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Global Economic Weekly

When confusion meets uncertainty
Global Letter: When confusion meets uncertainty 21 February 2025
Executive orders are coming out of the oven at an increasing speed. Not surprisingly, Economics
market participants are confused. When companies start to have trouble rationalizing the Global
impact of different public policies on their relevant relative prices, the option value of
waiting and postpone investment goes up. The US economy is still the one offering the Table of Contents
best risk adjusted opportunities. However, policy mistakes do occur and at this point
Global Letter 2
constitute the main risks to an otherwise still robust economic outlook.
US 4
United States: Congress is still the key player for deficits Euro area 7
UK 12
DOGE has captured headlines, but significant and lasting reductions in spending will
need to originate in Congress. The reconciliation proposal by House Republicans would Asia 15
add ~$2.8tn to the deficit from FY 2025-FY 2034, and up to $2tn in spending Emerging EMEA 17
reductions. This is a smaller increase in the deficit than we expected. If enacted as Latin America 19
proposed, it would pose a downside risk to our outlook beginning in 4Q 2025. Key forecasts 21
Detailed forecasts 22
Euro Area: Productivity, catch me if you can Research Analysts 28
Despite many shocks to the Euro area productive base, we find no evidence of a regime
shift in productivity post-Covid. Gains from across/within sector reallocation are limited,
The productivity argument in support of higher neutral rate views looks misplaced to us. Claudio Irigoyen
Global Economist
BofAS
UK: Inflation review +1 646 855 1734
[email protected]
Inflation rose more than expected to 3.0%, while services rise was weaker. We upgrade
Antonio Gabriel
headline inflation to 3.1%/2.2% in 2025/2026. Stronger inflation and no sharp labour Global Economist
BofAS
market slowdown supports cautious cuts and implies risks are for less cuts than more. +1 646 743 5373
[email protected]
Asia: In the shadow of US tariffs Global Economics Team
BofAS
Only a few days after the US hiked additional tariffs on Chinese imports by 10%, the
See Team Page for List of Analysts
potential for US tariffs on other Asian economies looms large. Asia stands out as facing
higher risk of US tariffs.
Emerging EMEA: Central Asia – trip notes

Uzbekistan: Robust growth continues despite a lag in reforms. Kyrgyzstan: Robust
growth likely sustainable given base effect. Kazakhstan: VAT reform to be finalized,
possibly in watered-down form.
Latin America: Brazil – Deceleration is here

All high frequency economic activity indicators showed a contraction in Nov-24 and Dec-
24, signaling a slowdown in activity. Monetary is tight, while fiscal is unlikely to fuel
growth in 1H25. Weaker activity increases the risks for fewer rate hikes.
BofA Securities does and seeks to do business with issuers covered in its research
reports. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decision.
Refer to important disclosures on page 26 to 27. 12797800
Timestamp: 21 February 2025 04:30AM EST

Global Letter
Claudio Irigoyen Antonio Gabriel
BofAS BofAS
[email protected] [email protected]
When confusion meets uncertainty

Executive orders are coming out of the oven at an increasing speed. Not surprisingly,
market participants are confused. The signal-extraction problem associated with
processing daily headlines on tariffs, immigration, DOGE, geopolitics, peace deal on the
Russia-Ukraine conflict, etc. can be an overwhelming task. However, that is the nature of
the beast. But this goes beyond the already complex issue of dealing with policy
uncertainty.
Even though asset prices incorporate all the relevant information, they do not
necessarily reflect the divergence in beliefs, not only about the probability distribution of
certain shocks, but also about the economic implications of those shocks.
Do not confuse confusion with uncertainty

