Cliff Notes: Calm Conditions

Economic

Summary:

Key insights from the week that was.

In Australia, the RBA’s November Meeting Minutes provided a deep dive into the Board’s baseline views and assessment of risks. Chief Economist Luci Ellis subsequently discussed a number of noteworthy developments, one being the statement that the Board “would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable.” This is in line with the Board’s policy strategy to take and signal a patient and careful approach to assessing current disinflation. It should also be noted that the RBA’s economic and policy forecasts incorporate technical assumptions on the cash rate path based on market pricing. Of late, market pricing has shifted the start date for cuts back and also reduced the expected quantum of easing; the RBA have expressed a greater degree of comfort with such a view, considering known risks at this time.

Following these developments, we adjusted our view on the most probable path for monetary policy. We have moved back the start date for the cutting cycle from February to May, but have retained 100bps of easing in 2025, with a terminal rate of 3.35% still forecast for the December quarter. We see risks to the timing of the first cut in May as broadly balanced. Some of the more notable risks include the pace of the expected recovery in consumer spending following Stage 3 tax cuts – the hit to real incomes in prior years and caution shown by consumers towards spending in recent months leads us to expect a slower recovery in consumption growth than the RBA – and the tightness of the labour market. Both of these uncertainties have important implications for inflation’s trajectory. Next week’s October monthly inflation gauge will be another important update on Australia’s immediate inflation pulse and the risks (see here for our preview).

Over in the UK, annual inflation accelerated to 2.3% in October as electricity price rebates from 2023 cycled out. Core inflation was unaffected by this development, but edged higher to 3.3%yr in the month as services inflation remained sticky around 5.0%yr. Inflation is on track to overshoot the Bank of England’s 2.0%yr target for 2024 overall – the CPI needs to rise just 0.1% in the next two months for annual inflation to print at 2.25%yr come December 2024. The BoE’s more cautious tone around back-to-back cuts hence speaks to the lingering uncertainty for inflation.

In Japan meanwhile, while the data has not pushed rate hikes off the table, it is also yet to convince that the virtuous cycle of prices and wages is being sustained. Governor Ueda noted this week that the December meeting would be ‘live’ and that data between now and December would dictate their decision. CPI ex. fresh food came in slightly above expectations at 2.3%yr in October, below September’s 2.4%yr and August’s 2.8%yr, but above the 2.0%yr policy target. Services inflation has shown greater momentum in the past three months. RENGO leader Tomoko Yoshino has called on the new Prime Minister to support small businesses in raising wages ahead of the union’s wage negotiations in March. RENGO will be targeting another 5.0% increase in wages for FY25 after it secured a 5.1% increase in FY24. Persistence in inflation will help make the union’s case, as will support from the government. Large businesses in Japan have been quieter this year about their wage plans. Arguably, the BoJ will want to see evidence that businesses intend to maintain wage growth in FY25 before they raise rates again.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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ING

Economic

Energy

COP29’s not so wonderful circumstances

Climate scientists have become more pessimistic

The goal of limiting global warming to 1.5 degrees is slipping away, despite increased efforts across the globe. A recent poll among almost 400 Intergovernmental Panel on Climate Change (IPCC) climate scientists revealed that only a handful still believe this target is achievable. The discussion is now shifting to what extent global warming can be limited to 2.0 degrees, the upper boundary of the Paris Agreement signed at COP21 in 2015.

The 2024 UNEP Emissions Gap Report was published in advance of COP29 and provided a similar feel of pessimism. But we feel that the message was concealed behind many graphs and tables and, in turn, wasn't quite as bold as that provided by climate scientists when asked directly.

World leaders and policymakers take a step back

From a policy point of view, the fight against global warming and the resulting damage and loss to economies can be seen as a global coordination problem. Climate calculus requires a solution where governments act collectively in a fast and preferably steady and orderly manner. However, progress has stalled.

The geopolitical landscape, including conflicts in the Middle East and a second presidential term for Donald Trump, complicates coordinated action. Trump’s pro-fossil fuel stance and potential trade tensions could further delay the transition to a net zero global economy. We've also seen some intense debate – especially among government officials from Western nations – about potential conflicts of interest presented by Azerbaijan’s significant involvement in the oil and gas industry, which some suggested could undermine the credibility of the summit and its outcomes.

When governments step back, some corporates – but not all – take responsibility

So, what do you do as a corporate leader in such a challenging environment? Some feel responsible and take a step forward, trying to turn this vicious circle around. Responsibility can come from sincere concerns about the state of the climate and the many planetary boundaries that have been crossed. But it could also be a form of self-interest, as the risks and costs of doing business increase with global warming.

