The US elections turned out to be a ‘clean sweep’, with Trump winning the presidential election and the Republican party gaining a majority in both chambers of Congress. What is more, in just two months, US recession fears and concerns about the Fed being behind the curve have diminished.

Markets have fully embraced a soft-landing scenario, with the US economy slowing but maintaining forward momentum, assisted by lower rates. On tariffs, the world is holding its breath, as they could be announced soon after Trump’s inauguration. Even though actual implementation may not happen before the second half of next year, tariffs (or the threat thereof) are likely causing economic uncertainty, adversely impacting growth. In addition, tariffs are inflationary for those who raise them, hence for the US. While the growth gap between the US and Europe could narrow, we expect the inflation gap to remain in place.

In Europe, Germany is facing early elections in February 2025, and France's government has collapsed after just 90 days in office. France remains in the doldrums as is also visible in a steep decline in business confidence post the Olympic Games. Notably GDP growth in the southern European countries is much stronger than in the north.

We expect the ECB to continue cutting rates in steps of 25 bps per meeting next year toward 1.50-1.75%. Uncertainty around the outcome of the intended policies of the new Trump administration is likely to prompt the Fed to a slower pace of easing in H1 2025. However, our central Fed funds rate forecast remains below the 3.50-3.75% that is priced by markets.