Our base case remains that US/Israel strikes on Iran—and broader regional disruption—will be relatively short-lived (weeks not months), with energy prices reverting to close to pre-attack levels (likely with a residual risk premium), and have a moderate medium-term negative impact on global growth and inflation. However, in this highly volatile environment, the risk of more extended disruption remains high. 

Middle East conflict testing global economy’s resilience

• The ability of the US and partners to quickly restore flows through the Strait of Hormuz is critical and remains uncertain.
• Prolonged disruption to shipping and/or regional production would keep oil and gas prices higher for longer, weighing on global growth and keeping inflation elevated.
• Even in this downside case, we view the probability of a global recession as low with most estimates putting sustained Brent oil price of around $100/bbl taking around 0.5 percentage points off global growth and adding around one percentage point to inflation. But clearly there is a lot of uncertainty and country variation around these estimates.

Macro outlook

Why our base case remains that US/Israel attacks on Iran will be short-lived with limited lasting impact on energy and the macro outlook:

• OPEC has substantial spare capacity (there is not an oil supply problem) and is sufficient to compensate for a full loss of Iran’s oil supply.
• Most public pre-war analyses indicate the US military has the resources, capability and will (once the initial attacks on Iran are complete) to prevent an extended closure of the Straits of Hormuz.
• Trump is laser-focused on not losing the Republican’s congressional majority in the November mid-terms as it would hobble the last two years of his presidency. He will not want to see a sustained rise in oil and gasoline prices that will hurt his popularity with the electorate.
  • A prolonged conflict and sustained high energy prices would push inflation higher making it difficult for the Fed to cut interest rates and would likely keep government bond yields high. A sustained rise in energy prices (ie, months rather than weeks) would hurt US and global growth and push unemployment higher.
  • This goes against Trump’s key stated goals of bringing down the cost of living and lowering interest rates.

OPEC Production Capacity and Iran Crude Oil Production

Iran’s response

The hardest part of the analysis is assessing Iran’s medium-term response:

On one side of the equation, Iran will want to make the US, Israel and Middle East states supporting the US feel enough pain that they will think twice before attacking again in the future. On this basis there are incentives to keep the Strait of Hormuz closed for an extended period through periodic drone, missile and other attacks on vessels attempting to traverse the Strait.

On the other side of the equation, currently Iran is being allowed to ship oil near pre-war levels and its energy infrastructure has been mostly left intact. A large portion of Iran’s government budget is financed by energy revenues.

For the long-term survival of the current regime they need these revenues. How this balance of priorities and US capacity to unilaterally keep the Strait open play out, will determine how long energy prices stay high and the severity of the damage to the global economy.

Re-opening the Strait of Hormuz key to outlook

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• Developed economies and markets outperformed expectations in 2025—robust growth, falling inflation, and lower interest rates despite geopolitical shocks and higher US tariffs.
• Europe to benefit from fiscal expansion, monetary easing, lower energy prices, and positive real income growth; impact of US tariffs limited and manageable.
• Economic resilience set to continue in 2026, supported by strong household, corporate, and bank balance sheets, as well as easier fiscal and monetary policy.
• Biggest threat: potential turmoil in US government debt market amid high deficits and no credible plan for stabilisation; possible ripple effects through risk assets but likely offsetting central bank interventions.
• Sustained US government debt concerns could trigger further US dollar weakness and gold price upside, as investors grow uneasy with the US fiscal trajectory.
• Private market investors remain well positioned—solid company fundamentals and less-cyclical sector focus insulate against public market volatility, but careful selection is crucial as idiosyncratic risks rise.

Strong economic and market performance in 2025—but will it continue in 2026?

Despite geopolitical upheaval and the sharp rise in US import tariffs, the US, Europe, and UK economies are estimated to have grown by a better-than-expected 2.0%, 1.6%, and 1.4% in 2025, with inflation falling to 2.7%, 2.0% and 3.2% respectively. Resilient growth, resilient earnings and falling inflation and interest rates helped drive risk assets higher, with the S&P 500, Euro Stoxx 600, FTSE 100, and most other major market equity benchmarks ending the year near all-time highs and credit spreads tightening back towards historic lows.

Strong growth and falling rates have supported markets

Economic resilience to continue

While economic growth across most major economies will likely face headwinds from continued high geopolitical and US policy uncertainty in 2026, we think the economic resilience of last year will continue in 2026. Strong aggregate company, household, and bank balance sheets, together with stimulatory fiscal policy and lower interest rates in the major developed economies should provide strong buffers to downside growth risks and provide a continued stable operating environment for private companies in 2026. 

Strong household balance sheets provide downside growth buffer

Potential turmoil in government debt markets biggest risk to markets in 2026

In our view, one of the biggest risks to markets in 2026 is the risk of turbulence in government debt markets that ripples through to other asset classes. The US is a particular risk in our view, given that it has been consistently running fiscal deficits in the 7%–8% of GDP range (based on IMF data) in recent years, debt to GDP is currently at its highest level since World War Two and—most critically—there is currently not a credible plan to rein in US fiscal deficit and the US government debt level.

Unsustainable US fiscal deficits

On IMF forecasts most European (and the UK) government debt levels are expected to increase only slightly between now and 2030. The US is a stand-out exception, with the IMF forecasting US debt to GDP to rise by a further 18 percentage points of GDP by 2030. So far, the US government bond market has been relatively stable. However, the weakness of the US dollar over the past year and rise in the gold price indicates not all investors are comfortable with the US government debt trajectory.

Interest payments taking up increasing share of government revenues

Although a potential upset in sovereign bond markets is one of the greatest risks to markets in 2026 in our view, we think the market disruption caused by sustained US government bond selling would likely lead to a resumption of Fed buying of US treasuries and other interventions that would ultimately stabilise markets. The cost of such intervention would likely be further US dollar weakness (and gold price upside).

A number of Trump administration officials have advocated a weak US dollar as a way to boost US export competitiveness and to bring manufacturing back to the US. One of the more notable advocates of a weak US dollar has been Stephen Miran, Chairman of the Council of Economic Advisors under Trump and recently appointed member of the Federal Reserve Board of Governors (A User’s Guide to Restructuring the Global Trading System).

US dollar at risk as debt rises and Fed independence under threat

Therefore, while we think the risk of public market volatility remains elevated, we think private markets investors will remain relatively sheltered. Resilient global economic growth, the continued outperformance of the less-cyclical services sectors that most private markets investors invest in, and tailwinds from easier fiscal and monetary policy should provide a continued supportive investing environment for private market investors in our view.

Corporate balance sheets (in aggregate) remain strong

US growth to remain resilient in 2026 as tax cuts support consumer and business spending, with sustained high government bond yields a negative wild card

Growth support from the lagged impact of tax cuts in last year’s One Big Beautiful Bill Act and still healthy aggregate household and corporate balance sheets should provide growth support in 2026. Non-tech related US business investment and private consumption may continue to be negatively affected by the lagged impact of higher import tariffs on prices and supply chains and sustained high government bond yields. However, we think these potential growth drags will be offset by expansionary fiscal policy, continued strong technology-related investment and spending growth by middle and higher income consumers benefitting from tax cuts and the wealth effect.

Europe will likely see strong performance in 2026

More pronounced fiscal expansion, the lagged impact of easier monetary policy in 2025, lower energy prices and increased policy cohesion is expected to drive growth higher. Although France, Italy and the UK are in the process of reducing fiscal deficits in order to stabilise debt levels, Germany, and most of the rest of Europe are in a position to further expand fiscal policy—with defence and infrastructure two key areas of focus.