Whatever the motivation, there are some good examples of how corporate leaders step forward:

More than 100 CEOs and senior executives from the ‘Alliance of CEO Climate Leaders stepped forward in the run-up to COP29 by calling upon governments and fellow business leaders to commit strategically and financially to net zero.

Others are not calling upon governments but built a coalition of those willing within their industry to move forward. For example, more than 50 leaders across the spectrum of the shipping value chain – e-fuel producers, vessel and cargo owners, ports, and equipment manufacturers – signed a Call to Action at the opening day to accelerate the adoption of zero-emission fuels. This is important as energy efficiency gains are currently undone by increased geopolitical tensions that have already disrupted trade patterns and resulted in longer shipping routes (detouring around the Cape), causing the sector's emissions to hit record highs.

And there are leaders that use their voices in the media. By nature of being hosting in a major oil and gas-producing country, COP29 sparked controversy before it had even begun. Some leaders saw this as an opportunity to include these countries in the transition, especially leaders from companies that are accustomed to working in fossil fuel-rich regions. Similarly, firms focusing on green technologies see the summit as a platform for introducing sustainable solutions to a region that could greatly benefit from them.

But we realise that these frontrunners are still a minority. A fair share are likely to take a wait-and-see approach at best – or at worst, prove complacent towards delay in the transition. We knew it would be difficult to beat the levels of attendance seen at Dubai’s COP28 – the best-attended COP in history – but we cannot ignore this year’s pitiful turnout. There are some valid reasons for this – many CEOs and CFOs have noted a lack of strategic alignment between the main negotiation topics of UN member states and the areas where they can meaningfully contribute. The notable absence of key world leaders, like US President Joe Biden, President of the European Commission Ursula von der Leyen, French President Emmanuel Macron and German Chancellor Olaf Scholtz, has also reduced the opportunities for business leaders to engage with top policymakers.

We believe it is important that corporate leaders leverage their influence and lobbying power towards a more sustainable world, especially in times when governments step back. Sure, in the short term this step back benefits existing practices, but in the long run it’s in their own interest. Many leaders have committed to net zero production by 2050. A timespan of 25 years is, in terms of societal transitions, just around the corner. Many leaders only have one or two major investment cycles to get there, so they have to act soon. And radical transformation, for example in areas like green steel, green plastics and sustainable fuels is far from easy. Often these business cases are not competitive, requiring strong governments to lower the risk return profile of investments by targeted policies.

So, corporate leaders need governments to support this radical transformation. And the government needs businesses that invest in the transition towards a net zero economy. Without this healthy symbiosis, we fear that corporate leaders will focus on ‘business as usual’ and put incremental change over radical change. Think of solar and wind power over novel nuclear power (small modular reactors), energy efficiency over renewable natural gas, carbon capture and storage over direct air capture, and grey or blue hydrogen over green hydrogen.

The importance of climate adaptation grows if climate mitigation falters

In our view, climate adaptation is becoming a major topic in boardrooms, alongside climate mitigation. These two areas are interconnected; if temperatures rise faster than the 1.5-degree baseline many corporations use, the importance of climate adaptation increases. In such a scenario, corporate leaders must focus on adapting their businesses to rising temperatures and the damage caused by extreme weather events such as droughts, floods, forest fires, hurricanes, and hailstorms. The increased flooding risks for the textile industry in Bangladesh (and the global fashion supply chain), the threats from droughts and desertification to agriculture in Mediterranean countries, and the damage and losses for the housing and real estate sectors from more frequent and severe hurricanes in the US all underscore this point.

Here are two key ways we believe climate adaptation will become a priority in boardrooms:

Strategy and risk management

Corporate leaders increasingly need to integrate climate adaptation into their business strategies to ensure that their organisations are prepared to handle the impact of climate change. Focus will differ according to role. CEOs will prioritise climate adaptation alongside business growth and decarbonisation, incorporating it into their overall business strategies. CFOs will concentrate on safeguarding the financial health of their companies and their production assets against climate events. CROs will play a crucial role in assessing climate-related risks across regions and production locations. COOs and heads of business units will identify and implement business opportunities that arise from climate adaptation. Finally, leaders of HR departments will focus on ways to improve employee well-being and safety, such as adjusting working hours during excessive heat.

Supply chain management

A significant lesson from the Covid-19 crisis is that external events can profoundly impact your business. The same applies to climate events, where a crop failure in one place can have serious implications for food producers across the globe. Therefore, climate adaptation requires a supply chain and trade perspective to ensure your business remains resilient.

