also still see sectoral tariffs which will be contributing to a drag on exports. And additionally to that, we expect the government stimulus measures to remain very measured to the extent of an ongoing slowdown.

 

The fact that the first half of the year have not seen a slowdown can indicate that the stimulus measures are unlikely to be expanded significantly, which means that we are likely to continue to see further persistence of more structural issues within The China's economy, including its drug on the property market as well as its overcapacity in industrial sectors. Utilization ratios in a number of industrial sectors, particularly coal mining, automotive as well as draw chemicals production have been declining recently once again and that has been also contributing to deflationary pressures. With nominal GDP growth staying below real GDP growth for the ninth consecutive quarter, this issue is unlikely to be resolved even with the stimulus measures which the government has implemented so far, which means that economic growth will eventually slow. With that, we still anticipate China's growth too slow during the current year and further during the year 2026.

 

Ken Wattret:

Thanks Hanna. So when we think a bit more broadly about the Asia Pacific region, despite the exceptionally high level of uncertainty over tariffs that we've mentioned, export growth has generally been rather strong. Is that entirely due to similar front loading effects or is there anything else at play there? And if we do still expect to slow down in exports, when are we thinking this will occur and to what extent? 

 

Hanna Luchnikava-Schorsch:

So a lot of it does have to do with front plotting and some of the points which Ben already brought up while speaking about the us. And indeed we do see that merchandise exports performance for the rest of the Asia Pacific region has been exceptionally strong during the first quarter of the year. We do see that for the first five months of the year merchandise exports grew by over 40% for markets like Malaysia, Taiwan. They have seen growth of over 30% for the rest of the ASEAN sub region as well as India. And that is something which has, you know, started tapering off as has been already indicated by the forward looking purchasing managers indices, particularly export orders. But even the export order component of PMI has once again recovered in the latest readings for June, indicating that period of uncertainty is likely to persist well over August. And we might still see some fraud loading effects going further into the second half of the year. And nonetheless that is something which obviously will turn into a driver of growth during the year 2026 in particular. 

Now in addition to front loading, we also observe that exports of particular goods, including the AI led technology products has been very strong. Again numbers in high double digits for some of the high income technology producers like Taiwan, Hong Kong, but also Malaysia, something which we observed during the first five months of the year. Demand from the rest of the world has also remained resilient, which again is indicated by the fact that not only exports grew to the US but also to the regions like Sub Saharan Africa, Europe, and that has also contributed to the strength of exports and overall economic growth. And then of course not to forget it is not only merchandise or goods exports which are supporting the economies of Asia, but also exports of services, particularly tourism, where we also saw strong numbers from for several economies including Hong Kong, Taiwan, Japan, Singapore and then broader contribution of domestic demand which so far has also remained resilient, not least because of fairly moderate inflation broadly across the region. But to the second part of your question, we do expect the region to see an economic slowdown, most likely in the second half of the current year and even more so in the year 2026. Again, one reason is that the front loading is likely to see a correction and will become a drag on growth. And the second reason is that there will be a broader impact even of tariff uncertainty on domestic economy via impacts on manufacturing output as well as on domestic labor market where a lot of the labor force is occupied.

 

Ken Wattret:

And if we were to sum up all of these views related to some of them, the consequences of changes in US trade policy for the region, who are the likely winners and losers? 

 

Hanna Luchnikava-Schorsch:

So trade tariffs contribute to less favorable exports and investment environments and Asia Pacific region is arguably one of the most exposed to US tariffs, both due to a large share of exports to the US in its gdp, but also the fact that it it has been a subject to one of the highest tariffs announced so far. So that said, there are arguably any winners of of the announced tariffs in terms of who is likely to be most affected. It remains to be seen, based on the fact that the reciprocal tariffs in particularly which were announced on 2 April have been first postponed to July and now to August, and the fact that more than two dozens of tariff letters that the U.S. administration sent out so far has been directed to the Asia Pacific markets with tariff rates announced again ranging between 20 and 40%. Now obviously there is still room for negotiation over trade agreements which could reduce some of these rates. And indeed we have seen that out of four trade agreements which have been concluded with the US so far, three are from the Asia Pacific region, including mainland China, Vietnam and most recently Indonesia. We also still expect at least an interim trade deal to be concluded with India before or around first August. But nevertheless, again there is still a significant amount of uncertainty and it remains to be seen which market or which country will be subject to the highest tariffs. 