Europe has ample space to boost fiscal stimulus

The recent watershed changes in German and EU-wide fiscal policy to allow a significant rise in infrastructure and defence spending, marks a once-in-a-generation shift in fiscal policy. This should provide a medium to long-term boost to Europe’s growth rate – and at the very least provide downside growth protection. More recently, the announcements of the shift in policy led to a discernible improvement in business and consumer sentiment. This shift in policy should help offset any secondary effects from the ongoing global tariff turmoil.

While some companies in manufacturing and industrial sub-sectors may be negatively affected by higher US tariffs (e.g. autos, industrial machinery, chemicals and pharmaceuticals), private markets investors tend to have very limited exposure to these areas—with the bulk of investments in less cyclical services related businesses that are well-insulated from the direct effects of the trade war.

The UK will benefit from falling interest rates and continued positive real income growth

The UK will have to contend with the impact of higher taxes, but healthy household balance sheets, positive real income growth, more aggressive BoE rate cuts, and declining government bond yields should keep a floor under growth and sustain a stable company operating environment in 2026. Although the UK government has been criticized for raising taxes in its latest budget, the move to reduce fiscal deficits and stabilise the country’s long-term debt profile has paid off, helping to further reduce the UK government debt yield premium over equivalent US rates. Lower government bond yields (assuming no further disorderly moves in US and/or Japan government bond markets) should provide further support to household and corporate balance sheets and support growth later in 2026.

Will Trump’s latest tariff threats derail growth?

In late January 2026, US President Donald Trump threatened an additional 10% tariff on the imports of eight countries that sent troops to Greenland, including Germany, France, Sweden, Denmark, Norway, Finland, the Netherlands, and the UK. A few days later he retracted the threat. However, fears linger that he may bring tariffs back if he doesn’t get what he wants in Greenland. Therefore, below we present an updated table of the potential target countries and their exposure to the US goods market. As we highlighted in our trade war analyses last year, for most countries in Europe and the UK goods exports to the US are relatively small as a percent of GDP.

Higher US tariffs manageable for most countries

Country and sector exposure to the US market

Therefore, even if the threatened tariffs are implemented, the direct economic impact is likely to be quite small, as was the case when the US imposed tariffs in 2025. Of course, certain sectors such as the auto sector and some segments of the chemical, pharmaceutical and industrial machinery sectors, and US-exposed companies operating in those sectors could be affected. But at a headline GDP growth level the direct impact is estimated to be small, with most estimates putting the impact of an additional 10% tariff on US goods imports from Europe at around 0.1%-0.2% of GDP. If Europe were to retaliate strongly (not our base case), higher domestic costs, supply chain disruptions and potential higher financial market volatility could add to the impact, but our base is that any European response will be calibrated to minimise domestic disruption.

ECB monetary easing should support European growth in 2026

Fiscal and monetary policy will support growth in 2026, but government bond yields are likely to remain high, putting pressure on some companies and households

The Fed cut its benchmark interest rate 75bp in 2025. Further rate cuts are likely in the coming months, but perhaps not quite as many as the nearly 100bps swap markets are currently pricing, given the continued stickiness of services inflation and the continued impact of tariff increases on goods prices.

The ECB has been able to cut rates by 200bp over the past year as inflation has moved quickly down to its 2% target. With the ECB’s benchmark rate now at 2%, on our base case that economic growth holds up on more expansionary fiscal policy, lower energy prices and the lagged impact of the past year’s monetary easing, rates are probably at or near bottom.

The BoE, like the Fed, has been grappling with stubbornly sticky services inflation. Despite the stickiness of inflation, it managed to push through 100bps of cuts in 2025. Given the more-fiscally-prudent-than-expected government Budget announced in November, signs of cooling in the labour market and a likely faster decline in inflation later in 2026, larger BoE cuts than the 50bp currently priced into the swaps market for 2026 and a further narrowing of the UK government bond yield premium over equivalent US bonds seem likely.

Government bond yields likely to stay higher for longer

Private company fundamentals remain strong, systemic crisis risks are low, but idiosyncratic risks on the rise

Data from the Bank for International Settlements (BIS) shows that corporate debt service ratios in the US, Europe and the UK are falling and remain well below 2008 levels. On their analysis (Aggregate debt servicing and the limit on private credit), corporate debt service ratios provide ‘highly accurate early warning signals’ for systemic financial crises. On their most recent data this risk appears low (see chart above).

ICG proprietary data also shows relatively healthy private company fundamentals, with median EBITDA growth in the US and Europe (including the UK) holding up well and interest coverage ratios stabilising at comfortable levels on our most recent aggregated data through Q3 2025. While aggregate balance sheet and EBITDA trends are solid, idiosyncratic sector and company risks appear to be rising, putting a larger than usual premium on careful investment selection and downside protection.

Private company fundamentals at an aggregate level remain strong

Implications for private market investors

Given relatively high equity valuations, tight credit spreads and potential risks in major developed economy sovereign bond markets—particularly in the US given its current debt trajectory and concerns about Fed independence—we think the risk of higher for longer, longer maturity government bond yields, volatility in global public markets and further US dollar weakness remain high. Although the risk of market volatility remains elevated, we think private markets investors will remain relatively sheltered. Resilient global economic growth, the continued outperformance of the less-cyclical services sectors that most private markets investors are exposed to, and tailwinds from easier fiscal and monetary policy should provide a continued constructive operating environment for private market investors in our view.

Go deeper

• Follow us on LinkedIn or sign up to our email newsletter to receive notification of future macro and private markets research
• Watch or read ICG CEO & CIO Benoît Durteste’s September 2025 interview on Bloomberg’s Opening Trade, where he commented that Europe has a relatively favourable environment for investment
• Find out about the proprietary ICG Private Company Database, for which the next edition will be available in the coming weeks via the ICG Client Lounge

The post 2026 Macro and Private Markets Outlook: Sustained Resilience appeared first on ICG.

Corporate balance sheets at an aggregate level remain strong, corporate default rates have been trending down and are forecast to continue to decline, global economic growth remains healthy, systemically important banks are well ring-fenced, and household balance sheets as a whole are strong (see charts below).  

Most indications are that the recent company bankruptcies and losses faced by a few US regional banks are idiosyncratic in nature (i.e. company and bank specific), with limited broader implications for the systemic health of credit markets. It appears that fraud may have played a key role in driving the First Brands and Tricolor bankruptcies, with both companies operating in niche sectors (auto parts and subprime auto loans) known to be under stress.

Aggregate data from the Bank for International Settlements (BIS) shows that corporate debt service ratios (interest and principal payments as a percent of income) in the US, Europe and the UK are falling and remain well below 2008 levels. On their analysis (“Aggregate debt servicing and the limit on private credit”), corporate debt service ratios provide “highly accurate early warning signals” for systemic financial crises. On their most recent data this risk appears low (see chart below). In addition, household debt service ratios are also well below 2008 levels and have been declining, indicating household balance sheets remain strong, which should help keep a floor under private consumption.

Corporate debt service ratios low and falling

Systemically important banks are protected and economic growth is resilient

Systemically important banks remain well protected, with banks’ tier one capital ratios significantly higher than in the run-up to the 2008 global financial crisis and regular stress tests ensuring they are well buffered from potential external shocks. Tier one capital for the systemically important banks in the US, Eurozone and UK currently stand at around 15%, 18% and 18% compared to 10%, 8% and 6% in 2007.