Systems change: from greening activities to changing the rules of the game

Finally, we believe that the topic of systems change will enter the boardroom prominently as the private sector must think systemically about decarbonisation. If the current system produces unsustainable outcomes, leaders must change the rules of the game – not just the players (their companies).

Below, we've outlined our top three expectations on how systemic change thinking enters the boardroom:

Collaborative action and advocacy

Frontrunners in sustainability increasingly realise they can’t meet their net zero targets in isolation. Achieving goals like green steel, plastic, cement or transportation requires a thriving market for green hydrogen, effective carbon capture and storage (CCS), and robust electricity grids for renewable power. These goals can only be achieved effectively and efficiently through collaborative and coordinated action from companies, governments, industries, financiers, NGOs, and knowledge institutions.

We believe that corporate leaders will increasingly need to leverage their influence beyond their own operations. They should actively advocate for systemic change needed from all players, including governments and financial sectors. If the rules of the game become more sustainable, the desired outcomes will naturally follow.

Nature-based solutions

Beyond carbon emissions, companies are starting to address issues like biodiversity loss, plastic pollution, and water pollution. It was interesting to see that attendance of corporate leaders at the recently held UN Biodiversity Summit in Colombia was higher compared to last year, contrary to this years emissions summit in Baku.

Adopting nature-based solutions can align with CO2 reduction goals, creating a holistic approach to sustainability. Think, for example, of increasing ground water levels in peatland or agriculture land that lowers CO2 emissions from land use and generally increases biodiversity. Addressing these complex societal problems will yield the best results when corporate decision-makers adopt a systemic perspective rather than thinking within the confines of their own companies.

Carbon pricing

As economists, we support carbon pricing as an effective and efficient tool to enhance the financial viability of cleantech solutions and reduce emissions. COP29 is expected to solidify the framework for international voluntary carbon markets, addressing a persistent stumbling block in COP history by working out the details for accurate reporting and double counting of emissions. This development enables corporate leaders to incorporate carbon offsetting strategies into their carbon reduction plans. For example, CORSIA, a global market-based carbon scheme developed by the International Civil Aviation Organisation (ICAO), addresses CO2 emissions from international aviation through carbon credit trading. Similarly, the International Maritime Organisation (IMO) framework allows shippers to purchase carbon credits to offset emissions in long-haul shipping. While these are examples of sector initiatives, any organisation in any sector can use carbon offsetting to ‘lower’ its carbon emissions.

However, we favour mandatory carbon markets, like the EU ETS, or companies calculating with a fictive internal carbon price of comparable size when making investment decisions over voluntary carbon markets, as prices in voluntary markets are generally too low to reflect the true cost of carbon reduction.

That said, COP29 is crucial for strengthening the credibility of voluntary carbon markets, offering corporate leaders a tool to offset emissions that cannot be reduced through other means. We believe the priority should be to reduce one’s own emissions as much as possible, with offsetting reserved for the most challenging reductions.

Truth be told, we're not convinced that COP29 will deliver any monumental milestones in climate policy – but we do think it'll set the stage for more significant progress at COP30.

However, corporate leaders should not underestimate its implications or delay action. COP29 continues to shape the management agenda, particularly in areas like corporate responsibility, climate adaptation and systems change.

Despite the challenging environment, we think that corporate leaders that are sustainability pioneers should be able to channel the outcome from Baku into strategic discussions and concrete actions.

To stay updated on all economic events of today, please check out our Economic calendar

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Brookings Institution

Economic

At the end of 2025, the individual provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) will expire unless Congress acts. Since the law’s passage, criticism has centered on how the law disproportionately reduced taxes for high-income households. Thus, there is good reason to think that any tax bill that addresses these provisions will have to grapple with the broader question of how best to tax high-income households. We address these issues in a new paper in Tax Notes and a short policy brief.

Why is the structure of high-income household taxation important? First, these households earn a significant share of overall income and have substantial ability to pay taxes. As a result, they are expected to bear a significant share of the tax burden. This is a crucial issue to debate but not the one we examine here.

Instead, we focus on better ways to tax the affluent, holding constant the tax burden they bear. A key fact is that affluent households earn income in different forms than the general population. According to IRS data, the top .01% of households by income (the top 1 in 10,000) earn roughly 85% of their income from investments and closely-held businesses. In contrast, households in the bottom 80% of the income distribution earn nearly 80% of their income from labor, including wages, salaries, and fringe benefits.