Of course, there is a lot of uncertainty regarding whether tariffs will be imposed or not,
the tightening of immigration will be soft or involved sizable deportations, DOGE will
have a meaningful impact in reducing spending, tax cuts will be implemented or not, etc.
However, confusion goes beyond uncertainty. Even if there is consensus about the
probability distribution of the different shocks, there is still a lot of confusion about the
impact of the realization of the shocks on the economy. Even if everyone agrees that
tariffs will be increased 20% across the board, some people read it as inflationary, some
others as recessionary and a few others as stagflationary. Some people think the Fed
will have to hike rates and some people interpret this as a shock that will eventually
induce the Fed to cut rates.
The confusion only compounds when we add other dimensions such as immigration,
DOGE, taxes, etc and this affects the reaction function of the different decision makers
in the economy.
Confusion is pervasive
Interestingly, this confusion is not a monopoly of the private sector but starts in the
design of public policies. The official argument to impose tariffs on certain countries
relies on targeting those countries where the US runs a trade deficit with. As if tariffs
were the solution to balance trade in a country-by-country basis.
The confusion extends to the Fed, whose reaction function will depend on how the
combination of policy shocks affecting the economy will impact inflation and
employment. The Fed is signalling that there is no rush in cutting rates any further.
Confusion compounds uncertainty and the option value of waiting increases with both.
The confusion extends to the Treasury, which considers continuing financing the deficit
with short term liabilities because the Fed is reducing the stock of Treasuries.
Confusion can affect investment

Obviously, there are many reasons to be optimistic about investment, including
deregulation across many sectors, industrial policy in the semiconductor sector, etc.
However, confusion affects investment the other way around. When companies start to
see changes in the rules of the game, have trouble rationalizing the impact of different
public policies on their relevant relative prices, the option value of waiting and postpone
investment goes up.
We are starting to see this in different measures of policy uncertainty. We don’t see it
more broadly in the data because it is too recent, but this is something that needs to be
2 Global Economic Weekly | 21 February 2025

monitored carefully. It will show up first in business and consumer confidence, then in
demand for financing and credit and eventually in investment dynamics.
The US economy is still the one offering the best risk adjusted opportunities.
Consumption continues showing signs of resilience. The labor market remains strong.
Asset prices are consistent with market participants mostly ignoring the noise and
assuming the worst-case scenario will be avoided because it is in nobody’s interest to
hurt US companies and crash the stock market. However, policy mistakes do occur and
at this point constitute the main risks to an otherwise still robust economic outlook.
Global Economic Weekly | 21 February 2025 3

US
Aditya Bhave Stephen Juneau
BofAS BofAS
Shruti Mishra Jeseo Park

BofAS BofAS
Congress is still the key player for deficits

• DOGE has captured headlines, but significant and lasting reductions in spending will
need to originate in Congress.
• The reconciliation proposal by House Republicans would add ~$2.8tn to the deficit
from FY 2025-FY 2034, and up to $2tn in spending reductions.
• This is a smaller increase in the deficit than we expected. If enacted as proposed, it

would pose a downside risk to our outlook beginning in 4Q 2025
The power of the purse lies with Congress

There has been a flurry of headlines around savings found by Department of Government
Efficiency (DOGE). According to its website, the savings have totaled $55bn—0.8% of FY
2024 outlays and 3% of the FY 2024 deficit. These are likely to grow over time as
reductions in employment are tallied, office space is reduced, and other spending is
rescinded or withheld. That said, these savings are unlikely to accrue all in one year given
that many Federal contracts span multiple years.
More importantly, however, is that Congress still has the “power of the purse” and sets
appropriations for Federal Agencies. Therefore, any savings generated by DOGE, may
simply result in shifts in spending, rather than reductions unless Congress cuts
appropriations to account for DOGE savings. In other words, Congress is still likely to
originate any significant deficit reduction.
Republican proposals will add to deficits over time

Given this view, we suggest investors pay close attention to budget reconciliation
developments laid out by Republicans in both the House and Senate. Senate Republicans
are working on a two-bill approach, the first of which addresses the border and military
and the second will address tax provisions. Meanwhile, House Republicans are pursing a
one bill approach, which reportedly has the support of President Trump. Both approaches
Exhibit 1: House Budget Resolution (FY 2025-FY 2034) Exhibit 2: Debt held by the public to GDP (%)
The House Budget resolution would add $2.8tn in deficits by FY 2034 CRFB estimates that public debt to GDP would climb to 123% in FY 2034
compared to the CBO’s current law estimate of 117%
Reconciliation instruction
Committee ($bn) 160
Deficit increases CBO: Current Law CRFB: House Budget Proposal
Ways & Means 4,500
Judiciary 110
Armed Services 100 120
Homeland security 90
Deficit reductions
Energy and Commerce -880 80
Education and workforce -330
Agriculture -230
Additional cuts -560
Primary deficit increase 2,800
40
Debt Limit increase 4,000
Source: Committee for a Responsible Federal Budget (CRFB), Bipartisan Policy Center
BofA GLOBAL RESEARCH 0
1990 1995 2000 2005 2010 2015 2020 2025 2030
Source: CBO, CRFB
BofA GLOBAL RESEARCH