Banks’ Tier One Capital Ratios highlight balance sheet strength of systemically important banks

The US economy has continued to grow at a healthy pace despite political and policy uncertainty, with US GDP expected to grow by 1.8% in both 2025 and 2026 according to consensus estimates. Europe, UK and other major developed economies also continue to show positive growth. This should provide a continued constructive operating environment for businesses.

Resilient global GDP growth

In addition, the US Fed has cut its benchmark rate 125bp from its high in 2024 and the swap market is pricing a further 125bp of cuts to 3% over the next twelve months. The ECB has more than halved its benchmark interest rate to 2% over the past year and the swap market is pricing around 50bp of rate cuts from the Bank of England over the next twelve months. Rate cuts should support growth and further reduce companies’ funding costs.

Declining default rates and robust debt service ratios

Moody’s data shows that the global speculative grade default rate has been declining over the past year and Moody’s baseline forecast is for the default rate to decline from around 4% currently to around 2.5% over the next year (see chart below).

Moody’s global speculative grade default rate and baseline forecast

Strong private company fundamentals

Data from ICG’s proprietary private company database indicate that private company fundamentals at an aggregate level remain strong, with median EBITDA growth of both Europe and US companies growing at a healthy pace and interest coverage ratios stabilising at comfortable levels.

US and Europe EBITDA growth holding up well

US and Europe Interest Coverage Ratios at comfortable levels

Therefore, while there is always scope for further idiosyncratic problems at a company and bank-specific level, macro conditions and measures of systemic risk indicate recent concerns about the broader financial system are overblown.

Watch video

Why have markets and economies been so resilient and is this likely to continue?

In this short film recorded on 29 October 2025, Nick assesses current structural macro and credit market fundamentals, key risks to the outlook and what current conditions may mean for investors broadly and private markets investors in particular.

The post Recent US Credit Market Dislocation: Systemic or Idiosyncratic? appeared first on ICG.

Overview

• Despite high geopolitical and trade policy uncertainty, the global economy and markets have remained remarkably resilient so far this year.
• Against most expectations, developed economy growth in the first half of the year has trended between 1.5% to 2%, in line with its longer-term average, most equity benchmarks are near all-time highs and credit spreads remain tight.
• European and UK growth has proven to be much more resilient than most investors expected, with US import tariffs and policy uncertainty having a much smaller impact on growth than initially feared.
• Although the US economy has been losing momentum, with recently revised US real final sales to private domestic purchasers (a cleaner measure of US growth than GDP which has been distorted by tariff front-running) slowing to 2.4% in the first half of the year from 3.1% in 2H 2024, most lead indicators point to a moderate rather than a precipitous slowdown.
• Monetary policy easing underway, with the Fed resuming rate cuts in September, the ECB having cut its benchmark rate in half over the past year, the BoE expected to start cutting rates again by early next year and China’s central bank also prepared to ease further. 
• Private company fundamentals are strong, with ICG proprietary data showing US and Europe private company EBITDA growing at a solid pace through the first half of 2025 (see chart below) and median interest coverage ratios stabilising at comfortable levels.
• The question is whether this resilience will be sustained.

Resilient global growth

Tariff impact more limited than initially feared

Most major developed market economies should see only limited headline growth damage from the Trump administration’s tariffs, in our view. It remains to be seen exactly where country and sector tariffs end up, though indications are that tariffs for most countries (particularly once carveouts are accounted for) will be much lower than the initial “reciprocal” tariffs announced in early April. 

As the chart below shows, most of Europe, the UK and other large, developed economies have only a small direct exposure to the US goods market. Certain sectors such as steel, aluminum, autos, chemicals and potentially pharmaceuticals and semiconductors may see a larger negative impact. But with the services sector making up more than 80% of most developed economies GDP (and where most private markets investors invest), most businesses are expected to see only limited direct impact. The indirect impact through exposures to affected goods exporting companies and potential wider economic disruption will need to be monitored, but bottom-up analyses indicate these effects should be manageable.

US growth is slowing, but not by much so far

We think the US economy is likely to be one of the most negatively affected by the Trump administration’s trade tariffs, with higher across-the-board import costs pressuring company margins and investment capacity and higher goods prices hitting consumers’ real spending power. Higher business and consumer uncertainty may also cause companies and households to hold back on investment and consumption.

US real final sales to private domestic purchasers (a cleaner measure of US growth than GDP which has been distorted by tariff front-running) slowing to 2.4% on a quarterly annualised basis in the first half of the year from 3.1% in 2H 2024, with personal consumption slowing to 1.6%  in 1H 2025 from 4.0% in 2H 2024.

Although economic and labour demand growth is slowing, we believe recession risks remain low, with fiscal policy expected to support growth and strong household, bank and corporate balance sheets putting a floor on growth downside.

The Fed is currently forecasting around 1.6% full year GDP growth in 2025 and 1.8% growth in 2026. While recent GDP data revisions indicate growth in 2025 may end up a bit higher than the Fed’s forecast, generally most hard data supports this slower, but relatively resilient growth outlook.

Inflation in the US has been stickier than expected, which has limited the Fed’s ability to lower interest rates, however we think that is now changing. Although tariffs will likely push headline inflation higher, wage and underlying inflation pressures appear to be abating. With the US Labour market now cooling, we think the Fed will be in a position to continue rate cuts in the coming months – though perhaps not quite as quickly as the market is currently pricing.

US labour market is cooling quickly

US government debt and US dollar risks continue to simmer in the background

One wild card risk to monitor is a potential disorderly back-up in US government bond yields and faster decline in the US dollar if investors decide US fiscal policy and the government debt trajectory are unsustainable and that Fed independence has been truly compromised. So far, the US government bond market and moves in the US dollar have been relatively orderly, but this could change quickly.

It is likely that a sharp and sustained rise in US government bond yields would be met with aggressive policy intervention by the Fed to stabilise nominal yields. However, quantitative easing into an economy not far off full capacity would likely be viewed by the market as inflationary, pushing down expected US real yields and adding further downward pressure on the dollar.

US government debt risks remain a wild card

Europe to benefit from expansionary fiscal and monetary policy, limited exposure to US goods market

Europe is likely to see the economic recovery that started at the end of 2023 to continue into 2026 and beyond. Changes in German and Europe-wide fiscal policies are expected to provide a medium to long-term fiscal boost to growth and well-behaved inflation allowing the ECB to keep monetary policy easy.

The recent watershed changes in German and EU fiscal policy to allow a significant rise in infrastructure and defence spending, marks a once-in-a-generation shift in fiscal policy. The European Commission estimates that its proposal to exempt defence spending from EU fiscal rules will open the way to a potential additional EUR650bn in new spending over the next four years on top of the proposed EUR150bn Common Borrowing Facility. 

In all, on proposals so far, the increase in Europe defence and German infrastructure spending could be as large as EUR1.7trillion, equivalent to around 10% of EU GDP. This should provide a medium to long-term boost to Europe growth – and at the very least provide downside growth protection. This shift in policy may also help offset any potential secondary effects from the ongoing global tariff turmoil.

A pivotal moment for European fiscal policy

With Europe exports to the US equivalent to less than 3% of GDP, the impact of higher US tariffs is expected to have only a limited negative impact on headline economic growth, with most independent estimates putting the one-off hit to growth at between 0.3-0.5% of GDP over two years.

