News of the week summary - 05/01/2025
China's aggressive fiscal stimulus to revive economic growth
China has announced a significant increase in the issuance of ultra-long special treasury bonds for 2025 to address persistent economic challenges. These bonds, which are government-issued debt instruments with extended maturities, will fund initiatives aimed at stimulating business investment and boosting consumer spending. Specific measures include subsidies for households to trade in old consumer goods, such as cars and appliances, and incentives for businesses to upgrade large-scale equipment. Additionally, households will receive subsidies for purchasing digital products like smartphones and smartwatches.
This move reflects China's broader strategy to counter deflationary pressures and rekindle domestic demand. Ailing sectors such as property and weak consumer spending, combined with global trade uncertainties, have hampered growth in the world’s second-largest economy. To combat these issues, the Chinese government has allocated substantial resources—up to 1 trillion yuan in 2024—towards infrastructure projects like railways, airports, and farmland development.
In a marked fiscal shift, the issuance of special treasury bonds is projected to reach 3 trillion yuan in 2025, the highest on record. Local governments will also ramp up special bond issuances to 4.7 trillion yuan, funding various public works and key industries. Altogether, China's fiscal deficit, inclusive of these measures, could reach 9–10% of GDP—a historically high level.
Complementing these fiscal policies, monetary easing is anticipated, with the central bank signaling potential rate cuts from the current 1.5% benchmark. Such actions aim to lower borrowing costs, encourage investment, and foster economic expansion.
The government remains committed to a 5% economic growth target for 2025. However, structural issues like local government debt and a protracted property sector crisis loom as obstacles. Despite these challenges, officials express confidence in their ability to sustain recovery, underscoring the critical role of coordinated fiscal and monetary policies in stabilizing the economy.
Eurozone labour market defies economic stagnation, but challenges loom
The eurozone's labour market has demonstrated remarkable resilience despite a stagnant economy, with unemployment at 6.3%. This counterintuitive trend, where employment growth has outpaced GDP expansion since 2022, is partly attributed to "labour hoarding." This practice involves firms retaining employees even during downturns, supported by rising profit margins and stabilizing costs, such as energy prices.
However, the European Central Bank (ECB) warns that these supportive factors are waning. Labour hoarding peaked in late 2022, and firms are now less inclined to keep excess workers, signaling a gradual reversion to historical correlations between employment and economic output. Still, the ECB anticipates no dramatic weakening of the labour market, projecting that unemployment will remain low in the near term.
The stability of the labour market is critical for maintaining disposable incomes and consumer demand, which are key to moderating inflation. Policymakers, however, remain cautious, as a sharp erosion of employment could trigger deeper economic challenges, including deflationary pressures.
Despite the steady labour market, investor confidence in the eurozone is waning. The Sentix index, a key measure of investor morale, fell to -17.7 in January, the lowest since November 2023. Germany, the bloc’s largest economy, continues to weigh heavily on the region, grappling with a prolonged recession.
While expectations for future economic performance have slightly improved, the current assessment remains bleak, reflecting widespread pessimism about Germany’s near-term recovery. This poses risks to the broader eurozone, as Germany’s economic health is pivotal for regional stability.
European markets rally amid softer tariff expectations
European stocks and currencies surged on optimism fueled by reports that US tariffs under the incoming Trump administration might be less severe than previously anticipated. The proposed tariffs could be narrowly focused on "critical imports" linked to national or economic security, marking a departure from Trump’s earlier broader tariff threats. This shift boosted investor sentiment across global markets.
The euro climbed by 1.2%, while a pan-European index of 600 stocks rose 0.8%, with auto stocks leading the charge. Currencies vulnerable to US trade policies, including the Mexican peso and Canadian dollar, also saw gains. The Chinese yuan appreciated by 0.4% in offshore trading. Analysts noted that narrowing the scope of tariffs could soften the economic blow of protectionist policies, easing concerns about retaliatory measures.
The tempered tariff plans provide temporary relief to global markets but highlight the ongoing sensitivity to US trade policies. While European and US markets showed resilience, concerns about elevated Treasury yields and the Chinese yuan’s depreciation reflect underlying fragilities. Beijing’s measures to stabilize markets and the yuan underscore the broader economic challenges facing the world's second-largest economy amid uncertainties surrounding Trump’s policy agenda.
France Scales Back Budget Savings to Support Growth
France’s new government, led by Finance Minister Eric Lombard, has revised its fiscal strategy, targeting €50 billion in savings for the 2025 budget. This is a reduction from the €60 billion goal set by the previous administration, which collapsed last month after its budget proposal failed to pass. Lombard emphasized the need for a more moderate approach to avoid stifling economic growth, aiming for a budget deficit of 5.0% to 5.5% of GDP in 2025.
The previous government, under Michel Barnier, had aimed to reduce the deficit from 6.1% in 2024 to 5% in 2025. However, deep divisions in parliament, particularly over austerity measures, led to its downfall. Investors and credit rating agencies have grown increasingly concerned over France’s fiscal situation, which has heightened pressure on Lombard to craft a viable budget that balances economic growth and fiscal discipline.
To avoid a repeat of last month’s no-confidence vote, Lombard is consulting opposition parties, particularly the Socialists, who advocate higher taxes on wealthy individuals and corporations. The revised budget plan retains elements from the failed proposal, including an additional €8 billion tax on France’s largest companies and a hike in taxes on the wealthiest taxpayers.
Lombard has also expressed openness to increasing the 30% flat tax on capital gains and investment income introduced in 2018 by President Emmanuel Macron. While this measure was intended to attract global investors, it has faced criticism for disproportionately benefiting the rich, intensifying political sensitivities around fiscal policy.
France’s fiscal challenges reflect broader tensions between economic growth and fiscal responsibility. Austerity measures, though necessary to restore financial credibility, risk undermining confidence among businesses and households. The government’s revised budget strategy seeks to thread the needle by preserving growth while addressing deficits, but political divisions in parliament remain a significant hurdle.
Ultimately, the success of Lombard’s approach will hinge on his ability to secure bipartisan support and reassure markets that France can stabilize its finances without derailing economic recovery. This delicate balancing act underscores the broader struggle faced by advanced economies grappling with post-pandemic fiscal pressures.
Russian gas transit through Ukraine ends
Russian natural gas transit through Ukraine ceased this week after the expiration of a long-standing transit deal. The stoppage cuts off one of the last two major routes for Russian gas to Europe, resulting in an estimated 5% reduction in European gas imports during the peak winter heating season. Slovakia is expected to feel the most significant impact.
This development follows Ukraine's refusal to negotiate an extension of the 2019 agreement, signed under EU mediation. The Ukrainian government has emphasized its aim to deprive Russia of gas transit revenue, which previously contributed about $6.5 billion annually to the Kremlin.
The cessation of gas flows through Ukraine could drive up European gas prices, particularly as demand for liquefied natural gas (LNG) competes with Asian markets. European officials, however, maintain that the bloc's diversified supply chain, bolstered by expanded LNG import capacities since 2022, can offset the loss of Russian pipeline gas.
The halt reflects a broader geopolitical shift in Europe’s energy strategy following Russia's full-scale invasion of Ukraine in 2022. EU member states, encouraged by the European Commission, have sought alternative energy sources to reduce dependency on Russian fossil fuels. However, Hungary and Slovakia, with Moscow-friendly policies, had pushed for extending the deal.
For Russia, the expiration of the transit deal represents a substantial economic blow, compounding the effects of international sanctions. Gazprom, Russia’s state-owned energy company, blamed Ukraine for the breakdown, citing its refusal to extend the agreement.