And then of course what adds to complexity is that it's not only geographical tariffs but also industry tariffs which already came into effect, including those for steel and aluminum autos which have already impacted a number of producers, particularly in countries like Japan, South Korea. There are still investigations ongoing Regarding tariffs for seven additional industries, including semiconductors as well as pharmaceuticals, that is something which might have a significant impact again for a number of Asia Pacific countries like technology exporters and pharmaceuticals in case of India. So again that the tariff landscape still remains very uncertain. And in the end of the day the settled tariff rates which will be coming into effect will determine, you know, the extent of an impact for the Asia Pacific markets. But we do see that, you know, that the markets which so far have been subject not just to reciprocal tariffs, but industry specific tariffs, and these are the ones I already named, Japan, South Korea and some of the technology exporters like Taiwan and Hong Kong seem to be the most exposed. In addition to that, the lower value added producers in south and Southeast Asia, including Bangladesh, Pakistan, but also Cambodia, Laos, may also be significantly impacted by tariffs. Vietnam, which negotiated the trade agreement with the US so far, still may come out as a relative loser in the story because of a so-called clause on transshipment goods. Vietnam was able to negotiate general reciprocal tariff rate of 20%.

But the U.S. administration has put a clause on transshipment goods without providing a clear definition what those transshipment goods are and how they're defined. And potentially it could include a very broad definition of all of the production inputs which go basically into the supply chains of Vietnam's exports to the US which will be very difficult for Vietnam to replace. So ultimately it's still unclear to which extent Vietnam will will be impacted by tariffs. 

 

Ken Wattret [00:27:33]:

Thanks Hanna. And and briefly, another of our key views for 2025 was that some of the usual engines of growth in the emerging economy space would falter. We are now seeing some signals of weaker economic activity in Brazil and Russia. For example, as already discussed, we're expecting to see a slowdown in mainland China. India's been losing momentum in line with our expectations. Do you see the signs of slowdown there as a cause for concern? 

 

Hanna Luchnikava-Schorsch:

So India we indeed expected to slow during the current year from the very strong growth that we saw during the fiscal year 2020. And yet it is continuing to lead regions growth with real GDP growth rates projected to remain above 6% in both current fiscal year and the next fiscal year. Now we do start seeing a slowing momentum in economic activity from the first fiscal quarter of the current year, which started in April, the March quarter. Real GDP growth was reported at 7.4% year on year. And we anticipate it to to come down substantially during the current quarter. And that has to do with a number of factors. First, we have seen that previously growth has been supported mostly by public investment, whereas private investment has continued to lack, despite the government's efforts to boost it. And that has to do with primarily with the amount of uncertainty, both in terms of external demand and tariffs and trade uncertainty, but also uncertainty regarding the robustness of private consumption, of private demand. 