The ECB has been well ahead of the curve, cutting interest rates by 200 basis points over the past year as inflation has neared its 2% medium-term target. While we think the ECB is largely done with rate cuts, we think the lagged impact of monetary easing will help support economic growth as we move in 2026.

Interest rate cuts ahead

Political stalemate in France likely to drag on, but limited impact on real economy expected

A vote of no confidence in the government forced French Prime Minister Bayrou to resign in early September. President Macron appointed ally and former defence minister Sebastien Lecornu as the new prime minister, tasked with cobbling together sufficient votes to pass the 2026 budget by year-end.

While the political noise level is high, neither the extreme right or left have sufficient votes to implement their respective agendas. Therefore, the most likely scenario is continued muddle through, with government policy staying mostly on autopilot and the fiscal deficit remaining in the 4.5-5.5% of GDP region until new presidential elections are held (likely in 2027). 

Although policy gridlock may limit the upside potential of France’s economy, it also means damaging extremist policies will not be implemented. Recent business surveys indicate company executives continue to see a positive operating environment into the third quarter, with economic growth likely to continue to trend in the 0.5%-1% range.

The markets have taken recent political developments in stride, with French government bond yields declining and the stock market rising in the run-up to and after the vote.

UK to see limited negative impact from trade war, but policy constraints limit near-term growth upside

With only around 2% of UK GDP exposed to the US goods export market, the UK is likely to see a relatively small negative impact from US tariffs. However, fiscal constraints and sticky inflation give policymakers less leeway to support growth than in Europe. Therefore, while GDP growth in 2025 is expected to remain positive, it is likely to slow to around 1% in 2H 2025 after growing 1.6% in the first half of the year.

Lower interest rates in 2026 as inflation starts to fall again later in 2025 and continued strong real household income growth should help support a pick-up in growth in 2026 and into 2027. Consensus forecasts are for around 1.2% GDP growth in 2025, 1.4% in 2026 and longer-term growth of around 1.5%.

China and developed Asia holding up well

China growth has held up much better than many expected, with GDP currently on track to meet the government’s target of 5% this year. 

China’s direct exports to the US are equivalent to less than 3% of GDP and estimates are that China production in third countries sent to the US are less than 2% of GDP. While this is not insignificant and will have an impact on specific sectors and companies, the overall impact on China’s economy is expected to be manageable. In addition, China has substantial fiscal and monetary firepower to support growth if needed.

Developed Asia is experiencing a similar dynamic. While specific sectors and companies will likely be negatively affected, the rise of domestic demand – and services in particular – as a key driver of economic growth, has reduced these countries vulnerability to higher US import tariffs.

Implications for private markets investors

Overall, we think the macro context described above provides a constructive environment for private markets investors. While the risk of public market volatility remains elevated, with think private markets investors will remain relatively sheltered. In the first half of 2025, the around 400 companies in the US, Europe and the UK tracked by the ICG database saw median EBITDA grow at a solid pace (see chart below). Slower, but still resilient economic growth, the continued outperformance of the less-cyclical services sectors that most private markets investors are exposed to, and tailwinds from lower interest rates should continue to provide a positive investing environment for private markets investors through the rest of 2025 and into 2026 in our view.

Private company EBITDA growth has remained firm

Watch video

Why have markets and economies been so resilient and is this likely to continue?

In this short film recorded on 29 October 2025, Nick assesses current structural macro and credit market fundamentals, key risks to the outlook and what current conditions may mean for investors broadly and private markets investors in particular.

The post Remarkable Resilience: Global Economic and Private Markets Update appeared first on ICG.

Mild growth impact, with US most negatively affected

The negative impact of higher global tariffs on the US economy is estimated to be larger than the impact on the EU, with most estimates putting the hit to the US economy at around 1% of GDP and the (likely one-off) boost to US headline inflation around 1.5% percentage points above where it would be without the announced tariffs. 

With the overall impact of the tariffs on EU growth expected to be relatively small, the more critical implications for investors are at the sector level where there are some large divergences in exposures (and still some unresolved issues). 

Europe economic recovery to resume after brief lull

Under the agreement as first announced, most goods exports from the EU to the US will see a 15% tariff rate. This is up from an average of around 2% pre-Trump’s inauguration. Although a large increase, most sectors exposures to the US goods market are low (see table below). 

Automotive sector likely to remain under pressure

Automotive imports will see their tariff level fall to 15% from the rate of 25% announced in April. However, with tariffs still much higher than the pre-Trump rate of 2.5%, Europe’s automotive sector (along with much of the rest of the world’s auto sectors) will likely remain under pressure. 

Pharmaceuticals still awaiting conclusion of US Section 232 investigation

Many pharmaceutical exports will also incur a 15% tariff to access the US market (though certain generic drugs will be excluded and the timing of implementation is still unclear). While this is lower than the up to 200% tariffs Trump threatened earlier this year, it will represent a hit to EU pharmaceutical exporters historically used to 0% tariff access to the US market. There is also still uncertainty about whether a higher tariff rate may be implemented further down the line once the US Section 232 investigation by the US Department of Commerce into pharmaceutical imports (with a focus on concerns of over-dependency on foreign supplies of critical medicines and ingredients) is completed. 

Semiconductor manufacturing equipment to remain tariff-free

Semiconductors are also included as part of the agreement and will be covered by the 15% tariff rate according to European Commission president Von der Leyen. As with pharmaceuticals, while this is lower than previously threatened rates, it is a large rise from their previous tariff-exempt status, and it is still unclear whether a higher rate will be imposed at the conclusion of the ongoing 232 investigation. Although details are not yet available, it appears semiconductor manufacturing equipment will be excluded from the new tariffs as will aircraft and component parts.  

Steel and aluminium exporters may benefit from a new quota system

Steel and aluminium tariffs will stay at 50% for now but it was agreed that a quota system would be implemented that will allow a certain amount of the metals to be sent to the US at a lower tariff rate. 

Other EU sectors with relatively large exposures to the US market that may be negatively affected by the 15% tariff rate are industrial machinery and appliances, optical and medical instruments, chemicals and some agricultural products. However, outside of these areas EU exposure to the US goods market is small relative to GDP. 

Therefore, while the proposed US-EU trade agreement will have a disruptive effect on certain sectors and companies, the broader macroeconomic impact is expected to be small.

Resilient European growth

Looking forward, we think after a brief lull in growth over the next quarter or so, Europe growth will rebound and resume the growth recovery that began in late 2023 (see chart below).  While we do not expect a strong V-shaped recovery, we think European growth remains solidly supported,  providing a continued constructive investing environment.

A supportive growth environment across most of Europe

Strong private sector balance sheets, fiscal and monetary expansion to provide a continued constructive investing environment

Strong household and company balance sheets, rising real incomes, easing monetary policy and –significantly – a watershed shift towards a more expansionary fiscal policy should, in our view, provide downside protection to European growth and support private company fundamentals going forward. As always, bottom-up sector and company selection will be critical as tariffs and shifting global macro policies increase performance dispersion. For a broader macro view of the global consequences of the trade war please click here: Trade War Views: Implications for the Economic Outlook and Business Operating Environment.

Europe economic exposure to US tariffs is low, with a few vulnerable sectors

ICG Private Company Database: Limited private markets exposure to sectors affected by US tariffs

The post Trade War Update: US-EU trade deal reduces policy uncertainty and downside growth risks appeared first on ICG.

• Our base case scenario is that most major developed economies will avoid recession in 2025, but policies are in flux and the outlook is especially uncertain. 

