Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 8
THE DRUMMER'S EAR | RHYTHMIC REASONING
Fig. 7: German and U.K. labour markets are depressed
Fig. 8: Steep increase in Japanese fiscal policy uncertainty
300
Fiscal policy uncertainty index,
3mth moving avg.
another pension funds withdrawal round lift household spending
alongside solid investment trends. Chilean GDP remains backed
by upbeat consumption and investment momentum, but
weakness in labour markets is a sore point that will need to be
monitored for risks of a growth downshift. Finally, Colombia’s
shift from public to private sector outperformance over the past
few quarters has been a welcome development, resisting the
drag from highly restrictive central bank policy due to untamed
inflation and indexation risks for the year ahead (Fig. 6).
6%
200
100
0
1987
1993
1999
2005
2011
2017
2023
Source: Economic Policy Uncertainty, Scotia Wealth Management
2%
0%
-2%
-4%
2016
2018
2020
Germany
2022
2024
U.K.
Source: ONS, Destatis, Scotia Wealth Management.
The E.U. has reached a trade agreement with the U.S. setting a
15% tariff rate that avoids feared 25%+ duties threatened by the
White House, but the Eurozone still faces an important economic
shock from U.S. trade policy that will weaken its external sector—
accompanied by a ~15% gain in the EUR against the USD further
challenging the competitiveness of their U.S.-bound shipments.
Germany’s public stimulus ramp-up over the next few quarters
should act as a decent offset to trade challenges, but Germany,
France, and Italy—or 55% of the Eurozone—are still only expected
to expand by a muted 1% in 2026, while labour market momentum
remains concerning (Fig. 7)
Falling employment numbers amid higher labour costs and
weak business sentiment (Fig. 7) are teeing up another year of
disappointing U.K. GDP growth in 2026, eyeing a ~1% expansion
for the third consecutive year. Government spending is expected to
remain the U.K.’s growth leader over the next few quarters, albeit at
a decelerating rate—particularly from around mid-2026. However,
ongoing fiscal worries and elevated government disapproval rates
may further impact these plans, with more details to come at the
November Budget, while weighing on overall economic confidence.
In Asia, Japan’s economy has strung five consecutive quarters
of expansion, with the latest data for 2Q25 showing a rebound
in consumer spending. The U.S.-Japan trade deal has eased
uncertainty for Japan’s economy that may be weighing on
investment and hiring plans—although the 15% tariff level will be
well above last year’s effective rate of ~1.5%. Domestic political and
fiscal uncertainty (Fig. 8), with PM Ishiba recently stepping down,
continues to be a headwind for Japan’s expansion, as are elevated
inflation levels that are teeing up additional rate hikes by the BoJ
in the quarters to come.
Recent Chinese economic data paint a picture of slowing
momentum despite the efforts of authorities to prop up spending
—albeit with possibly too short-lived measures. Greater exports
to ex-U.S. partners have kept Chinese exports growth in positive
territory despite sharp declines in trade with the U.S. (Fig. 9) but
it remains to be seen whether these gains are sustainable as the
global economy keeps to a slow pace of growth (and some of
these export gains may simply be rerouting to avoid steep U.S.
duty rates). As things stand, absent another round of central
government stimulus, China is on track to miss its 5% GDP growth
target this year, likely slowing to the low 4s in 2026 and 2027.
Fig.9: Gains in ex.-U.S. exports make up
sharp fall in Chinese shipments to the U.S.
75%
YoY % change, 6mth moving avg.
YoY % change
4%
60%
45%
30%
15%
0%
-15%
-30%
2015
2017
To World
2019
To U.S.
2021
2023
2025
To World ex.-U.S.
Source: China Customs, Scotia Wealth Management
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