Germany hat es geschafft, US consumer (still) holding strong and why markets are not buying the “America First” pledges this time

A two-thirds majority in the Bundestag has exempted defense spending from the normal budget, allowing new debt above 1% of GDP, and established a special infrastructure fund of EUR500bn to address decades of underinvestment (capital stock -10pps over the last decade). Defense spending will be front-loaded but infrastructure projects are likely to take time. The stimulus could boost private investment by up to +5.9% cumulatively over the 12-year life of the infrastructure fund, although structural reforms are needed to fully realize potential growth. Debt-financed fiscal spending is expected to add +0.3% to GDP in 2025, with growth expanding to +1.7% in 2026 and +2.1% in 2027. But risks such as inflation and capacity constraints remain, and the debt-to-GDP ratio is projected to exceed 72% by 2037 from 62.8% currently. Capital markets had already priced in this week’s vote and are now charging roughly 30bps higher interest rates for Germany. Considering the upside on growth and inflation, the resulting additional debt-servicing costs for Germany should be manageable (0.1-0.2% of GDP, ceteris paribus).

The US economy looks to be weakening rapidly amid trade tensions, policy uncertainty and risks of higher inflation. The plunging sentiment of the American consumer is signaling substantial spending retrenchment in Q2 2025. The extent of potential damage hinges on three factors: household incomes, balance sheets and stock-market-related wealth effects. On the positive side, government transfers and stronger wage growth for low-income households are supporting household income. Moreover, balance sheets are solid overall, with a healthy net lending position of 2-3% of GDP. Breaking down US GDP growth by terms of trade, bond spreads and the stock market, we find a q/q drop of -0.7pp in GDP growth at end-Q1. Of this, the negative wealth effects caused by lower stock prices appear to have driven -0.6pp (roughly two-thirds), with the remaining third explained by tariff-induced deteriorating terms of trade. We expect US GDP to flatline in H1 2025 and grow by a lackluster +1.6% in 2025, should trade tensions wane by mid-year.