• We think the US economy is likely to see the sharpest slowdown among major developed economies in 2025, with growth slowing to between 0%-0.5%, with potentially a quarter or two of negative growth (technical recession) depending to what degree announced tariffs are (or are not) moderated and the degree to which the Fed and Treasury are willing to intervene to stabilise markets as needed. Strong aggregate household, company and bank balance sheets coming into this period reduce the risk of a deep 2008/09 type of financial crisis-led downturn in our view.

• In our view, most European economies will continue to see positive growth in the 0.5%-2% range in 2025, with increased fiscal stimulus and ECB rate cuts helping to offset tariff disruption. Although the UK is likely to see a relatively small negative impact from US tariffs, fiscal constraints and sticky inflation give policymakers less leeway to support growth than in Europe. Therefore, while we think UK growth in 2025 will remain positive, GDP growth in the 0.5%-1% range seems more likely. 
  
• Europe, the UK and other countries are likely to benefit from lower goods prices as China and other affected exporters divert goods formerly destined for the US market. Lower relative input costs should boost competitiveness relative to US companies contending with higher input costs and disrupted supply chains. Europe will additionally benefit as the dramatic realignment of US economic and geopolitical priorities accelerates Europe’s move towards more cohesive and coordinated regional economic, financial and defence policies.

• While the ECB has scope to cut rates another 50-100bp this year, the Fed and BoE are constrained by sticky core inflation and – particularly in the US – heightened inflation expectations. Until inflation expectations are clearly under control, an extended rate cutting cycle seems unlikely. The BoE is facing a similar situation, but most lead indicators point to more rapid core inflation declines in the coming months, which should allow the BoE to push through more aggressive rate cuts in the coming months.

• The tariff war will likely dampen Asia-Pacific growth but not substantially damage it. Lower energy prices and lower import prices from China should push inflation down and provide central banks room to ease monetary policy to support growth if needed. China will likely offset a large part of the US tariff hike impact through easier fiscal and monetary policy and a weaker yuan.

• The business operating environment will likely become more difficult for a number of companies across all markets, but performance dispersion is likely to be high. While some companies in manufacturing/industrial sub-sectors will be hit by the higher US tariffs (e.g. autos and auto related companies), we (and most of the private markets industry) tend to have limited exposure to these areas – with the bulk of our investments in less cyclical services related businesses that are well-insulated from the direct effects of the trade war.

• It is too early to fully assess the secondary effects of a potential slowdown in the US economy, potential sustained lower asset prices and higher policy uncertainty. We will be monitoring sentiment and purchasing manager indicators and company fundamentals in the coming months to gauge the potential magnitude of these secondary effects and their impact on the broader global economic outlook and business operating environment.

Jump to:

• Downloadable table detailing country and sector exposures to the US goods markets

Country exposure to US import tariffs varies widely

US Views

US President Donald Trump’s announced tariffs mark the biggest upheaval to international trade policy since US President Herbert Hoover signed the Smoot-Hawley Tariff Act in 1930. The Budget Lab at Yale (TBL) estimates that on tariff polices announced through 7 April 2025, the US average effective tariff rate will be 22.5%, the highest rate since 1909. On their calculations this will push US inflation up by 2.3% in the short-run, reduce US GDP growth by 0.9 percentage points in 2025, and reduce the size of the US economy by 0.6% persistently.

It is estimated that the tariffs announced so far, if fully implemented, will most strongly affect clothing and textiles prices, with TBL estimating apparel prices will rise 33% and food prices 4.5%, around three times recent grocery inflation. These price increases will disproportionally hit middle-to-lower income households given the larger share of budgets spent on basic necessities, reducing discretionary spending power. Companies that are likely most at risk from weaker consumer sentiment and spending power are those in discretionary categories such as apparel, furniture and consumer electronics. Companies in the auto and related sectors are also likely to be affected by supply chain disruptions, higher input prices, squeezed margins and likely lower sales volumes on reduced consumer purchasing power.

US tariffs do not cover services, so the direct impact on services businesses is expected to be minimal. However, the impact of heightened policy uncertainty on broader economic activity will need to watched carefully, with business and consumer sentiment surveys key indicators to monitor. Recent US consumer and business sentiment indicators have dropped sharply. If the recent turmoil in financial markets is not reversed the effective tightening of financial conditions will likely further weigh on business investment and household consumption, with ramifications across all sectors. 

That being said, we believe a number of sectors should remain relatively insulated from the disruptions, including parts of the healthcare, financial services, and business services sectors, as well as certain segments of the technology sector. While economic growth may be diminished in the near-term, the US will continue to produce and grow some of the world’s market leading companies. We are focused on identifying those companies and industries which will continue to grow despite potential broader economic headwinds.

Rising stagflation risks in the US

Europe and UK Views

Only around 3% of EU GDP and 2% of UK GDP is directly exposed to the US goods market, limiting the overall direct economic impact of the hike in US tariffs on goods. Around 85% of the EU and UK economies are services-related and this segment of the economy will not be directly affected by the new US tariffs.

Therefore, the overall medium to long-term impact on European and UK. growth is expected to be relatively small. Using ECB calculations, the impact of a 20% tariff on all EU goods exported to the US would reduce EU growth by around 0.24 percentage points if there is no retaliation by the EU, and up to a maximum of 0.40 percentage points with full retaliation (we believe any retaliation will likely be limited and focused), with the brunt of the impact concentrated in the first year after the rise in tariffs, and then diminishing with time. Private sector estimates of the impact of US tariffs on the EU economy are generally lower than the ECB estimates above.

The impact on the UK economy of the announced 10% tariff on UK exports to the US (and taking account of the global 25% tariff on autos & parts, steel and aluminium exports to the US) vary widely, but they are generally estimated to be around half or less than half the size of the impact on the EU economy – not surprising given the UK’s lower export exposure to the US and lower tariff rate.

The recent watershed changes in German and EU-wide fiscal policy to allow a significant rise in infrastructure and defence spending, marks a once-in-a-generation shift in fiscal policy. This should provide a medium to long-term boost to Europe’s growth rate – and at the very least provide downside growth protection. This shift in policy may help offset any secondary effects from the ongoing global tariff turmoil.

While specific companies in manufacturing/industrial sub-sectors will likely be hit by the higher US tariffs (e.g. autos and auto related companies), we (and most of the private markets industry) tend to have very limited exposure to these areas – with the bulk of our investments in less cyclical services related businesses that are well-insulated from the direct effects of the trade war.

It is too early to fully assess secondary effects of a potential slowdown in the US economy, sustained lower asset prices and higher policy uncertainty. We will be monitoring sentiment and purchasing manager indicators in the coming months to gauge the potential magnitude of these secondary effects and their impact on the broader economic outlook.

Europe growth expected to remain resilient

Asia-Pacific Views

The outlook for Asia-Pacific economies varies widely by country, with smaller more open economies likely seeing a larger hit from the current trade war than those with larger and more insulated domestic markets.

Of the major Asia-Pacific countries, Australia, India, China and Japan have the lowest goods export exposure to the US market relative to GDP (3% and below) with Vietnam an outlier in its very large economic exposure to the US goods market (27% of GDP). Thailand, Singapore, Malaysia and Korea lie somewhere in the middle with US export to GDP ratios in the 6%-9% of GDP range. China will take a relatively big hit given the magnitude of the tariff increases it is faced with (and is hitting back with), but easier fiscal and monetary policy and likely further yuan weakening will likely help ease the blow. 

