Market outlook
Update: 13 May 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 as a consequence of US tariff policies). 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. 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
US economic activity fell by 0.1% (non-annualised) in the first quarter of 2025, compared to positive growth of 0.6% in the final quarter of 2024. The decline was mainly due to a large rise in imports as companies anticipated the expected increase in import tariffs. As a result of recent US economic policy, specifically with respect to import tariffs, growth in the US is expected to remain subdued, and possibly even negative, in the next few quarters.
Euro area growth in the first quarter amounted to 0.4%, after 0.2% in the fourth quarter of 2024. Export growth strengthened ahead of the tariff announcement. The manufacturing sector shows tentative signs of bottoming out, but the expected recovery in the service sector has not (yet) materialised. Uncertainty around economic policy and the ongoing trade conflict are likely to lead to low economic growth in the euro area over the next quarters. The medium-term growth outlook improves on the back of expected defence spending and infrastructure investments.
Quarter-on-quarter growth in Belgium was 0.4% in the first quarter, implying a strengthening of growth dynamics compared to the previous quarter. Relatively strong domestic demand continued to outweigh the negative contribution to growth from net exports. For the next few quarters, we expect growth to remain broadly in line with that of the euro area.
The Czech economy grew by 0.5% in the first quarter, after 0.7% in the fourth quarter of 2024. This was supported by private consumption against the background of a weak and delayed industrial recovery. Hungarian economic activity shrank by 0.2% in the first quarter due to an industry slump. According to our estimates, first quarter growth in Bulgaria and Slovakia was still relatively resilient at 0.4% and 0.3%, respectively.
The main risk to our short-term outlook for European growth is a further escalation of the ongoing global trade conflict. More specifically, uncertainty is being caused by the prospect of further US policy actions, the EU’s response to this and to the potential trade diversion of Chinese export goods away from the US market towards the EU.
Our view on interest rates and foreign exchange rates
In the euro area, inflation remained unchanged at 2.2% in April, driven by the negative demand shock caused by trade tariffs imposed by the US, lower energy prices and the strength of the euro exchange rate. This disinflationary pressure is likely to persist in the coming months. In the US, inflation was 2.4% in March and is likely to increase in the course of 2025 as a consequence of the import tariffs imposed by the government there.
The ECB continued its easing cycle and cut its deposit rate in January, March and April 2025 to its current level of 2.25%. The ECB is expected to cut its policy rate further.
The Fed put its easing cycle on pause in the first quarter amidst economic uncertainty. While the Fed has downgraded its growth outlook due to the trade tariffs imposed, it upgraded its inflation outlook due to the inflationary impact that these tariffs are likely to have. On balance, the Fed is now expected to maintain its pause in the second quarter. If its assessment of the impact of US economic policies allows, the Fed will resume its cautious easing path in the second half of 2025.
There has been a disconnect between the 10-year bond yields in the US and Germany since the start of the first quarter. This was mainly driven by two events. First, a huge fiscal spending plan was passed in the German parliament covering defence spending and infrastructure investment. Increased defence spending plans were also announced at EU level. As a result of the changed German fiscal stance, German 10-year bond yields temporarily rose sharply in early March (before subsequently moderating again). This rise lowered the US-German 10-year spread to about 140 basis points, coming from well over 200 basis points at the beginning of the first quarter. Following this, the announcement of so-called reciprocal tariffs by the US on 2 April led to a sharp rise in US 10-year bond yields, increasing the US-German spread again to about 180 basis points in mid-May. The rise of US bond yields was initially driven by higher inflation expectations and the markets’ expectation of future Fed monetary policy. In a second phase, the rise also gradually started to reflect a more general risk aversion towards US assets. This was reflected in the sharp depreciation of the US dollar in April.
The Czech National Bank cut its policy rate in February and May 2025 by 25 basis points each to the current level of 3.50%. The Czech National Bank is expected to moderately cut its policy rate further. Since the beginning of the first quarter, the Czech koruna has appreciated moderately overall due to the weak US dollar and lower energy prices. The koruna is expected to broadly remain stable in the coming quarters.
The Hungarian central bank kept its policy rate unchanged at 6.5% during the first quarter and it is expected to maintain its pause during the second quarter as well. The forint strengthened against the euro for most of the first quarter. However, after the announcement of the reciprocal US tariffs on 2 April, the forint started to depreciate against the euro.
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.