Market outlook
Update: 13 February 2025
Risk statement
As we are mainly active in banking, insurance and asset management, we are exposed to a number of typical risks for these financial sectors such as – but not limited to – credit default risk, counterparty credit risk, concentration risk, movements in interest rates, currency risk, market risk, liquidity and funding risk, insurance underwriting risk, changes in regulations, operational risk, customer litigation, competition from other and new players, as well as the economy in general. KBC closely monitors and manages each of these risks within a strict risk framework, but they may all have a negative impact on asset values or could generate additional charges beyond anticipated levels.
At present, a number of factors are considered to constitute the main challenges for the financial sector. These stem primarily from geopolitical risks which have increased significantly over the past few years (including the war in Ukraine, conflicts in the Middle East and trade wars). These risks result or may result in shocks for the global economic system (e.g., GDP and inflation) and the financial markets (including interest rates). European economies, including KBC’s home markets, are affected too, creating an uncertain business environment, including for financial institutions. Regulatory and compliance risks (in relation to capital requirements, anti-money laundering regulations, GDPR and ESG/sustainability) also remain a dominant theme for the sector, as does enhanced consumer protection. Digitalisation (with technology, including AI, as a catalyst) presents both opportunities and threats to the business model of traditional financial institutions, while climate and environmental-related risks are becoming increasingly prevalent (as recently evidenced by Storm Boris in Central Europe). Cyber risk has become one of the main threats during the past few years, not just for the financial sector, but for the economy as a whole. The war in Ukraine and geopolitical tensions in general have triggered an increase in attacks worldwide. Finally, we have seen governments across Europe taking additional measures to support their budgets (via increased tax contributions from the financial sector) and their citizens and corporate sector (by, for instance, implementing interest rate caps on loans or by pushing for higher rates on savings accounts).
We provide risk management data in our annual reports, quarterly reports and dedicated risk reports, all of which are available at www.kbc.com.
Our view on economic growth
Driven primarily by private consumption, US growth in the fourth quarter amounted to 0.6%, somewhat lower than in the third quarter (0.8%). Growth is expected to remain at about 0.6% in the first quarter of 2025, despite labour market tightness that is expected to ease further.
Euro area growth in the fourth quarter came in at 0.0%, after 0.4% in the third. The manufacturing sector continues to exhibit a persistent weakness, while the expected service sector recovery has not (yet) materialised. Growth is expected to continue at about its current pace in the first half of 2025 and to pick up in the second half of 2025 on the back of recovering domestic consumption.
Quarter-on-quarter growth in Belgium came in at 0.2% in the fourth quarter, after 0.3% in the third. Relatively strong domestic demand continued to outweigh the negative contribution to growth of net exports. For the first half of 2025, we expect growth to remain broadly in line with that of the euro area.
The Czech economy grew by 0.5% in the fourth quarter, the same as in the third quarter. This was supported by private consumption, against the background of a weak and delayed industrial recovery. Hungarian economic growth recovered to 0.5% in the fourth quarter after contracting by 0.6% in the third quarter. According to our estimates, fourth-quarter growth in Bulgaria and Slovakia was relatively strong, amounting to 0.6% and 0.5%, respectively.
The main risk to our short-term outlook for European growth is the repercussion of the US elections in November, in particular with respect to trade policy. Other risks include the persistence of the current weakness in the global manufacturing sector. Specific European risk factors include political instability and ongoing government budget discussions in the EU for 2025.
Our view on interest rates and foreign exchange rates
The disinflationary process in the euro area and the US paused in the fourth quarter. In the euro area, headline inflation rose again in December, going up to 2.4% and being driven mainly by higher energy prices, the weak euro exchange rate and statistical base effects. The impact of energy prices and potential trade tariffs in the course of 2025 are likely to exert some upward pressure on headline inflation.
The ECB continued its easing cycle and cut its deposit rate in October and December 2024, as well as in January 2025, by 25 basis points each time to its current level of 2.75%. The ECB is expected to cut its policy rate further in the first half of 2025.
The Fed also continued its easing cycle in the fourth quarter by cutting its policy rate in November and December by 25 basis points each time. After a pause in January 2025, the Fed is now expected to continue cutting its policy rate in the course of 2025, but is expected to take a more cautious stance in order to assess the impact of new US economic policies.
Ten-year bond yields in the US and Germany moved higher during the fourth quarter, with the US-German spread widening sharply. The main driver was robust US economic growth and expectations regarding the US presidential elections and the likely inflationary impact of new US policies, in particular with respect to trade tariffs. As a result, the US-German yield spread widened, leading to a stronger dollar against the euro.
The Czech National Bank reduced its policy rate at the end of September and November 2024, as well as in February 2025, by 25 basis points each time to 3.75%. One more 25-basis-point rate cut is expected in the first half of 2025. Since the beginning of the fourth quarter, the Czech koruna has been volatile and relatively weak, due mainly to higher US interest rates, a generally stronger US dollar and overall risk sentiment. The koruna is expected to broadly remain stable in the coming quarters.
At the end of September 2024, the National Bank of Hungary cut its policy rate by 25 basis points to 6.5%. The Hungarian central bank is expected to pause its easing cycle in the first quarter of 2025 because of high energy prices, accelerating growth of domestic consumption and the weakness of the Hungarian forint. During the fourth quarter of 2024, the forint depreciated against the euro by about 3%, and this weakness persisted into the start of 2025. It has been caused by higher interest rates in the US and stronger US dollar, political risks, uncertainty about access to EU funds and a weak export-oriented sector. Besides the possibility of a temporary strengthening correction in the first quarter of 2025, the forint is expected to continue depreciating in the following quarters due mainly to a higher inflation trajectory compared to the euro area.
For more detailed analyses and data, please refer to KBC Economics
Disclaimer: the expectations, forecasts and statements regarding future are based on assumptions and assessments made when drawing up this text. By their nature, forward-looking statements involve uncertainty. Various factors could cause actual results and developments to differ from the initial statements. Moreover, KBC does not undertake any obligation to update the text in line with new developments.