And on that front, again, something which we have already started seeing at the end of the last fiscal year and continue to see currently, is that rural spending remains robust, not least because of moderating inflation and good harvests during winter and also now projected favorable monsoon season, which is the main harvesting season, which determines really the course of rural demand as well as inflation. But when it comes to urban demand, it still remains soft, not least because of the soft labor conditions. And that is something which we do not see necessarily improve significantly during the remainder of the current year. Now, if you look at the supply side of the economy there as well, there are some pockets of economy which continue to underperform manufacturing in particular, if you look at India's industrial production and its component manufacturing, we see that manufacturing growth has continued to slow with the latest reading for May growing only slightly above 2% growth, which is again among the lowest in the last two years. And that is despite the ongoing optimism within the private sector about the future of manufacturing related to, you know, the relocation of some of that mobile supply chains to India. And with that, I think the critical factor to watch is really how India is successful in negotiating the trade deal with the US and whether indeed it ends up with the tariff rate, which is relatively lower to the rest of its competitors within the region, namely Vietnam, but also some of the other markets within asean. So assuming that it does secure at least an internal deal with the US and especially assuming that no substantial increase in tariffs for India's crucial pharmaceutical sector become effective, we anticipate that India's growth will or we project India's growth at 6.2% during the current fiscal year and 6.4% during the next fiscal year.

 

Ken Wattret:

Thank you, Hanna. Time's ticking on, so we need to move on to Europe and we'll bring in Diego. And one of our key predictions was that the two largest economies in the euro area, Germany and France, would continue to struggle. Diego, can you explain a bit more what's behind their economic weakness, which has been obviously particularly persistent in Germany? 

 

Diego Iscaro:

Sure. Hi, Ken. Hi, everyone. Yes, we still project the German and French economy to underperform the eurozone in 2025, despite the better-than-expected performance at the start of the year, which was mainly driven by trade front Loading. Now, Germany in particular have been struggling since 2021. Activity has been virtually flat since then. And while France has done a little bit better, still underperform compared to the Eurozone. And we expect this underperformance to become more marked in the second half of the year and in 2026. 

Now, some of the reasons why the German and French economies have struggled in recent years are due to common shocks affecting the whole region. For example, higher energy prices following the start of Ukraine. Also tighter mortgage policy from the ECB until last year. There are some specific factors that have led to the German underperformance. In particular the size of the German industrial sector, which is relatively larger not only compared to France, but also to most other economies in the Eurozone. And this meant that the German economy has been particularly impacted or affected by the recession in the manufacturing sector that we've seen in recent years. And also Germany or the German economy has been particularly hit by increasing competition in key export markets, particularly in mainland China.

And this is not noticeable but we're looking at the trade data, which shows German export to China peaking in 2021, but they have trended downwards since then. 

 

Ken Wattret:

And on the positive side, is there any prospect of a positive shift for either economy in the period ahead? I mean, we've highlighted the sea change in fiscal policy in Germany and defence spending in Europe more broadly. Do we see that as a game changer for growth? If so, you know how soon and what areas stand to benefit most. 

 

Diego Iscaro:

Yeah, we have covered extensively in the past the impact, the potential impact of a more accommodative German fiscal stance. Undoubtedly it's a big deal, involves quite big numbers, potentially around 1% of GDP per year for the next 10 years. But the overall impact on growth will depend on many factors, including how much of these funds will eventually be spent and where they will be spent. What will be the impact of the high investment spending on productivity spillovers to other sectors and countries in the region and so on. For us, I think there are quite a few reasons to be optimistic. For example, fiscal expansions tend to have a larger impact in terms of substitute demand conditions and also in countries where public debt levels are relatively low, as it is the case in Germany. However, I think there are also quite a few reasons to be cautious. 

And I think the risk of under delivering on the fiscal front is not negligible. And it remains to be seen whether the German economy can quickly absorb a fast increase in investment spending, particularly in sectors such as construction, for example, which are dealing with quite acute lead shortages. Now, we are Assuming that fiscal expansion to start having a more noticeable impact on growth and German growth from 2026 onwards, and looking at our baseline projections, we think that the risks are balanced. Now in France, the situation is slightly different. The French economy is in a good position to benefit from increasing defence spending across the region. Being the EU country with the largest defence sector, inflation has also fallen substantially and is below the US on average. And labor markets in France have been radically resilient, despite the recent increase in unemployment. However, France doesn't have the fiscal space Germany has.