Perhaps more important than country level exposures are the varied range of sector exposures. Even if the recently announced (and now postponed) “reciprocal” tariffs are not fully implemented, there will likely be large differentials in performance at a sector level. Some of the most exposed sectors include autos and parts, electrical and machinery equipment, agricultural products, textiles and clothing.

Services business are not being directly targeted by the Trump administration’s new trade tariff regime and most services businesses should remain relatively unscathed. However, secondary effects from potentially slower domestic and global growth, and exposures to businesses directly tied to international goods trade will need to be monitored.

On our base case that US growth slows but deep recession is avoided, and that Europe and UK growth is sluggish but positive, the global economic environment should remain supportive for most Asia economies. It is likely that China goods exports to non-US countries will ramp up and prices will come down as many Chinese companies are forced to divert product away from the US market. While this may have a negative impact on domestic competitors, it will also likely help push goods inflation down and allow central banks to cut interest rates more swiftly if domestic growth concerns warrant it.

On balance, we think the ongoing tariff war will dampen Asia-Pacific growth but not substantially damage it. Lower energy prices and lower import prices from China should push inflation down and provide central banks room to ease monetary policy (and allow currencies to weaken) to support growth if needed. The biggest likely impact of the tariff war is likely to be at a sector level, with autos and parts, electrical and machinery equipment, agricultural products, textiles and clothing most at risk and most services businesses relatively well-insulated.

Country and Sector Exposures to the US Goods Markets

Go deeper

• Listen or watch Nick Brooks’ 14 April appearance on Bloomberg’s Daybreak Europe and The Opening Trade (17mins into the show)
• Read Nick’s latest US and European Private Company Trends analysis (ICG Clients Only) or a short summary
• Watch video case studies across our portfolio (ICG Clients Only)

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Bucking the trend

Private companies in Europe, the UK and the US performed strongly through the first nine months of 2024, according to data tracked by the proprietary ICG Private Company Database. The database tracks key financial metrics of around 500 US and European private companies on a quarterly basis, providing unique insights into the structural fundamentals of companies that make up the private markets universe.

Europe and UK private companies continued to outperform their US counterparts, bucking the trend of relatively weak headline GDP growth. The EBITDA growth outperformance reflects a combination of a more favourable sector and company mix and more resilient margins. Median EBITDA growth for Europe and UK domiciled private companies rose by an average of 9.6% in the first nine months of the year, with momentum picking up in the third quarter.

Sustained strong performance of Europe and UK EBITDA growth despite weaker headline GDP growth may seem counter-intuitive at first. However, as detailed in this report, private companies tracked by ICG’s Private Company Database have limited exposure to the heavy industry and manufacturing sub-sectors that have been the main cause of the weakness in Europe’s headline GDP numbers. Private company exposures tend to be in areas where European and UK companies have generally thrived, with higher relative weights in fast-growing sectors such as software and services, commercial and professional services as well as consumer staples. Median margins in overweighted sectors have also tended to hold firm.

US private companies also performed well in the first nine months of 2024. US EBITDA growth has been on an accelerating trend since bottoming in Q3 2023, with improving margins – particularly in the consumer discretionary and healthcare sectors – supporting growth. US private company median EBITDA growth rose by 5.5% in the first nine months of the year and accelerated to 6.1% in the third quarter, with company-level guidance pointing to continued healthy growth in 2025.

Debt sustainability measures have held up well, with strong EBITDA growth helping to offset continued high interest rates. In Europe, median leverage (Net Debt/EBITDA) stood at 4.8x in Q3 2024 and the median interest coverage ratio (EBITDA/Cash Interest) appears to have stabilised at a comfortable 2.6x. In the US in Q3 2024, the median leverage ratio stood at 5.4x and the interest coverage ratio held steady at 1.9x. With interest rates at or near peak and underlying growth still strong, it is likely that debt metrics will continue to stabilise in 2025.

Despite substantial geopolitical uncertainty and potential policy risks, private companies tracked by ICG’s Private Company Database appear to be well-positioned for the year ahead. A focus on less-cyclical services-related sectors, strong cashflow generation, balance sheet strength and pricing power has helped support private company performance through the major dislocations caused by the Covid pandemic and Russia’s invasion of Ukraine. We think these characteristics will hold private companies in good stead as we head into an uncertain 2025.

Resilient private company EBITDA growth

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• Trump’s election win marks a watershed moment for the global economy and geopolitical landscape. Donald Trump’s US presidential win together with a Republican sweep of the US Congress puts Trump in a strong position to swiftly start implementing his economic and political agenda in early 2025. As his campaign proposals were very broad-brush, it’s too early to assess how his policies will play out. However, he has made clear that trade tariffs, immigration controls, regulatory easing and tax cuts are priorities.
• Trade tariffs expected to dampen growth, push inflation higher (initially). It remains to be seen how aggressively the Trump administration implements its planned tariff increases on goods. Statements by Trump during his campaign indicate potentially a 60% tariff on all China goods imports and 10% to 20% tariffs on all other countries goods imports. More recently he announced he would put a 25% tariff on goods imports from Mexico and Canada and add 10% to tariffs on goods imports from China. Most analyses indicate that a large rise in US tariffs would likely have initially an inflationary impact in the US, followed by a negative growth impact on all countries involved, with inflation falling as demand slows and base effects kick in. China would be particularly badly affected given the scale of the proposed China tariffs and the importance of the manufacturing sector to its economy. Offsets will likely include a weaker yuan and further fiscal and monetary stimulus measures.
• US tariff rise impact on Europe and UK expected to be manageable. To put things in perspective, goods exports from Europe and the UK to the US in 2023 were equivalent to around 3.2% and 2.2% of GDP respectively. The services sector in Europe and the UK makes up around 80% of their respective GDPs, and most of the services sector should see little direct impact from higher US goods tariffs. While higher tariffs on goods has the potential to hurt parts of their manufacturing sectors – autos, pharmaceuticals and machinery in particular – the impact on the broader Europe and UK economies should be manageable in our view. The inflation impact is expected to be negligible given weakening underlying inflation pressures and likely only token, highly targeted retaliatory tariffs.

US government debt on an unsustainable trajectory

• Proposed US tax and regulatory policies are growth positive, but bring inflation and debt sustainability risks. An extension of the 2017 corporate tax cuts, reinstatement of expired investment incentives, promised new tax cuts on tips, overtime pay, a repeal of taxes on social security benefits, restoring of the state and local tax deduction and an easing of energy and financial regulations, if implemented, would be growth positive. However, with the economy already growing at full potential, further stimulus risks driving inflation higher. Higher inflation and government bond yields have the potential to derail growth if the Treasury doesn’t appear to have a credible plan to fund the proposed tax cuts.
• Markets have given the administration-in-waiting the benefit of the doubt, but this could change. The market reaction to Trump’s win implies most investors assume many of Trump’s tax cut promises during his campaign will not be fulfilled and fiscal prudence will prevail. Our base case is key economic officials in the Trump administration recognise the risks of a potential bond market revolt and will therefore be careful to present credible fiscal plans. But Trump is unpredictable and has huge sway over his Cabinet and Congress. With the US fiscal deficit estimated at 7.6% of GDP this year and general government debt 122% of GDP, there is little room for error.

Executive summary

Donald Trump’s US presidential election win and the Republican sweep of the US Congress is a watershed moment for the global economy and geopolitical landscape. It is too early to make any definitive statements on how his administration will affect global markets and economies, but a few key themes stand out.