The taxation of high-income households can create distortions that affect the overall economic efficiency and horizontal equity of the tax code. In the past decade, much of the debate has centered on how the tax code distorts how much taxable income is reported, in what form that income is reported, and when income is realized. Lawmakers and analysts have also considered how taxation influences the types of investments business make, how businesses finance investments, and what legal forms businesses take.

Improving the taxation of high-income households is not as simple as cutting taxes. Some tax increases on high-income households would reduce distortions. For example, lawmakers could raise taxes on capital income by limiting the extent to which corporations could deduct net interest expense. This would reduce an existing tax provision that favors debt finance by making the taxation of debt-financed business investment more similar to the taxation of equity-financed investment.

And some tax cuts can increase distortions. The canonical example of this is the TCJA’s 20% deduction for pass-through business income, Section 199A. This deduction greatly increased the incentive for owners of closely-held businesses to report their business income as lower-taxed profits rather than wages. For example, $1 of income would be taxed at a maximum rate of 29.6% if reported as a profit but would be taxed at the federal level at a rate of 40.2% if reported as labor compensation.

Tax policies affecting the affluent have important consequences for the distribution of the tax burden, but also the equity and efficiency of the tax system. Ultimately, lawmakers should approach taxation of affluent households the same way they approach tax reform: Construct a tax system that will raise revenue while minimizing distortions.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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SAXO

Economic

Saving for Stability: The Foundation of Every Financial Strategy

For anyone starting their wealth-building journey, saving is a critical first step. Think of it as your financial safety net.

Who Should Save?

If your goal is short-term (under 3 years), such as buying a car or funding a holiday.

If you value stability and need quick access to funds (e.g., for emergencies).

Instruments to Consider:

High-Yield Savings Accounts: Offer modest returns but immediate access.

Money Market Funds: A step up in returns, these provide a low-risk option with slightly better yield than savings accounts.

Fixed Deposits (CDs): For higher interest rates, consider locking your money away for 6–12 months.

Strategy:

Automate your savings! Set up recurring transfers post-payday. To make the most of this, aim to beat inflation.

Investing for Growth: Building Wealth for the Long Haul

Investing is about putting your money into assets that grow over time, whether through price appreciation, dividends, or interest.

Who Should Invest?

If your goals are medium-to-long-term (5+ years), like buying a home or funding retirement.

If you’re comfortable taking on some risk for potentially higher returns.

Instruments to Consider:

Equities (Stocks): Perfect for growth-oriented investors, stocks can deliver strong returns over the long term.

Bonds: For those seeking stability, bonds provide steady income and capital preservation. Government bonds like Irish sovereigns or U.S. Treasuries are low-risk options, while corporate bonds offer higher yields.

ETFs: Ideal for diversification and low fees, ETFs can track indices, sectors, or themes, offering a balanced way to grow wealth.

Strategies:Growth

Investing: Focus on companies or sectors with high potential for price appreciation, such as technology or renewable energy.

Income Investing: Choose dividend-paying stocks or bonds to generate consistent cash flow.

The Long-Term Approach: Adopt a buy-and-hold strategy. ETFs like the S&P 500 or Euro Stoxx 50 allow you to invest broadly in high-performing markets without the need to pick individual stocks.

Trading for High Rewards (and High Risk): The Art of Active Management

Trading involves short-term buying and selling, aiming to capitalize on price movements. While it offers high potential returns, it’s also the riskiest strategy.

Who Should Trade?

If you thrive on risk and are willing to dedicate time to monitoring markets.If you have discretionary funds that you can afford to lose.

Instruments to Consider:

Equities: Focus on volatile stocks with significant daily price swings.

Forex and Commodities: Ideal for traders looking to profit from macroeconomic trends.

Leveraged ETFs: A high-risk way to amplify short-term returns.

Strategies:

Momentum Trading: Ride the wave of stocks or sectors with strong upward (or downward) momentum.

Day Trading: Profit from intraday price movements in stocks, forex, or futures.

Swing Trading: Hold positions for a few days to weeks to capitalize on medium-term trends.

Caution: Trading requires advanced knowledge and tools. Start small, use demo accounts to practice, and avoid leveraging until you’ve built experience.

Balancing Act: How to Combine Saving, Investing, and Trading

You don’t need to pick just one strategy! A balanced approach can help you achieve financial goals while managing risk.

Short-Term Goals (0–3 Years): Prioritize savings for stability and liquidity. For slightly higher returns, consider low-risk ETFs or bonds. Examples include the SPDR Bloomberg 1-3 Year Euro Government Bond UCITS ETF (SYB3).

