Euro Area: German Fiscal Package Fuels Growth and Inflation
Germany, the euro area's largest economy, has recently approved its most significant fiscal spending increase in over a generation. The centerpiece of this package is a €500 billion infrastructure investment fund, expected to boost economic growth and inflation. This development may prompt the European Central Bank (ECB) to raise its policy interest rate.
The fiscal plan, which includes an exemption from the rule limiting defense spending to 1% of GDP, could significantly impact growth, inflation, and monetary policy across the euro area. In addition to Germany’s fiscal measures, increased defense spending across Europe and the potential for a ceasefire in Ukraine have led to upward revisions in forecasts for growth, inflation, and the ECB policy rate.
Funding the plan could also lead to a substantial increase in government-backed debt issuance, as outlined by Roger Hallam, Vanguard’s global head of rates, and Shaan Raithatha, senior European economist. They noted that the plan unlocks "billions of euros in spending that could help revitalize Germany’s sluggish economy, which has contracted for over two years."
Financial Market Outlook: Performance of Major Asset Classes
Vanguard’s financial market forecasts, based on the December 31, 2024, run of the Vanguard Capital Markets Model®, outline probable outcomes for major asset classes. These projections are hypothetical and reflect a range of outcomes:
Australian Dollar Investors:
Australian equities: 4.5%–6.5% (21.8% median volatility)
Global equities ex-Australia (unhedged): 4.1%–6.1% (18.8%)
Australian aggregate bonds: 4.1%–5.1% (5.6%)
Global bonds ex-Australia (hedged): 4.4%–5.4% (5.0%)
Note: Projections are hypothetical and may vary with changing market conditions.
Regional Economic Outlook…
Australia
Australia’s economy has remained resilient, despite aggressive monetary tightening. Growth is expected to gradually recover in 2025, driven by rising real household incomes, a rebounding housing market, and anticipated rate cuts.
Growth: 2% for 2025
Unemployment Rate: Rising to 4.6%
Inflation: Stable at 2.5%, with core inflation at 2.8%
Interest Rates: Reserve Bank of Australia’s cash rate target to end 2025 at 3.5%
United States
Policy uncertainty around tariffs and immigration continues to weigh on the U.S. economy, with growth projected to slow in 2025.
Growth: 1.7% (down from 2.1%)
Inflation: Core rate at 2.7%
Unemployment: Slight increase expected with limited private-sector job growth
Interest Rates: Federal Reserve to cut rates twice, targeting 3.75%–4% by year-end
Canada
Trade and tariff concerns have led to downward revisions in Canada’s growth forecasts.
Growth: 1.3% (down from 1.8%)
Inflation: Core inflation at 2.4%
Unemployment: Rising from 6.6% to 7%
Interest Rates: Bank of Canada’s policy rate forecast to end 2025 at 2.25%
Euro Area
Germany’s ambitious infrastructure and defense spending plan is expected to fuel growth.
Growth: 1% in 2025 (up from 0.5%)
Inflation: Below 2% by year-end, with core inflation slightly higher in 2026
Interest Rates: One final ECB rate cut to 2.25%
Unemployment: Modest rise to just under 7%
United Kingdom
The UK’s economy remains sluggish with persistent inflation pressures.
Growth: 0.7% (down from 1.4%)
Inflation: Rising to 3.5% before falling to 2.5% by year-end
Unemployment: Projected to rise to 4.7%
Interest Rates: Bank of England expected to cut rates to 3.75%
Japan
Japan’s economy shows steady recovery, supported by wage growth and structural labor improvements.
Growth: 1.2%
Inflation: Core rate stable at 2%
Interest Rates: Gradual increase from 0.5% to 1.0% by year-end
China
Despite a strong start to 2025, underlying headwinds could slow China’s growth in the latter half of the year.
Growth: 4.5% (slightly below target)
Inflation: Core rate at 1.5%
Unemployment: Stabilizing at around 5%
Monetary Policy: Targeted rate cuts to stimulate consumption
Emerging Markets
Economic conditions in emerging markets remain mixed, with significant variability across countries.
Mexico: Growth could fall below baseline if tariffs persist, with core inflation remaining above target.
Brazil: High inflation has prompted the central bank to raise rates to 14.25%.
Rick Maggi CFP, Financial Advisor Perth, Westmount Financial
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This article contains certain 'forward looking' statements. Forward looking statements, opinions and estimates provided in this article are based on assumptions and contingencies which are subject to change without notice, as are statements about market and industry trends, which are based on interpretations of current market conditions. Forward-looking statements including projections, indications or guidance on future earnings or financial position and estimates are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance. There can be no assurance that actual outcomes will not differ materially from these statements. To the full extent permitted by law, Vanguard Investments Australia Ltd (ABN 72 072 881 086 AFSL 227263) and its directors, officers, employees, advisers, agents and intermediaries disclaim any obligation or undertaking to release any updates or revisions to the information to reflect any change in expectations or assumptions.