are likely to increase the deficit over time given the cost of extending the 2017 Tax Cuts
and Jobs Act (TCJA)
Indeed, the House Budget Committee recently published its budget resolution for the
next the FY 2025-FY 2034 budget window.i It proposes an increase in the primary-deficit
by $2.8tn over the 10-year period ending FY 2034. This reflects a deficit increases of
~$4.8tn over the 10-year, of which $4.5tn represent tax cuts, and $2.0tn in spending
cuts (Exhibit 1).
In Exhibits 3 to 5 we compare the House plan’s expectations for outlays, revenues, and
deficits with CBO’s. House Republicans project the proposal to yield lower outlays
throughout the budget window versus CBO’s current estimates (Exhibit 1). This reflects
a reduction is mandatory spending but also less nondefense discretionary spending.
Meanwhile, revenues would be much lower than CBO expects initially reflecting the
extension of tax cuts but are projected to rise over time likely due to more positive
economic assumptions versus CBO. Therefore, we’d take these estimates with a grain of
salt.
The non-partisan Committee for a Responsible Federal Budget (CRFB) estimates that
the proposal could add $4tn to the deficit over the budget window after accounting for
interest. As a result, CRFB projects debt-to-GDP to rise to 123% by 2034 compared to
117% in CBO’s baseline, which assumes the tax cuts expire at the end of the year
(Exhibit 2).
Exhibit 3: Federal outlays to GDP Exhibit 4: Federal revenues to GDP Exhibit 5: Federal Deficit to GDP expectations
expectations. expectations. The House proposal would result in larger deficits
The House proposal would yield a persistent The House proposal would result in a sharp drop in the near-term than CBO projects under current
reduction in outlays relative to CBO’s baseline in revenues in the near-term compared to CBO law.
reflecting an extension of expiring tax cuts
35 6
Total outlays 22
CBO (Jan 2025, current law)
30 House Plan 20 0
18
25 -6
16
20 14 -12
Revenues Deficit
12 CBO (Jan 2025, current law) CBO (Jan 2025, current law)
15 House Plan -18 House Plan
1990 1998 2006 2014 2022 2030 10 1990 1998 2006 2014 2022 2030
1990 1998 2006 2014 2022 2030
Source: CBO, House Budget Committee Source: CBO, House Budget Committee
BofA GLOBAL RESEARCH Source: CBO, House Budget Committee BofA GLOBAL RESEARCH
Digging into the details

As of today, House Republicans have simply outlined the broad contours of a
reconciliation bill that sets the stage for negotiations among committees and across
both chambers of Congress. More details should emerge in the coming weeks as
committees are expected to have proposals by no later than March 27. While details are
limited, we make the following takeaways from the current outline:
1) Tax cuts may be limited mostly to a TCJA extension

The proposal allows the Ways and Means Committee, which formulates tax proposals, to
submit a plan that increases the deficit by no more than $4.5tn over the 10-year period
budget window. In our view, this will likely leave little room for tax changes beyond an
extension of the 2017 Tax Cuts and Jobs Act. Indeed, the CBO previously estimated that

extending the prior provisions of 2017 TCJA and restoring provisions that had sunset in
prior years through FY 2034 would cost roughly $4tn before interest.ii Therefore, the
House plan is consistent with our assumption that tax cuts aside from at TCJA extension
will be limited.
2) Spending cuts risk being larger than we expect

While the tax provisions appear to be consistent with our current assumptions, proposed
spending cuts are more significant than we expected. Indeed, House Republicans are
seeking to cut mandatory spending by $2tn over a 10-year period resulting in a primary
deficit increase of $2.8tn, well below our $5tn assumption heading into the elections
(see note: US Economic Viewpoint: A taxing year ahead 28 October 2024).
We think the risk is that the proposed spending cuts end up more modest. This is
because cuts target Medicaid and food assistance programs, which may be difficult for
some House Republicans to support. Given the Republicans small margin in the House,
they cannot afford to lose many votes. So, a few Republican representatives could have
enough leverage to water down tax cuts.
3) The size of tax cuts may depend on spending cuts