Medium-Term Goals (3–10 Years): Focus on equities and ETFs for growth. Reinvest dividends to take advantage of compounding. Examples include the VanEck iBoxx EUR Sovereign Div 1-10 ETF (TGBT).

Long-Term Goals (10+ Years): Mix stocks, bonds, and ETFs to build a diversified portfolio that balances growth and income. Examples include the SPDR Bloomberg 10+ Year Euro Government Bond UCITS ETF (LGOV).

Practical Action Plan for Different Investor Types

The Income Seeker

Goal: Generate consistent cash flow.

Focus on dividend stocks and corporate bonds.

Use ETFs like WisdomTree US Quality Dividend Growth UCIT ETF (WTDM) or like WisdomTree Global Quality Dividend Growth UCIT ETF (WTEM) for diversification.

The Long-Term Builder

Goal: Grow wealth steadily over time.

Use index funds like S&P 500 ETFs or MSCI World ETFs for broad exposure. Examples include the iShares Core S&P 500 UCITS ETF (Acc) (CSPX) and the iShares Core MSCI World UCITS ETF USD (Acc) (SWDA).

Regularly contribute to retirement accounts and reinvest dividends.

The Risk-Taking Trader

Goal: Maximize returns through active strategies.

Engage in forex trading, commodities, or options for speculative plays.

Adopt a disciplined risk management strategy—limit losses and avoid over-leveraging.

Final Thoughts: Adapt and Thrive

The best financial strategy evolves with your life stage and market conditions. Regularly reassess your goals and rebalance your portfolio. Whether saving for security, investing for growth, or trading for thrills, the key is to stay informed, diversified, and disciplined.

Put your money to work wisely, and watch as it builds the life you envision. As always, plan for the long term, but be agile enough to seize short-term opportunities.

To stay updated on all economic events of today, please check out our Economic calendar

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JanusHenderson

Political

Economic

Over the past few months, there has been a lot of talk about “vibes.” Good vibes, bad vibes, brat vibes, crypto vibes … the vibes have taken over our collective psyches.

In fact, we’ve seen “nervous vibes” from investors of all stripes over the past two years through our Investor Survey. In both the 2023 and 2024 surveys, 78% of respondents cited the 2024 presidential election as their top concern as it relates to the impact on their finances. That concern – which topped worries about inflation or a potential recession – led to pessimism about the markets and shifts toward more conservative allocations.

Now that the election is decided, it may be time for a vibe check with clients.

Bad vibes and uncertainty linger

Even though the election has been decided, that doesn’t mean the emotions investors have grappled with over the past couple years will disappear. Given how tight the race was, there are inevitably many Americans who were disappointed with the outcome, and many uncertainties about the economy remain. This uncertainty could lead to emotional, short-term decision making, which as we know usually leads to less-than-optimal long-term investment results.

Now more than ever, advisors need to help clients focus on their long-term goals and not let their emotions lead them to make significant allocation changes. Here are a few ideas that I’ve found can help put the election and its impact – or lack thereof – on markets in proper perspective:

Research has shown that investors who let their political preferences dictate their investment decisions underperformed the broader market by 2.7% per year on average through over-trading, taking less risk, and having increased international allocations. In the one-year period following the last five elections (three Democrat wins, two Republican) the S&P 500® Index has returned on average +19%. From 1945 to 2024, the average return of the S&P 500 in the first year of a presidential administration has been +7.7%.

Finally, it may be helpful to remind these investors that everyone, no matter their candidate of choice, woke up the day after the election and went to work. And that (among other things) is ultimately what makes stock prices – and our long-term investments – increase in value.

Good vibes in markets – for now

Immediately following Trump’s win, equity markets shot upward, with the S&P 500 reaching an all-time high of 5,995 on November 8, 2024. Along with that, the VIX index of implied equity market volatility decreased significantly. Between November 1 and November 8, the VIX decreased by 31.7% to a level of 14.94.

The good vibes initially felt in markets may have some investors convinced the surge will continue for the next four years. And while markets do tend to go up during most presidencies (both Democrat and Republican), it’s important to remember that equity performance has historically been indifferent to election outcomes over the long term. In fact, every U.S. president going back to Herbert Hoover has seen a bear market during their administration.

Helping Investors Manage Post-election “Vibes”_1

Along with that, the Shiller CAPE Ratio, a stock valuation measure that uses real earnings per share over a 10-year period versus just a one-year period, was at 38.08 on November 7, 2024. (Its all-time high 44.19 in December 1999.) Research has shown that CAPE values are strongly negatively correlated with future returns (correlation coefficient = -0.7). The current elevated level may mean that stocks are overvalued and that markets could be headed for a period of lower returns.

