5 questions to Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank

I am encouraged by the fact that the coalition government has now cut the Gordian knot. With new elections taking place in February, a new government will be able to take responsibility and initiate an economic turnaround that is worthy its name. After Donald Trump’s presidential victory, it is all the more urgent to restore our country’s competitiveness. There is little dispute about the causes of Germany’s ills, and so I am confident that a new government will be able to quickly agree on measures to sustainably modernise infrastructure, reduce energy prices in the short and long term, push ahead with the reduction of bureaucracy in state administration, but also in companies – they need to look at themselves here too – catch up on our PISA lag and, last but not least, restore our defence capacities. The latter, by the way, would also have positive economic effects in the short term if the procurement of defence systems were to be conducted primarily in Europe.

No, it is not. Lower energy prices have recently contributed significantly to the decline in the annual rate of inflation. This effect is now fading out of the statistics. Furthermore, the core rate of inflation, i.e. excluding energy and food, and services inflation, remains too high. Incidentally, I see structural reasons at work that are likely to keep inflation closer to 3% than to the target level of 2% over the next few years. One of these is demographics, which is creating a sustained labour shortage that will certainly not be overcome by artificial intelligence in the short term. Climate protection measures, extreme weather events driving up insurance premia, and the foreseeable rise in protectionism are further inflationary factors.

From an cyclical point of view, the eurozone seems to have considerable scope for interest rate cuts. However, I think that more than two or three rate cuts are unlikely because the overall conditions are tending towards stagflation, i.e. growth remains weak but inflation is rising again towards 3 %.

The Fed is also in a very tricky situation. So far, the new administration is not yet in charge, but the economic policy measures Trump has announced are mostly inflationary. This applies to higher tariffs, migration policy and also tax cuts for companies are likely to push up inflation.

We expect two to three interest rate cuts by the first half of 2025, which should push short-term yields down somewhat. At the same time, however, long-term yields could rise if the corresponding US yields rise in the wake of Trump’s expected inflationary economic policy. That would be a relatively unusual constellation.

Lower short-term interest rates reduce the short-term funding costs for banks. By the same token, banks involved in granting long-term loans and that engage in reasonable maturity transformation can benefit from higher long-term yields. Of course, banks are impacted not only by the interest rate environment but also by the cyclical situation. The latter usually has an impact on the quality of the loan portfolio. Therefore, if the new German government pursues a growth-friendly economic policy and thus compensates for some of the negative effects that we could face as a result of US customs policy, for example, the banking sector as a whole will remain stable for the foreseeable future.