One section of the proposal also ties tax cuts to spending cuts, though it is non-binding.
If spending cuts fall short of $2tn then provisions that increase the deficit will be
reduced by the shortfall. The reverse is true if spending cuts exceed the $2tn goal. Since
the provision is non-binding, the signal we take from this is that tax cuts could broaden
if other offsets, for example savings from DOGE actions and revenue from tariffs, are
incorporated in negotiations.
The House proposal is a downside risk to our outlook

For now, we think it is too early to draw strong conclusions on the eventual
reconciliation bill. There are still many moving parts for both the spending and revenue
provisions. For example, Congressional Republicans could seek broader tax cuts than we
expect but for a shorter time to keep the cost down.
That said, if we take the House proposal at face value, it poses a downside risk to our
deficit and economic outlook. Under our current assumptions we expect the primary
deficit to GDP ratio to increase by 0.5ppt in FY 2026, which would translate to a positive
fiscal impulse for growth. However, if spending cuts are more in line with the House
plan, then we would expect the fiscal impulse to be only modestly positive. We’ll
continue to update our views as we learn more.

Euro area
Ruben Segura-Cayuela Evelyn Herrmann
BofA Europe (Madrid) BofASE (France)
Chiara Angeloni Alessandro Infelise Zhou

BofA Europe (Milan) BofASE (France)
Euro area productivity: catch me if you can

• Despite many shocks to the Euro area productive base, we find no evidence of a
regime shift in productivity post-Covid.
• Gains from across/within sector reallocation are limited, not at least because past
shocks led to little Darwinian selection of existing firms.
• The productivity argument in support of higher post-Covid neutral rate views looks
misplaced to us.
Complete report: Europe Economic Weekly: The EU alphabet soup is back 21

February 2025
No evidence of regime shift in productivity post-Covid…

Today we look at productivity dynamics in the Euro area (EA) since the pandemic.
Understanding these nuances is particularly relevant to today’s macro debate: higher
productivity growth means higher potential growth, hence higher long-term rates. Thus,
we assess whether, behind cyclical gyrations (eg, shocks since 2020), sectoral shifts or
changes in allocative efficiency could have brought about a regime shift in Euro area
productivity. In short, we find no evidence of gains from improved resource allocation.
…despite many shocks to the Euro area productive base

The list of past shocks is indeed remarkable: from Covid-related lockdowns to
disruptions in global supply chains, the energy crisis, input shortages and shipping
issues. The policy response during this period was also unprecedented in the form of the
recovery and resilience national plans under the Next Generation EU (NGEU, with a
strong focus on digital and green transitions) coming on top. As such, we examine
whether, like in previous crisis episodes, those shocks have led to any Darwinian
selection (less productive firms fold and the survivors become more resilient) and/or
structural changes on the EA supply side.
Gains from across/within sector reallocation seem limited

We run cross-sector shift-share analysis and decompose within-sector productivity
growth. Our findings suggests that: 1) the pandemic did not induce long-term structural
changes in the sectoral composition of the economy; 2) the few productivity gains
versus pre-Covid levels reflect mostly improvements within sectors rather than from
cross-sector reallocation; and 3) within-sector dynamics also fail to show better resource
allocation from least productive to more productive firms.
Little Darwinian selection explains no creative destruction

Few across/within reallocation gains are consistent with the fact that past shocks have
had limited “cleansing effects” on the production base, not least because of the
mitigating impact of the Euro area policy response. This suggests that Euro area firms
are not necessarily more resilient than before the pandemic, at least when it comes to
the (many) old structural rigidities constraining their ability to adjust efficiently.
Productivity not supporting the argument of a higher r*

We are aware of the usual caveats when using productivity metrics (data sacristy/pro-
cyclicality). And we also acknowledge that it is too early to gauge the long-term
implications (especially from NGEU implementation) on sectoral changes and

productivity. But for now, what we found does not seem to endorse the view that a
regime (upward) shift in productivity post-Covid occurred in the Euro area. It follows that
the (higher) productivity argument to support the views of higher level of Euro area
neutral rate (r*) looks misplaced to us.
Euro area labour productivity: caveats and post-Covid stylized facts