Of course, while the VIX and the CAPE can help provide historical context, none of these measures can predict with certainty where stocks are headed, especially when so many unknown factors have the potential to change the trajectory of the markets and economy.

Long-term vibes matter most

So, what are investors to do? There are always reasons to be optimistic and pessimistic, but the market is going to do what it is going to do – and we can’t control that. The only thing we can control is the long-term plan we have created. And that should be a plan that is created with your goals in mind, not who the president is or isn’t.

In the end, my own vibes tell me that keeping a goals-driven, long-term focus is the best we can do, and history supports the effectiveness of that strategy.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Goldman Sachs

Economic

“The US economy is in a good place,” writes David Mericle, chief US economist in Goldman Sachs Research. “Recession fears have diminished, inflation is trending back toward 2%, and the labor market has rebalanced but remains strong.”

Goldman Sachs Research predicts US GDP will grow 2.5% on a full-year basis. That compares with 1.9% for the consensus forecast of economists surveyed by Bloomberg.

The US Economy is Poised to Beat Expectations in 2025_1

Three key policy changes following the Republican sweep in Washington are expected to affect the economy, Mericle writes in the team’s report, which is titled “2025 US Economic Outlook: New Policies, Similar Path.”

Tariff increases on imports from China and on autos may raise the effective tariff rate by 3 to 4 percentage points.Tighter policy may lower net immigration to 750,000 per year, moderately below the pre-pandemic average of 1 million per year.The 2017 tax cuts are expected to be fully extended instead of expiring and there will be modest additional tax cuts.

How will Trump’s policies impact the US economy?

While the expected policy changes under President elect Donald Trump may be significant, Mericle doesn’t project that they will substantially alter the trajectory of the economy or monetary policy.

“Their impact might appear most quickly in the inflation numbers,” Mericle writes. Wage pressures are cooling and inflation expectations are back to normal. The remaining hot inflation appears to be lagging “catch up” inflation, such as official housing prices catching up to the levels reflected by market rents for new tenants.

Goldman Sachs Research forecasts that core PCE inflation, excluding tariff effects, will fall to 2.1% by the end of 2025. Tariffs may boost this measure of inflation to 2.4%, though it would be a one-time price level effect. Our economists’ analysis of the impact of the tariffs during the first Trump administration suggests that every 1 percentage point increase in the effective tariff rate would raise core PCE prices by 0.1 percentage points.

The US Economy is Poised to Beat Expectations in 2025_2

“While we have yet to see definitive evidence of labor market stabilization, trend job growth appears to be strong enough to stabilize and eventually lower the unemployment rate now that immigration is slowing,” Mericle writes. The economy was able to grow faster than Goldman Sachs Research’s estimate of potential GDP growth over the last two years, in part because a surge in immigration boosted labor force growth. Next year, a tightening job market is expected to replace the role of elevated immigration.

Policy changes, meanwhile, are anticipated to have roughly offsetting effects on economic expansion over the next two years. “The drag from tariffs and reduced immigration will likely appear earlier in 2025, while tax cuts will likely boost spending with a longer delay,” Mericle writes.

Policy changes are likely in other areas too, such as a lighter-touch approach to regulation. But the effects are expected to occur mainly at an industry level rather than a macroeconomic level.

How likely is a US recession?

The US Economy is Poised to Beat Expectations in 2025_3

“Recession fears have faded as the downside risks that had worried markets failed to materialize,” Mericle writes. There’s 15% chance of US recession in the next 12 months, according to Goldman Sachs Research, which is roughly in line with the historical average.

“Consumer spending should remain the core pillar of strong growth, supported both by rising real income driven by a solid labor market and by an extra boost from wealth effects,” Mericle writes. “And business investment should pick back up even as the factory-building boom fades.”

There are risks to the economy, however. A 10% universal tariff, which would be many times the size of the China-focused tariffs that unnerved markets in 2019, would likely boost inflation to a peak of just over 3% and hit GDP growth.

Markets could become concerned about fiscal sustainability at a time when the debt-to-GDP ratio is nearing an all-time high, the deficit is much wider than usual, and real interest rates are much higher than policymakers anticipated during the last cycle.

The outlook for the Fed during the Trump administration

Goldman Sachs Research expects the Federal Reserve to continue to cut the funds rate down to a terminal rate of 3.25-3.5% (the policy rate is 4.5% to 4.75% now), which would be 100 basis points higher than in the last cycle.

