Coface Warns of Global Economic Risks as Divergence Between US and Europe Widens

According to Coface’s latest analysis, while the global uncertainty surrounding the high number of elections last year is easing, the overall economic landscape remains uncertain, with significant risks ahead. Despite improvements in certain regions, the global economy still faces numerous challenges, from US policies impacting global economies to China grappling with overproduction and many developing countries struggling with dollar appreciation and capital outflows.

Coface has updated the ratings of several countries and sectors based on a revised outlook. Seven countries have had their ratings adjusted, with four seeing increases and three seeing decreases. Additionally, 20 sector ratings were reviewed, with eight increases and twelve decreases, reflecting the changing dynamics of global trade and investment.

A key factor contributing to the risks is the divergence between the US and the eurozone economies. The US economy is expected to remain strong, driven by robust household spending and a strong labor market, with tax cuts and deregulation under President Trump likely boosting investments. However, this contrasts sharply with Europe, where growth is constrained by challenges in manufacturing and construction. While inflation is falling, consumer spending in Europe is likely to stay subdued due to a lack of confidence, especially amid political uncertainty in countries like France and Germany.

In Europe, risks are tilted towards the downside, particularly if labor markets weaken and investment fails to recover despite interest rate cuts. The ongoing decline in corporate margins and the rise in business closures contribute to this fragile economic outlook. Another significant risk for the European economy comes from US trade policies, which could trigger further tariffs, exacerbating tensions between the EU and the US. The European Central Bank is expected to cut interest rates by 25 basis points, but the Federal Reserve may take a more cautious approach, with limited rate cuts, raising the potential for conflicting monetary policies.

The European automotive industry faces a challenging 2025 after a slow year in 2024. While new car registrations were expected to grow slightly in 2024, the second half saw a 3% decline. The sector faces increasing competition from China, particularly in the electric vehicle segment, where Chinese companies dominate battery production. Despite efforts by Brussels to impose tariffs on Chinese electric vehicles, the protection of the European market could lead to higher tariffs, further straining the industry. Additionally, US trade policies under President Trump, including potential tariff threats, could significantly affect EU car exports, particularly in Canada and Mexico, which are vital markets for European manufacturers.

Developing countries are particularly vulnerable to the global economic shifts, as the rising dollar and capital outflows exacerbate existing economic imbalances. The election of President Trump has increased risks for these economies, particularly those with high levels of dollar-denominated debt. For example, the sharp depreciation of the Brazilian real at the end of 2024 highlights the turbulence that can affect countries with large fiscal and external imbalances. China also faces challenges, with growth expected to slow significantly in 2025 due to the absence of substantial stimulus and the ongoing risk of US tariffs.

Despite these numerous risks, Coface forecasts slight improvement in global growth for 2025, with a slight increase to 2.7% from the previous estimate of 2.6%. This forecast is largely driven by the resilience of the US economy, which is expected to continue supporting global growth, offsetting the fragility of the eurozone and other regions.