Productivity is the Achilles’ heel of the old continent. The comparison vs the US is eye-
catching: the gap in productivity growth has been widening for 20 years and the
pandemic shock has done nothing to change. Indeed, between 4Q19 and 3Q24, hourly
labour productivity increased by c.2% in EA vs 8.5% in the US (and 0.6% for the EA vs
7.2% when considering employment-based productivity). The stronger procyclicality of
Euro area productivity metrics also magnifies the productivity gap vs the US. Recall that
labour inputs adjust more flexibly to production volumes in the US than in the old
continent. Moreover, the Euro area’s extensive use of short-time working schemes in the
aftermath of Covid (with labour hoarding yet to fully normalize, see note: Euro Area
Viewpoint: Labour market: it’s getting more complicated) have augmented the
procyclicality since. In the following analysis, we try where possible to use both
employment-based (ELP) and worked-hours based (HLP) productivity measures.
Sectorial and country developments: specificities apply

Euro area aggregate productivity dynamics since 2020 blur cross-country and cross-
sector specificities. By country, ELP deteriorated promptly for France and Germany,
while the latter recorded a modest increase in HLP as a result of labour hoarding
practices still largely in place. For France, the lack of gains also on HLP could reflect the
increase in apprenticeship contracts (normally associated with lower worked hours). For
Italy, the reverse applies: this reflects labour input gains that were particularly strong in
the less-productive construction sector due to post-Covid construction bonuses (see
note: Euro Area Viewpoint: Italy in 2025 - average is the new norm 28 January 2025).
Among the big four, Spain is the outperformer, with productivity improvements across
both metrics, reflecting GVA gains outpacing labour input growth (Exhibit 6).
Exhibit 6: Cumulative labour productivity growth across the main EA Exhibit 7: Cumulative labour productivity growth across the main Euro
countries - 3Q24 vs 4Q19) area sector - 3Q24 vs 4Q19
Spain seems the outperformer with productivity improvements across both Construction recorded the sharpest decline in productivity since pre-Covid
metrics levels
12% GVA growth

Arts, Entertainment & Recreation
8% Labour input growth Public Admin
Labour productivity growth Professional, Science & Tech
4% Real Estate Activities
Financial & Insurance Activities
0% Information & Communication
Trade, Travel, Accomodation & Food
-4% Construction
HLP
Industry
ELP
-8% Agrig
ELP HLP ELP HLP ELP HLP ELP HLP Tot business econ
DE FR IT ES -15% -10% -5% 0% 5% 10%

Source: Eurostat, BofA Global Research. Note: ELP stands for employment-based labour Source: Eurostat, BofA Global Research. Note: ELP stands for employment-based labour
productivity and HLP for worked-hours based labour productivity productivity and HLP for worked-hours based labour productivity
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH
At the Euro area level, productivity dynamics were also pretty dispersed across sectors
(Exhibit 7). Construction recorded the sharpest decline in productivity since pre-Covid
levels, with a cumulative ca 9-10% vs 4Q19 levels. In larger sectors, such as industry,
trade & transport and the public sector, ELP declined marginally while HLP broadly
stagnated (Exhibit 7). On the flipside, the highest productivity gains were recorded in

service sectors like information & communication, recreation, and professional &
technology services, all driven by strong GVA growth in the recovery years.
Sectorial shift-share productivity analysis: shift effect short-lived

Now, we run a sectoral shift-share analysis to try to work out what drove the small
productivity gains since Covid. We thus decompose aggregate productivity using a
standard shift-share analysis1 to detect whether productivity gains were driven by a
reallocation of labour resources between and/or within sectors.
We break down productivity growth into:
• a within-sector component (equal to the sum of productivity growth of individual

sectors in the absence of changes in labour input shares),
• a shift component (which gauges between-sector productivity gains stemming from

a shift of labour input from low to high productivity sectors), and
• an interaction-term (which captures the correlation between product and