That’s because our economists expect the Federal Open Market Committee to continue nudging up its estimate of the neutral rate (typically considered the interest rate that neither stimulates nor slows the economy). In addition, non-monetary policy tailwinds — in particular, large fiscal deficits and resilient risk sentiment — are offsetting the impact of higher interest rates when it comes to demand.

To stay updated on all economic events of today, please check out our Economic calendar

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Bruegel

Economic

At first sight, the 10 September 2024 European Union Court of Justice (CJEU) ruling on Apple’s Irish tax bill seems just about fair. The ruling, confirming that that Ireland granted unlawful aid to Apple and should recover €13 billion in unpaid taxes, tackles an extremely aggressive scheme. European Commission executive vice-president and competition commissioner Margrethe Vestager hailed it a “big win for European citizens and for tax justice” .

But the decision also raises challenging tax policy questions. Apple certainly engaged in very aggressive tax planning, facilitated by Irish law, but the CJEU granted the taxing rights over the shifted profits to Ireland exclusively, despite most the profits accruing elsewhere. This decision could have unintended negative consequences for the EU single market in the long term.

In particular, the ruling validates a situation in which rules on the allocation of profits to jurisdictions for taxing purposes remain flawed and generate distortions among EU members. An effort is underway to reform international rules on taxing some of the profits of the world’s largest companies but this is nowhere near completion; its finalisation is even more unlikely with President Trump back in office in the United States . In this context, there is a serious risk that imbalances in profit allocation within the EU will increase, with small open economies (Ireland, Luxembourg, Malta, Cyprus) being the winners, to the detriment of other member states.

The fruits of an aggressive strategy

Like many other US tech companies, Apple developed very aggressive tax strategies as early as the 1990s, using hybrid tax instruments and taking advantage of loopholes in international tax rules. Their profit-shifting strategy resulted in ‘stateless income’, ie income located outside any tax jurisdiction. This strategy was facilitated by a combination of accommodating tax rules in the United States and continental European countries, and Irish residence and profit-allocation rules. Two tax rulings issued by Ireland in 1991 and 2007 approved the strategy .

As a result, Apple shifted intellectual-property-related income outside of the EU almost tax-free. Profits made from sales of phones, laptops and iPads were largely untaxed in the countries where the sales were made, because they were booked in stateless companies, not taxed on their worldwide income by any country, including Ireland, which was their state of incorporation.

It was the 1991 and 2007 Irish tax rulings that the European Commission disputed. According to the Commission, in 2011 alone, Irish subsidiaries of Apple recorded a €16 billion profit, of which only €50 million was taxable, with tax of €10 million paid – an effective tax rate of 0.005 percent.

Instead, the Commission argued, profit allocation should have been decided on the basis of normal application of rules developed within the Organisation for Economic Co-operation and Development on transfer pricing and profit attribution rules. Though at the time, these rules were not yet incorporated into Irish legislation, they should have, according to the Commission’s view, led to the taxation of IP-related profits in Ireland.

In the Commission’s view, the profits should not have been allocated to the stateless companies because those companies lacked the functions necessary to handle and manage the intellectual property. Apple’s Irish branches performed more functions and the Commission claimed that profits should have been allocated to them in line with, first, the OECD transfer-pricing guidelines (TPG), and second the authorised OECD approach (AOA) on profit attribution to permanent establishments (even though the AOA was adopted by the OECD years after the Irish tax rulings were granted).

The trouble with transfer pricing

Transfer-pricing rules were first adopted by the League of Nations in the 1920s to allocate the profits of multinational companies to the ‘right’ jurisdiction and to avoid the same transactions being taxed in two countries. Under the ‘arm’s length principle’ employed in transfer pricing, transactions between legal entities in the same economic group should be priced at market price, similarly to transactions between independent parties.

Since the 1990s, the OECD has developed sophisticated methods to implement the arm’s length principle, leading in theory to profit being allocated to where it is earned (OECD, 2022). In short, the profit follows company functions, assets and risks. Economically, it should be allocated where value is created.

But the implementation of transfer pricing rules has resulted increasingly in profits being funnelled to low-tax jurisdictions where companies locate certain functions, assets and risks – just enough to attract the profits. In a knowledge-based and digitalised economy, excess returns are generated by capital and intangible assets (mostly intellectual property), which are much easier to shift around than physical assets, which were dominant in the bricks-and-mortar economy when the arm’s length principle was conceived. What was initially an anti-abuse rule has thus become a tool for tax planning.