The first is that Trump has made clear he intends to raise tariffs on imported goods, with China likely facing the brunt of the increases. The second is that he plans to cut US taxes and regulations, though it is not yet clear how deep the cuts will be and how the tax cuts will be paid for. And third, on the geopolitical front, his early administration appointments indicate he will likely pursue an “America First” isolationist-leaning, transactional foreign policy, similar to his first term.

The initial market reaction to his win has been relatively orderly, with US risk assets and the US dollar out-performing, and government bond yields stabilising following a large pre-election rise. Looking forward, a key risk to the outlook is a potential back-up in US government bond yields (with ripple effects through global markets) if the new Trump administration tries to push through tax cuts without a credible plan to pay for them.

Another key risk is an escalatory tit-for-tat global trade war that disrupts supply chains and drives global growth lower and (initially) drives inflation higher. Our base case is that cooler minds will prevail, and worst-case scenarios will be avoided, allowing the current global economic expansion to extend through 2025. However, Trump is notoriously unpredictable and without the constraints of divided government, his policies and the global outlook have the potential to change quickly.

US bond yields up, but an orderly rise – so far

Assessing potential impact of Trump’s trade policy

While it is too early to make any firm judgements on how a Trump presidency will affect the global economy, there are a few clear areas where there will likely be major policy changes.

The first is trade policy. A key Trump campaign message is that his administration plans to raise tariffs on imported goods. Although very few specifics have been provided, during his campaign Trump indicated he wanted to put 60% across-the-board tariffs on goods imports from China and 10% or 20% tariffs on goods imports from all other countries. More recently he announced he would put a 25% tariff on goods imports from Mexico and Canada and add 10% to tariffs on goods imports from China. It remains to be seen how these policies might be implemented in practice. Last time tariffs were implemented on a less-damaging product- by-product basis to reduce the impact on US consumers.

What do higher tariffs mean for the US economy?

Most analyses indicate that a large rise in US tariffs will have a dampening impact on US domestic demand as real purchasing power is hurt by higher goods prices, and investment is hit by higher trade uncertainty, with some offset from government tariff revenues depending on the degree to which they are recycled into the economy through tax cuts and higher spending. On most analyses, higher import tariffs are initially inflationary as tariff costs are passed on to the consumer. However, ultimately slower demand growth as real incomes are hit, and base effects after the initial one-off price increases, causes inflation to come back down (with prices at a permanently higher level).

Europe and UK goods exports to the US as % of GDP

Manufacturing makes up small share of most developed economies’ GDP

The impact of higher tariffs on Europe is manageable

In terms of the potential direct growth impact on Europe, to put things in perspective, Europe’s goods exports to the US in 2023 were equivalent to around 3.2% of GDP. Even for Germany, the most exposed of Europe’s economies, goods exports to the US were equivalent to 4.2% of GDP. UK goods exports to the US are equivalent to 2.2% of GDP. The manufacturing sector makes up around 15% and the services sector makes up over 80% of Europe’s GDP. While services companies servicing domestic goods exporters exposed to the US may be affected, most services sector companies should see little direct impact from higher US goods tariffs.

Therefore, if Trump follows through on his threat to raise import tariffs on goods, while they will have potentially large consequences for parts of Europe’s manufacturing sector – autos, pharmaceuticals and machinery in particular – and may have secondary effects on companies servicing them, the impact on the broader Europe and UK economies should be manageable in our view. The inflation impact is expected to be negligible given already weak underlying inflation pressures and likely only token highly targeted retaliatory tariffs.

China likely to be most negatively affected by Trump policies

The potential impact on China will be much larger given the higher proposed tariff levels indicated for China and China’s much larger exposure to the manufacturing sector, with the manufacturing sector making up around 26% of China’s GDP. As growth slows, further fiscal support, monetary easing and yuan depreciation seem likely.

Potential impact of fiscal policies

The non-partisan CRFB1 estimates on its central case that if all of Trump’s tax and spending plans were implemented it would push US national debt up by around $8tr over the next ten years (a 45% of GDP increase). Already, interest payments on US government debt are larger than spending on defence or Medicare. While it is unlikely all of Trump’s proposals will be implemented, if even part of his tax cuts are passed without credible spending cuts elsewhere, there is a risk investors will view the US debt trajectory as unsustainable and will demand higher yields on government debt. In addition, the stimulatory effect of a large further fiscal expansion on an economy already growing at or above potential has the potential exert upward pressure on inflation, adding to the initial inflationary impact of tariffs.

It is of course too early to make any concrete assessments of the impact of policy given uncertainty around implementation. The Fed has taken this view, highlighting at its November meeting that until fiscal plans are known, monetary policy will remain data dependent.

However, if it looks as if even a portion of Trump’s proposed tariff and tax cuts will be implemented swiftly, all else equal, a pause in rate cuts by the Fed in Q1 2025 is plausible. An additional and related key risk to the outlook is a potential disorderly back-up in US government bond yields if the new Trump administration tries to push through tax cuts without a credible plan to pay for them. While this is not our base case, it is a key risk that needs to be watched.

Government fiscal positions back in focus

Implications for investment strategy

It is too early to take any definitive views on what the new Trump administration’s economic policies will look like and their potential investment implications. However, based on what we know so far, and what we learned during Trump’s first term, there are a few key themes that stand out. The first is that higher tariffs on goods imports are likely – with China taking the brunt of the hit. The second is that tax and regulatory cuts are also likely, though it is still unclear how deep they will be and to what extent they will be offset by spending cuts. And third, that immigration controls will be tightened, likely slowing the growth of low cost labour supply.

One clear take-away from the thrust of Trump’s likely policies is that global manufacturing companies everywhere are at risk and investors will have to do detailed due-diligence on their exposures to potential supply chain disruptions, their direct and indirect exposures to the US export market and risks of increased competition from China exports diverted from the US market. Most services companies should see limited impact. However, diligence on the potential effects of tariffs on imported inputs and on business customers directly or indirectly exposed to the US goods export market will also be necessary.

In our view, in this environment investors should prepare for higher for longer interest rates, higher public market volatility and take a granular bottom-up approach to investing, with a focus on supply chain resilience and customers direct and indirect exposure to potential US tariffs. We maintain a bias towards asset light services companies with strong recurring cashflows and pricing power. Real assets and strategies with steady and resilient cashflows and inflation hedge properties, as well as strategies that are able to take advantage of market dislocations, should also perform well in this environment in our view.

The post What does Trump’s election win mean for the global economy? appeared first on ICG.

• The monetary easing cycle has begun as major central banks start lowering rates
• Europe and UK economies supported by rising real incomes as energy shock fades
• US economy appears on-track for a soft landing as growth slows, but not by too much
• A constructive investing environment, but geopolitical and idiosyncratic risks are high
• In this environment we maintain a bias for less cyclical exposures, companies with predictable and resilient cashflows, and strategies that provide downside protection and can take advantage of market disruption

Overview

Summer market volatility shook markets up, but underlying economic fundamentals across most major economies support a continued constructive investing environment in our view. The spike in market volatility over the summer appears to have been driven primarily the unwinding of yen carry trades. Low liquidity and the self-reinforcing nature of the trade unwinding exacerbated the market moves. Since then, calm has returned and most risk assets have more than recouped their summer losses.

Looking forward, high frequency economic data indicates most major developed economies are seeing continued positive growth, with the economic expansion in Europe and the UK, sluggish, but on track, and early signs the US economy is cooling (but not too much). With inflation finally starting to near central banks targets, interest rate cutting cycles have begun which should support households, companies and deal flow in 2025.