Public debt ratio is well above 100% of GDP and the fiscal deficit is above 5% of GDP, which means that it doesn't have the option of funding higher defense spending with more debt Germany has. And on the other hand, France needs to consolidate its public finances. But politically this is very difficult. And this being clearly illustrated by the draft budget for next year which was unveiled last week, which proposes around 40 billion euros in fiscal consolidation. But the bill has very little probability of being approved by Parliament assistance and there are quite big question marks about the current government's ability to deliver fiscal consolidation and other reforms, given that it doesn't have a majority in Parliament. So we think that this uncertainty will continue to weigh down on the French economy and that's why we think that French growth will be below the German growth for next year. 

 

Ken Wattret:

And continuing with that theme of fiscal matters, we focused a lot on the various challenges that face the UK government. And echoing the question that was posed to Ben earlier on the US, how do we assess the risk of a fiscal crisis in the UK? 

 

Diego Iscaro:

Yeah, thank you, Ken. It's good timing for this question because this morning the UK published its government borrowing figures for June which were much worse than expected. There are some common points between France and the UK on the fiscal front. I think for the UK, the challenge is that we have this combination of structural pressures on the budget, on the spending side, for example, coming from age and demographics. And that combined with weak economic growth and tackling this mix is very difficult politically, particularly given some of the self-imposed constraints the government has, such as a pledge to not increase certain taxes and also having to meet its current fiscal rules. And all of this makes the UK quite vulnerable to a change in investor sentiment. And the government had a taste of this potential market stress earlier this year when the 10-year yield rose to 16-year high of almost 5%. And in terms of, you know, the revolution, I think we think that new tax rises are increasingly likely, almost inevitable. 

Later this year the government pledged in its pre-election manifesto that it will not raise income tax, corporation tax or VAT. But we think that it's likely that the current freezing on personal tax allowances will be extended. And also we think that their increase in capital gains tax is also likely. Now, whether this is going to help to provide a sustainable solution, the answer is almost surely not. I think if you want to picture a kind of ready optimistic scenario that would involve some supplies, Styrofoams, particularly on the planning system, deliver growth again on that front, we're quite skeptical at this stage and that's not reflected in our current projections. Well, this is another reason why we think when we hear about the fiscal policy narrative of fiscal policy boosting European growth. It really depends where we look. It's definitely the case in Germany, but not in France and certainly not in the UK.

 

Ken Wattret:

Thank you. And briefly, trade. The EU's obviously in the crosshairs of US tariff policy as it was under the first Trump administration. What are we assuming going forward for tariffs and trade relations and how big a worry is that for economic growth prospects? 

 

Diego Iscaro:

Yeah, that's a big worry. And actually uncertainty about trade policy, not only about the level of tariff, but just uncertainty about trade policy. I feel a major driver of our European forecast since the start of the year. Now, since February, we have assumed that the baseline tariff on U.S. imports of EU goods will be set at around 10%. We have kept that assumption in our latest forecast which we published last week. Now, the reason why we didn't change this assumption to 30% as mentioned in the letter sent by the US government last week, at the time we took the view that there's some room for negotiation between them and the August 1st. And the fact that the start of the tariff was initially pushed to 1 August was an indication of that. 

Now there's nothing official so far. The latest reports suggest that that space for negotiation has been narrowing. And I think that is fair to say that the risk of baseline tariff being at least for a period of time higher than we are currently assuming in our forecast has increased. Now, in terms of how much of a downside this can be for the EU economy, I think the overall impact will depend not only on the level of the baseline tariff, but also the scope. For example, whether you can get some exceptions on Section 232 tariff, whether proposed higher typhoon pharmaceutical products goes ahead or not, but also how the European Commission responds in terms of countermeasures. But yes, it has the potential on the worst-case scenario to take the economy into a recession later this year.

 

Kristen Hallam:

Thank you for listening to the Decisive Podcast from S&P Global. Please subscribe and join us for next week week's episode. Until then, stay curious and stay informed.