employment changes, i.e. it is positive when intra-industry productivity growth
comes with a positive shift effect).
We apply the decomposition to both annual growth of ELP and HLP for the Euro area. In
terms of cumulative change in productivity since 4Q19 (Exhibit 8), the main driver was
indeed the within-sector component, considering both productivity metrics. Reallocation
of labour inputs from low to high-productivity sectors (shift effect) had a positive impact
in the aftermath of pandemic shocks but that was short-lived. Note that the small
positive contribution of the shift-component was similar in magnitude when looking at
EPL or HPL.
Exhibit 8: Shift-share analysis of cumulative productivity growth vs Exhibit 9: Shift-share analysis of cumulative productivity growth vs
4Q19 – Euro area aggregate 4Q19 – Euro area countries
Intra-sector gains drove cumulative productivity growth When comparing Euro area countries, idiosyncratic dynamics are play. Overall
no evidence of efficiency gains from shifts in resource reallocations
3%
6% Within-sector effect Shift effect
Within-sector effect
Shift effect Interaction Productivity growth
4%
2% Interaction
Productivity growth 2%
0%
1%
-2%
DE FR IT ES DE FR IT ES
0% HPL EPL
HPL EPL Source: BofA Global Research
Source: BofA Global Research
We run the decomposition also for the main Euro area countries (Exhibit 9). Again,
idiosyncratic dynamics are at play. We highlight a few points:
1. The shift component has been remarkably negative in Italy. This reflects
productive resources having been re-allocated inefficiently from highly to less
productive sectors because of Super-bonus distortions.
1Denis, C., McMorrow, K. and Röger, W., “An analysis of EU and US productivity developments (a total
economy and industry level perspective)”, European Economy – Economic Papers, No 208, European
Commission, July 2004, p. 78.

2. The shift effect has also been higher for Germany and Spain. For the latter, this
could reflect that it saw the highest aggregate magnitude of sectorial swings
during the crisis years. It could also be the result of catching-up effects of
aggregate productivity.
3. The effect of the “interaction” component on productivity is negligible or

slightly negative for all countries, suggesting that those sectors that experience
higher productivity growth are not the main generators of employment gains. In
sum, sectoral shift-share analysis fails to support evidence of efficiency gains
from productive resource reallocations since the pandemic.
Within-sector productivity decomposition: no signs of allocation efficiency gains

We take a further step and try to investigate within-sector productivity dynamics. The
Annex contains a few stylized facts characterizing the Euro area productive base. In
brief, given the greater firm heterogeneity and widespread productivity dispersion
across firms operating in the same sectors, we try to infer whether productivity-
enhancing allocation gains occurred across firms.
We thus refresh our within-sector productivity decomposition. We apply the

methodology from Olley & Pakes, who proposed a measure of allocative efficiency by
breaking down sectorial labour productivity into an unweighted average of all the firms
in the industry and a covariance term between relative productivity and relative size of
the product. The covariance term can be seen as a proxy of static allocative efficiency,
i.e. the extent to which over a given period of time firms with above-average
productivity attract more resources (i.e. have a higher-than-average size). A high
covariance term means that resources are more efficiently allocated (the term should be
zero in the case of random allocation of resources).
Exhibit 10: Covariance term between size and productivity (named OP Exhibit 11: Delta between 2019-2022 in productivity-size covariance
gap) – 2022 data term
Consistent with economic theory, allocative efficiency results higher No evidence that resources allocation has improved (and may even have
manufacturing sectors than services deteriorated for the EA aggregate)
9.0% Manufacturing Op Gap 0.2
8.0% Services Op Gap Manufacturing Delta 2022/2019 Services
7.0% 0
6.0%
5.0%
-0.2
4.0%
3.0%
2.0% -0.4
1.0%
0.0% -0.6
DE ES FR IT DE ES FR IT
Source: Eurostat Structural Business Statistics, BofA Global Research
Source: Eurostat Structural Business Statistics, BofA Global Research
Theoretically this methodology applies to firm-level data. Given the difficulty in

accessing granular firm-level data, we use as a second-best solution Eurostat’s structural
business statistics with the highest level of sector (NACE category) and size-class
disaggregation2. Thus, the single data point is a given size class of a given NACE.
Furthermore, we restrict our analysis to the manufacturing and service sectors, we proxy
labour productive only with employment-based metrics and compare 2019 levels with
2021/22 averages (the most up-to-date available data).
2 Eurostat provides five size class categories: From 0 to 9 persons employed, from 10 to 19 persons employed,
from 20 to 49 persons employed, from 50 to 249 persons employed, 250 persons employed or more.

