Fiscal Outlook And Deficits
They projected the euro area public deficit to rise from 3.1% of GDP in 2024 to about 3.4% in 2025 and 2026, pointing to a mildly accommodative fiscal stance. Germany’s public deficit was forecast to move from 2.4% of GDP in 2025 to 4.3% in 2026, with other countries also expected to use fiscal headroom. They said headline inflation was expected to be around 2% in 2027, and they did not expect immediate ECB action. They forecast 25bp rate rises in December 2026 and June 2027, with a risk these could be brought forward, possibly to June. Given the recent spike in energy prices stemming from tensions in Iran, we should not overreact as we did a few years back in 2022. Europe’s economy has become more efficient, with natural gas consumption relative to GDP down nearly 15% since that period. With current gas storage levels at 65% full, well above the five-year average, the continent is positioned to handle this shock without a major economic disruption. The underlying economic strength suggests we should be wary of betting against European growth. The German government’s recently confirmed €50 billion stimulus package, combined with resilient consumer spending, is expected to push GDP growth above its potential this year. We are emerging from a period of weakness, and this recovery looks set to gain momentum.Rates And Policy Outlook
From a rates perspective, the European Central Bank appears to be firmly on the sidelines for now. With the latest Eurostat data showing headline inflation holding steady around 2.1%, there is no immediate pressure for them to tighten policy. This suggests that volatility in the front-end of the interest rate curve may be overpriced. Therefore, we see the first ECB rate hike as a distant event, likely not occurring until December of this year. Selling volatility on near-term interest rate futures could be a viable strategy in the coming weeks. The main risk is that the ECB’s June meeting could surprise the market if upcoming forecasts show a stronger medium-term impact from the current environment. Create your live VT Markets account and start trading now.
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