This scenario assumes a status quo in the tariff confrontation with the US on 4 June, ie, an across-the-board increase in tariffs to 10%, with the exception of exempted products, 25% on automobiles and 50% on steel. The risks associated with this central scenario are bearish. The stagnation scenario could materialise if the trade confrontation with the US were to intensify, if the competitiveness constraints were to bite further, if private sector confidence were to deteriorate significantly and, finally, if the fiscal stimulus were to be implemented more gradually than anticipated.
In the not-too-distant past, such an uncertain environment, with a global slowdown and shrinking export markets, would certainly have led to an ‘underperformance’ by emerging economies, which were also handicapped by market aversion to risk, rising interest rates and pressure on their currencies. However, despite tariffs (the effects of which will vary greatly from one economy to another), our overall scenario remains rather optimistic for the major emerging countries. They could show unprecedented resilience, thanks to support that could partially cushion the impact of a lacklustre environment: relatively strong labour markets, solid domestic demand, monetary easing (with rare exceptions) and limited Chinese deceleration. Finally, emerging currencies have held up well, and the risk of defensive rate hikes penalising growth is lower than might have been feared. This relatively positive outlook is, however, accompanied by higher-than-usual secondary risks, due to the unpredictability of US policies.
In terms of monetary policy, the end of the easing cycles is approaching. In the US, The Fed is firmly in “wait and see” mode, faced with a scenario of a clear downturn in 2025, a rebound in 2026 and rising inflation that would continue to significantly exceed its target – as well as the degree of uncertainty surrounding this scenario. But in our view, it will still proceed with modest easing followed by a long pause. Our scenario still calls for two cuts in 2025, but shifts them by one quarter (in September and December, vs June and September previously). After these two cuts, we expect the Fed to keep rates unchanged at a maximum upper limit of 4% throughout 2026. As for the ECB, although it refuses to rule out any future rate cuts, it may well have reached the end of its rate-cutting cycle, with growth expected to pick up and inflation on target. Of course, a deterioration in the economic environment would justify further easing: the ECB stands ready to cut rates if necessary.
On the interest rate front, US interest rates are feeling pressure from (1) the risk of stubborn inflation and a fiscal path deemed unsustainable, (2) a compromised AAA rating, (3) fickle economic decisions, and (4) heightened investor concerns. Our scenario assumes a 10Y Treasury rate close to 4.70% at end-2025 and 4.95% at end-2026. In the Eurozone, with growth resilient and projected to accelerate, inflation on target and the ECB expected to have almost completed its easing, interest rates are likely to rise slightly and sovereign spreads to stabilise or even tighten. The 10Y Bund rate could thus approach 2.90% at end-2025 and 2.95% at end-2026. Over the same maturity, France’s spread relative to the Bund would hover around 60-65bp, while Italy’s would narrow to 90bp by the end of 2026.
Lastly, the USD is continuing to lose some of its lustre. It has been under pressure from (1) Donald Trump’s volatile, unpredictable economic (and other) policies, (2) the deteriorated US budget outlook, (3) speculation about any official intentions to depreciate the currency, and (4) resistance from other economies. However, we continue to think it is too early to call the demise of the USD’s reserve currency status. We expect EUR/USD to reach 1.14 in Q425, before falling to 1.10 in 2026.
“Crédit Agricole Group, sometimes called La banque verte due to its historical ties to farming, is a French international banking group and the world’s largest cooperative financial institution. It is France’s second-largest bank, after BNP Paribas, as well as the third largest in Europe and tenth largest in the world.”
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