Our proxy of within-sector allocative efficiency shows that the covariance term is higher
in manufacturing than services, consistent with the fact that resources tend to be more
efficiently allocated in the tradable sector. Core countries outperform for allocative
efficiency the Euro area periphery (Exhibit 10). But the key question is: how has
allocative efficiency changed with respect to 2019? The delta in 2022 vs 2019 of
productivity/size covariance term shows that allocative efficiency deteriorated for Spain
and Germany, and remained broadly similar to pre-pandemic levels for Italy and France.
How can we reconcile this with the finding above? Productivity growth has been mainly
driven by gains from the most productive firms/sectors. But again there is no evidence
that resources allocation has improved. Rather, the long-lasting structural issue of
resource misallocation persists (and may even have deteriorated) for the aggregate Euro
area productive base.
Limited cleansing effect of the shocks prevented reallocation gains

Our findings seem consistent with recent ECB findings based on firm-level data3.
Historically, episodes of crisis tend to lead to Darwinian selection on the supply side, by
pushing the least productive firms out of the market. In turn, “survivor firms” have
greater resilience. The national and EU policy response to the Covid/energy shocks,
however, was unprecedented, comprising a raft of supporting measures (from short-
term working schemes to state-guaranteed loans) to protect the corporate sector. This
contained potential solvency problems for EA firms but also prevented a crisis-led
cleansing effect. As such, the so-called Darwinian firm selection was less pronounced
than in other crises – if anything, total numbers of firms increased (Exhibit 12).
And the ECB firm-level findings indeed show that 1) while policy support did not
significantly distort resource reallocation across firms in 2020, it did so afterwards (as
the relative probability of low-productivity firms receiving support increased significantly
from 2021), and 2) compared with other crises, low productivity firms benefited from
larger cash buffers than in past crisis episodes (also a result of fiscal support during the
pandemic, among other reasons, Exhibit 13).
Exhibit 12: Cumulative contribution to 2019-2023 growth in total Exhibit 13: Cash holding distribution of low productivity firms during
number of firms, by size class the global financial crisis and the pandemic
Covid/energy shocks did not have much of a “cleansing effect” on Euro area Low productivity firms enjoyed relatively healthy cash buffers in 2020
productive base
12%
10-19
10%
8% 20-49
6% 50-249
4% More than 250 employed
2%
Tot
0%
-2%
-4%
-6%
-8%
DE ES FR IT Source: Lopez-Garcia and others (2024) “The impact of recent shocks and ongoing structural
changes on euro area productivity growth”, ECB Economic Bulletin, Issue 2/2024
Source: Eurostat Structural Business Statistics, BofA Global Research. The chart excludes size class BofA GLOBAL RESEARCH
0-9. Considering also micro firms, cumulative growth would have been -0.8% for Germany, 4.6%
for Spain, 22.8% for France and 1.4% for Italy.
3See Lopez-Garcia and others (2024) “The impact of recent shocks and ongoing structural changes on euro area
productivity growth”, ECB Economic Bulletin, Issue 2/2024.

UK
Sonali Punhani Ruben Segura-Cayuela
MLI (UK) BofA Europe (Madrid)
Inflation Review- Heating up

Complete report: Europe Economic Weekly: The EU alphabet soup is back 21
February 2025
Details of January inflation print