To redress this situation and update the rules somewhat, a two-part global tax deal was agreed in October 2021 . Endorsed by more than 140 countries, this introduced a 15 percent minimum tax (Pillar Two) and a new profit allocation rule for the largest companies, including Apple. Under the rule (Pillar One), a share of profits would be allocated for taxing purposes to the countries where sales happen .

Pillar One aims precisely to adjust, through a formulaic approach, the deficiencies of the arm’s length principle. It marks an implicit agreement by countries that current rules do not ensure a fair allocation of taxing rights.

Two ironies

The first irony of the CJEU ruling on Apple is that it elevates an anti-abuse rule – transfer pricing – into a general and underlying legal principle at exactly the time when the international community has recognised that it results in flawed profit allocation.

It is probably hard to determine where value is created, but it seems obvious that Apple’s profits from the EU single market (and other jurisdictions) belong more to the countries where the products are sold, or where products are engineered and designed (United States), than to Ireland. At minimum, they should have been shared between these different countries and not allocated fully to Ireland .

The second irony is that the winner – in this case Ireland – takes all… but the winner does not want the money. Ireland aligned with Apple to fight the Commission in court and is now procrastinating in recovering and using the funds. Irish finance minister Jack Chambers said after the September ruling that it would be months before the €13 billion would be drawn down and used . Ireland expects a €25 billion fiscal surplus in 2024, partly from the Apple money, backed up by the 15 percent Pillar Two minimum tax .

Other low-tax countries, such as Luxembourg and Singapore, will also be collecting the minimum tax on the profits allocated by companies to their jurisdictions. They will benefit from windfall revenues. In short, small open economies, where excess returns were recorded benefit from additional revenue and do not have to share it more fairly. The half-repaired international tax system (or still half-broken) benefits them massively.

Meanwhile, Pillar One of the global tax agreement is nowhere near completion. It requires a multilateral convention which is not yet signed, and will need ratification by two thirds of US senators, which is unlikely. In this context, there is a serious risk of that imbalances in profit allocation within the EU will increase, with small open economies (Ireland, Luxembourg, Malta, Cyprus) being the winners to the detriment of other member states.

The EU’s tax struggle

The European Commission is pushing for changes to reduce distortions but EU countries are resistant to EU intervention in their tax affairs.

The Commission has proposed a transfer pricing directive (European Commission, 2023a) but EU countries instead have engaged in discussions to revive a Transfer Pricing Forum that was dissolved in 2019. Such a forum would likely result in a weak form of coordination, allowing for discussions between EU countries but hindering real harmonisation of transfer pricing practices. Furthermore, such a forum can only be established if the Commission withdraws its proposal for a directive, as EU Treaties forbid the Council of the EU from adopting acts that clash with active legislative proposals.

The directive as proposed would have the merit of clarifying the legal situation, with a harmonised application of the arm’s length principle. However, the plan is perceived by EU countries as not providing enough flexibility to reflect the dynamic of international tax rules. There is also a perception of a risk that competence will be transferred to the EU. Nevertheless, adoption of the directive, if it is made more flexible to better align with the OECD rules, could be a short-term win to provide more tax certainty, even though it would not address the issue of unfair profit allocation.

More importantly, in the absence of Pillar One implementation, the EU should revisit its own profit-allocation rules. Small open economies cannot continue to be the winners of the corporate income tax game without generating tensions.

As far back as the early 1990s, the need for EU corporate income tax harmonisation was identified (Ruding, 1992). The Commission proposed a common consolidated corporate income tax base directive in 2013, which would have allocated consolidated profits based on keys including revenue, people and assets. The resistance of member states to Commission meddling in their sovereign tax affairs killed the proposal.

In 2023, the Commission proposed a more modest plan with the BEFIT (Business in Europe: Framework for Income Taxation; European Commission, 2023b) proposal, which provides for common rules to compute profits at the group level but avoids the question of profit allocation between countries. The CJEU ruling might bring the profit-allocation debate back to the table. It may still be that EU countries prefer a less-efficient outcome, without EU competence, over an improved resolution that would transfer tax competence to the EU. Still, it is urgent to take action.

The new Commission for 2024-2029 could organise an open debate on the next steps, from both the tax angle and the fiscal perspective. It is unlikely that EU countries will agree harmonisation, whether of the tax base or transfer pricing. The lack of progress on international negotiations Pillar One will not result in the EU taking the lead. Realistically, to fix the existing imbalances, another Commission proposal, from 2021, on a new statistical resource for the EU budget based on a proxy of corporate profits, could be a quicker win (Saint-Amans, 2024). It would mitigate the absurd outcome of the implementation of the current rules, reinforced by the CJEU’s bad Apple decision.

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