Despite these positives, geopolitical risk remains high, with the Middle East and US presidential election in focus. Idiosyncratic risks also remain high, with the lagged impact of high inflation and interest rates still feeding through the system. In this environment we maintain a bias for less cyclical exposures, companies with predictable and resilient cashflows, and strategies that provide downside protection and can take advantage of market disruption.

Central bank easing cycle finally underway

Watch analysis

A resilient services sector is supporting global growth

Global growth has proven to be much more resilient than expected over the past few years, as large-scale government fiscal programmes and massive central bank monetary expansion supported households and businesses through the Covid pandemic, supply chain and energy shocks. The cost has been a substantial rise in government debt burdens and a sharp increase in consumer and producer prices. 

Government debt burdens have soared

While most services sectors managed to bounce back relatively quickly, the wounds to the global manufacturing sector have still not fully healed. On top of the disruptions caused by Covid and the energy price shocks, global manufacturing companies are also having to deal with rising protectionism, the threat of trade war, a sharp decline in China demand and consequent rise in excess supply as China’s economy deflates under the weight of its ongoing property crisis.

The services sector, by contrast, has continued to perform strongly. After the initial boom in demand for services following the relaxation of Covid lockdowns, services sector growth has normalised back to a lower but still healthy pace. Although there are variations at a regional and country level, generally demand for IT and business services, healthcare, entertainment and recreation, retail, travel, leisure and transportation services continue to show particular strength. Near full employment in most major developed economies, together with rising real incomes as consumer price inflation falls below still strong wage growth, should continue to support services demand going forward in our view.

A two-track global economy

Europe and UK economic expansion on track

The Eurozone and the UK saw a healthy pick-up in economic growth in the first half of 2024. In Q3 there was some loss of momentum, primarily due to continued weakness in the global manufacturing cycle. Services sectors in most countries, however, have generally performed well. Looking forward, rising real incomes as the energy and supply shocks fade, together with falling interest rates should keep the expansion on track into 2025 in our view.

Eurozone services growth holding up well

Eurozone and UK GDP growth suffered in 2023 as industrial sectors and households struggled with the lingering effects of the sharp rise in energy costs caused by Russia’s invasion of Ukraine and the disruptions to supply chains caused by the Covid pandemic. Germany has been especially hard hit given its large energy-intensive industrial base and structural changes taking place in the auto sector.

However in 2024, outside of Germany, these effects have started to fade, allowing economic growth to start to normalise back to trend. While the Eurozone services PMI moderated in Q3 2024, underlying growth momentum in the services sector remains positive. With inflation and interest rates expected to fall further in the coming quarters, and wage growth still strong, we expect services growth to remain positive as real incomes continue to improve. In the first half of 2024 Eurozone GDP is estimated to have grown by around 0.6% and consensus forecasts are for full year growth of 0.7% and 1.3% in 2024 and 2025 respectively.

Europe and UK economies supported by rising real income growth

UK growth continues to surprise on the upside

In the UK, the PMIs have been surprisingly strong, with the September composite PMI rising holding at a still healthy 52.9 and the services PMI coming in at 52.8, indicating the economic expansion of the first half the year has continued into the second. UK GDP growth is estimated to have increased by 0.6% in 1H 2024 and consensus forecasts put full year 2024 and 2025 growth at around 1.1% and 1.4% respectively.

UK economy holding up surprisingly well

US growth remains strong, but signs of slowing momentum

US economy continued its strong performance through the first half of 2024, with US private final demand growing by 2.6% and 2.9% in Q1 and Q2 respectively and most high frequency indicators of growth momentum holding up well. However, more recently there have been signs the economy is cooling. Over the past few months US non-farm payrolls have surprised to the downside and the unemployment rate has been creeping up. Retail sales have been slowing even as credit card outstandings have hit all-time highs. While most data points to a soft landing, and this remains our base case, soft landings are notoriously difficult to engineer, so a close monitoring of the health of the labour market, the consumer and potential ripple effects from continued stress in the regional banking sector will be critical over the next few quarters.

US labour market is cooling down

Fall in inflation allows major central banks to start rate cutting cycles

With US inflation finally coming into the range of the Fed’s 2% target and employment data cooling, the Fed finally commenced its much-anticipated easing cycle with a larger than expected 50bp cut to its benchmark rate in September.

Headline and core CPI came in at 2.4% and 3.3% respectively in September. While domestic demand, as highlighted above, is still relatively strong, signs of cooling in the labour market and lead indicators pointing to further declines in wage growth and shelter inflation, should allow the Fed to steadily lower rates in the coming quarters. Swap markets are currently pricing another 75bp of cuts by year end and a further 100bp of cuts in 2025. While still resilient growth and sticky services inflation indicates to us that swap markets may again be getting ahead of themselves, the trend towards lower rates seems clear.

Inflation nearing central bank targets

In Europe, with underlying inflation pressures easing and growth momentum moderating, the ECB implemented its first 25bp rate cut in June and followed up with a second cut in September. We believe this marks the start of a measured but extended easing cycle as inflation nears its medium term target of 2%. Current swap market pricing implies the ECB’s benchmark rate will fall from the cycle peak of 3.5% to around 2.0% over the next year.

In the UK, with economic growth more robust than the Eurozone and underlying services inflation proving stickier, the BoE waited until August before implementing its first rate cut, lowering its benchmark rate 25bp to 5%. Swap markets are currently pricing in just under two more 25bp rate cuts by the BoE this year and around another 100bp next year.

A constructive investing environment, but idiosyncratic risks still high

If this macro environment holds, we think the overall investing environment will remain constructive.  However, the lagged impact of high interest rates is still feeding through segments of the market and for some companies the wounds from the Covid pandemic and energy price crisis have not fully healed. Therefore while we think system level risks are quite low, we think idiosyncratic risks remain higher than normal. In this environment we maintain a bias for less cyclical exposures, companies with predictable and resilient cashflows, and strategies that provide downside protection and can take advantage of market disruption.

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Summary of key trends

• Europe and US private companies maintained strong performance through 2023 and through H1 2024, with sales and EBITDA growth holding above pre-Covid levels and debt metrics remaining sound.
• Sales growth continued to slow through the second half of 2023 as growth normalised from the exceptional post-Covid lockdown growth rates of 2022 and price growth moderated.
• EBITDA growth re-accelerated in Europe and the US in the second half of 2023 as easing input cost inflation helped to stabilise margins.
• Sector performance divergence was high in 2023. Consumer discretionary and industrials saw the strongest EBITDA growth performance, benefiting from rising household real income growth and normalising supply chains. Chemicals and healthcare were the weakest performers, with margins under pressure, though there were tentative signs that the worst of the margin squeeze may have passed as wage growth slowed and energy costs normalised.
• Debt metrics remain sound, though interest coverage ratios declined in 2023 on continued high interest rates and weaker EBITDA growth. In Europe net leverage continued to decline and the median interest coverage ratio was a still comfortable 3.0x in Q4 2023. US net leverage rose modestly, and the median interest coverage ratio stood at 2.0 in Q4 2023.
• Equity cushions remained substantial, with the equity contribution to enterprise value in the US holding near an all-time high of 50% and 46% in Europe, providing substantial protection to debt holders.

Resilient private company EBITDA growth

US and Europe Private Company EBITDA Growth

The post US and Europe Private Company Trends: Resilience Sustained appeared first on ICG.