Macroeconomics

Goldman Sachs Research has updated its Carbonomics cost curve which considers over 100 different applications for decarbonization tech across key emitting sectors, reflecting technological innovation and a growing push for local supply chains and tariffs.    CarbonomicsTariffs, deglobalization and the cost of decarbonization  

    The economic growth outlook is improving in Germany — and in Europe as a whole — amid a fiscal plan that emerged after Germany’s federal election and the prospect of higher military spending across the region, according to Goldman Sachs Research. German voters in late February put Friedrich Merz in line to become Chancellor and gave his Christian Democratic Union (CDU) and the Social Democratic Party (SPD) a slim legislative majority that should allow for a two-party coalition. This outcome makes higher government spending more likely. The coalition partners have announced a fiscal plan to exempt substantial defense outlays from Germany’s so-called debt brake and to create a €500 billion ($546 billion) off-budget infrastructure and climate protection fund, among other steps.  In light of these developments, Goldman Sachs Research Chief European Economist Sven Jari Stehn and his team increased their forecast for real GDP growth in Germany this year to 0.2% from flat. They also raised their 2026 forecast by 0.5 percentage point to 1.5% and increased the estimate for 2027 by 0.6 percentage point to 2%. “Growth could be higher with quicker implementation,” Stehn and his colleagues write in a report. “In practice, we think the implementation will be more gradual given capacity constraints and well-known challenges with stepping up public investment.”  Why the German economy is improving The researchers examine the potential impact of three key elements in the fiscal plan. Defense spending in excess of 1% of GDP would become exempt from the debt brake, Germany’s constitutional limit on structural deficits. The team sees military spending ramping up to 3% of GDP by 2027 and reaching 3.5% after that. The off-budget infrastructure and climate protection fund, designed to last 12 years, would boost spending gradually, raising expenditures by €40 billion above our economists’ pre-election baseline in 2027. A third feature of the fiscal plan increases the permissible structural deficit German states can run. This and the freed-up space in the federal budget may be partially used for tax cuts. The lower house of parliament (Bundestag) passed the package this week and our researchers expect the fiscal package to also pass the upper house (Bundesrat) later this week, before newly elected Bundestag members are seated in late March. Business leaders and investors have been pushing for a loosening of Germany’s debt rules and a boost in government spending, as the economy has been sluggish for several years, a growth laggard among the large European nations. The outlook for euro area GDP growth The researchers also raised their forecasts for the euro zone as a whole. They added 0.1 percentage point to this year’s growth estimate, bringing it to 0.8% for the region. They increased the 2026 forecast by 0.2 percentage point to 1.3%, and boosted the 2027 numbers by 0.3 percentage point to 1.6%. “One reason is that we expect stronger growth in Germany to spill over into neighboring countries,” Stehn writes of the forecast change. “Another reason is that we now expect the rest of the euro area to step up military spending somewhat more quickly in response to the German announcement.” The team sees France boosting defense spending to 2.9% of GDP by 2027, Italy reaching 2.8% of GDP, and Spain boosting outlays to 2.7% of GDP. This is a 0.3 percentage point increase from the researchers’ previous estimates. Some of the increases in defense outlays could be offset by spending cuts elsewhere or tax increases, the researchers note, as these countries bump up against their own fiscal limits, resulting in a smaller economic boost.       “We see risks in both directions around our new forecast” for the euro zone, Stehn writes. A steeper increase in public spending, especially in Germany, could create faster-than-forecast growth in 2026 and 2027. On the other hand, the researchers acknowledge the ongoing risk that tariffs and trade tensions with the US might have a greater-than-expected impact. The researchers have as a baseline a 0.5 percentage point drag on growth from targeted tariffs and trade policy uncertainty in 2025. “An across-the-board tariff could imply an additional hit to growth of 0.5% this year,” they write. The prospect of increased government spending across the euro zone decreases pressure on the European Central Bank to cut rates below the neutral policy rate, the researchers find. They now expect that the central bankers will be satisfied by cutting rates to a terminal rate of 2%, with 0.25% cuts expected in April and June (the policy rate is 2.5% now), rather than lowering it further in July. 

   Recent policy announcements in China highlight new government efforts to raise birth rates. For investors, this suggests an improving outlook among dairy and infant formula companies that have sales in China, according to Goldman Sachs Research. It also creates a positive storyline for companies outside Asia that make ingredients for infant nutrition. The policy developments include a March 13 announcement by leaders in Hohhot, Inner Mongolia’s capital, of child-raising subsidies. The city will offer a one-time payment of RMB 10,000 ($1,383) to help support a family’s first child; provide RMB 10,000 per year up to age five for a second child, for a total of RMB 50,000; and will grant a subsidy of RMB 10,000 per year for 10 years for a third child or additional children. The announced subsidies in Hohhot also included a plan to provide milk to parents for one year after a child is born, through coupons for dairy products worth RMB 3,000. “Hohhot’s initiatives resonate with the government’s recent policy direction,” Goldman Sachs Research analyst Leaf Liu and her colleagues write in a report. How is China attempting to increase birth rates? A few days after Hohhot’s announcement, China’s government unveiled a special action plan that signaled the potential for more childcare subsidies nationwide. The plan reinforced policies to promote consumption that emerged from the annual plenary sessions of the National People’s Congress and the Chinese People’s Political Consultative Conference in Beijing earlier in the month. The subsidies for parents in Hohhot are high compared with similar programs announced in recent years in other Chinese cities, Andrew Tilton, chief Asia Pacific economist and head of Emerging Markets Economic Research, writes in a separate report. The macroeconomic impact will be limited if Hohhot is the only place offering subsidies at that level. Still, Goldman Sachs economists estimate that these types of supports, if implemented nationwide, could add between 0.1 and 0.3 percentage point to annual GDP. Shares of dairy companies that can benefit from these measures in China have risen: A basket of stocks that includes large makers of liquid milk, milk powder, and infant formula rallied more than 7% in just a few days. China’s fertility policy could boost stocks outside China Companies in Europe may also benefit from China’s efforts to boosts birth rates and provide greater support for families with young children, Georgina Fraser, head of the European Chemicals team, writes in a separate report. Policies to increase domestic consumption and enhance citizens’ quality of life could drive more demand for premium and higher-value dairy products. Investors may find opportunities in biotechnology companies that have engineered human milk oligosaccharides (HMOs), a type of carbohydrate that occurs naturally in human breast milk and promotes immune health and gut function. “The commercialization of HMOs is on the back of more favorable regulation,” Fraser writes. By 2030, there may be HMOs in 50% of the infant formula produced worldwide, up from just 5% today, she says in her team’s report. Some European companies make HMOs. Fraser writes that the market for these products could broaden across age groups. “HMOs are increasingly being recognized for supporting immune and gut health for a broader demographic,” Fraser writes. The outlook for demographics in China Births have been falling in China for years, but they rose in 2024. There’s further room for birth rates to rebound, Liu writes. Mothers aged 20 to 24 are estimated to be having children at half the pace they were before the pandemic, and mothers in the 30 to 44 age range have a birth rate notably below levels seen in Japan and South Korea for that age range. As a result, there’s scope for a recovery in birth rates. If policy support for having more children turns out to be significant nationwide, “our population model points to a potential uptick in new births” over the next decade, Liu writes.