We hope you were off to an excellent start! Among our New Year’s resolutions: Continue to serve you with sharp analysis, valuable insights & a balanced framework for your business decisions. We kick-start 2025 with a critical deep dive on the German economy in dire need of a strategic vision, a ‘Leitbild’ for 2030, to overcome stagnation and restart its growth engine; the 10 priority areas we identified as crucial. In our What to Watch section this week, we take stock of the first quarter of the century’ lessons for capital markets; we’re riding the China-Europe train – an increasingly credible route for trade against the backdrop of rising shipping costs and traditional trade routes becoming lengthier, and riskier. And we’ve researched surging gas price levels across Europe, a ‘hot’ topic ever since the start of the Ukraine war almost three years ago.

Germany – quo vadis?

The comprehensive report for you here.

On February 23, 2025, Germany will elect a new government. It will face no smaller task than to set Germany’s economy on a new course in a rapidly changing world. Our latest paper offers some pointers. In a nutshell: Over the past 25 years, megatrends such as demographics, climate change, artificial intelligence (AI) advancements, and changing geopolitics have reshaped global economies. Poised at the crossroads of these transformations, Germany faces challenges distinct from its earlier struggles as the “sick man of Europe”, raising doubts about its economic model. To navigate these complexities, Germany requires a “2030 Leitbild” – a strategic vision that strengthens growth foundations and charts a path to future prosperity.

Ten priority areas emerge as crucial to restart Germany’s growth engine:

1. Liberation from fiscal self-restraint: Public investments in decarbonization, transport, education and defence require reforms such as a dynamic debt brake and "golden rule plus" based on investments.

2. Transition to a green energy system to secure competitiveness: Achieving long-term sustainability requires EUR1tr in investments by 2035, equally divided between upgrading energy infrastructure and expanding renewable capacity.

3. Rebuilding public infrastructure after years of neglect: German public investments have plummeted from 1% of GDP in the 1990s to zero. Rebuilding capital stock will require an additional EUR600bn over the next decade.

4. Unleashing labor supply to close the demographic gap: Proactive labor market policies must increase workforce participation among women, older workers, and immigrants.

5. Ensuring generationally fair pensions: Reforms should curb cost increases, incentivize later retirement and expand capital-funded options like occupational pensions.

6. Reforming the tax system to boost motivation and incentivize work: To enhance competitiveness and encourage economic participation, reforms should focus on eliminating the solidarity surcharge, simplifying income tax brackets, and reducing corporate taxes to 25%.

7. Revitalizing innovation: Doubling R&D investment to 6% of GDP through tax breaks and strategic institutional support is critical for innovation and competitiveness.

8. Reducing regulatory hurdles: Reducing red tape by 25% over four years, digitalizing procedures, and streamlining EU negotiations are key to enhancing efficiency and competitiveness.

9. Strengthening European leadership: Germany must reinvigorate its role by supporting common debt mechanisms, deepening the Capital Markets Union (CMU), promoting equity market growth, incentivizing savings reorientation, and simplifying regulations.

10. Engagement for fair trade relations: Germany must pivot its value chains towards Europe, negotiate for free trade agreements, and focus on internal growth and industrial policy standardization.

The comprehensive report for you here.

What to Watch this week

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• Capital markets’ themes 2025 – lessons from the first quarter of the century. As we enter the second quarter of the century, markets grapple with critical questions shaped by recent economic and geopolitical shifts. Central bank rate cuts will continue on both sides of the Atlantic, aligning again with falling 10-year yields, though the pace will slow in the US due to renewed inflationary pressures. France’s fiscal challenges will likely keep its bond yields above those of Greece, Portugal, and Spain – a novum since last year. US equities will maintain their global leadership, supported by structural advantages (AI, reshoring, defense) and despite valuation concerns. Corporate spreads will stay near historic lows backed by strong fundamentals and a decent sectorial mix, which should offset risks from geopolitics. Last but not least, Chinese government bond yields are poised to dip below Japan’s for the first time, driven by deflationary pressures and persistent economic headwinds.

• Riding the China-Europe train: an increasingly credible route for trade. As maritime shipping has become lengthier, more costly, and riskier, rail transportation between Europe and China through Central Asia is becoming more and more competitive and attractive. Although capacity remains low, with transportation time more than 50% shorter and costs currently nearly 10% cheaper than maritime freight, rail is a credible and relevant transportation mode for time-sensitive industries such as electronics, auto, pharma and luxury/fashion. Europe needs to seize the opportunity, collaborate with China and Central Asian countries to develop these routes, avoid the pitfalls of the Belt and Road Initiative, and increase its supply-chain resilience.

• Energy crisis in Europe, season 2? Gas prices in Europe are surging again to levels unseen since fall 2023. This surge is not only due to the halt of Russian gas flows to the EU since the new year but mostly because of high gas consumption as the continent is facing a “normal” winter after two consecutive mild ones. On top of higher gas consumption, the weather is also leading to lower renewable electricity production, compounding issues for the bloc. Should consumption and drawdowns on storage continue at the current pace, the EU could end the winter season with low inventories (30-40% vs 56% in late March 2024). This could make gas prices 30% higher in spring 2025 compared to a year ago, which would pose inflationary risks for 2026 as regulated retail prices for electricity are scheduled to decrease in 2025 in many countries. The recent developments are a reminder that energy prices will remain higher for longer in the EU, at least 50% above pre-war in Ukraine levels. Policies should address this matter if Europe means to revive its industry.

  Click here to view the complete set of stories.