UK inflation rose more than expected in January from 2.5% to 3.0%, above consensus
and BoE’s forecast of 2.8% and our call of 2.7%. Core inflation rose from 3.2% to 3.7%
(0.56%m/m SA), in line with expectations.
The rise in services inflation was smaller than expected (0.58%m/m SA), increasing from
4.4% to 5.0%, 10bps below consensus and 20bps below BoE’s forecast but in line with
our call. The rise in services inflation was driven by the reversal of the weakness seen in
airfares in December, rise in VAT on private school fees and increase in bus fares. Core
services (i.e. ex-airlines, packaged holidays, education and accommodation) fell from
5.2% to 5.1%.
Housing services rose slightly from 7.4% to 7.5%. Transport services inflation rose from
-5.6% to 4.3% reflecting the reversal of weakness in airfares seen in December and rise
in bus fares. Education inflation saw a jump from 5.0% to 7.5% driven by VAT to private
school. Packaged holidays and accommodation rose from 3.7% to 3.8%. On the other
hand recreational and personal services fell from 4.2% to 4.0%,
The upside surprise came from food and core goods inflation. The big jump in food price
inflation from 2.0% to 3.3% (90bps above the BoE’s forecast) could reflect some
passthrough of higher employment costs (higher National Insurance
Contributions/National Living Wage and lower NICs thresholds) to food prices. Core
goods inflation also rose from 1.2% to 1.6% (50bps above the BoE’s forecast) driven
mainly by clothing and footwear, household goods and other recreational goods.
We upgrade our inflation forecasts

We upgrade our inflation forecasts to reflect January’s higher-than-expected inflation
print, potential 5% rise in the April energy price cap and 26% rise in water bills in April.
We revise 2025 headline inflation up from 2.7% to 3.1% and 2026 inflation forecasts
from 2.1% to 2.2%. Core inflation is likely to move up from 3.0% to 3.2% in 2025 and
from 2.2% to 2.3% in 2026.
Headline inflation is likely to pick up in Q3 2025 to 3.5% and stay above target until late
2026 in our forecasts. We expect services inflation to remain elevated at ~5% in coming
months and slow to 4.0% by Q4 2025. We continue to assume that a large share of the
National Insurance Contributions (NICs) rise gets absorbed in higher prices/ lower wages,
which along with the rise in National Living Wage (NLW) and other administrative
changes should keep domestic inflation elevated until April (we assume a 30-35bps
monthly rise in services inflation in April on the back of NLW/ NICs). We expect wage
growth to slow to ~4.0% in 2025 on the back of easing labour market, inflation
expectations and some passthrough of higher NICs to lower wages, moderated to some
extent by the rise in NLW and public sector wages.
Wage growth rose and there was no sharp slowdown in the labour market
At the same time regular wage growth (3mma) rose from 5.6% to 5.9% in Q4, in line
with consensus (with the single month rising from 5.6% to 6.0%). Private sector regular
pay (3mma) growth rose from 5.9% (revised down from 6.0%) to 6.2% (with the single
month rising from 5.9% to 6.1%). This is slightly weaker than the BoE’s forecast of 6.3%
but that’s due to past revisions. The monthly increase in private wage growth rose from

0.15%m/m in November to 0.54%m/m in December, pointing to elevated wage
pressures.
The unemployment rate was flat at 4.4%, below consensus of a rise to 4.5%.
Employment rose by 107K on a 3m/3m basis, higher than consensus of 48K.
Unemployment rose by 48K while inactivity fell by 155K. Payrolls rose by 21K in January,
above consensus of a 30K fall and the decline in December got revised down from -47K
to -14K. We have cautioned that payrolls get revised often- in the past three years,
payrolls have been revised up by an average of 20K, with recent upward revisions over
this year worth 47K on average.
Our view is that the labour market is loosening but we are not seeing a sharp slowdown
yet. The job market is holding up better than expected. Our BofA composite indicator of
UK employment growth, which incorporates signals from surveys and hard data (as
described in this note UK Viewpoint: Labour market: Mixed signals 29 January 2025),
points to employment growth having slowed to 0.7%y/y in Q4 2024, close to series
average which spans Q3 2015-Q4 2024. This is weaker than the latest official Labour
Force Survey data (1.4%y/y), but stronger than some survey measures such as REC and
HMRC payroll data (0.3%) would suggest. The latter seem to be exaggerating the labour
market weakness, in our view. We continue to expect a modest easing of the labour
market, with the majority of the National Insurance Contributions (NICs) rise being
absorbed in prices.
Redundancies remain low. Vacancies fell by 9K in three months to January. Vacancies

continue to be fall but the fall has moderated, and vacancy growth rose from -21%y/y
from a year ago to -11.8%y/y.
The data supports a cautious cutting cycle

The higher-than-expected headline inflation, high wage growth and no sharp slowdown
in the labour market supports our view that the BoE is unlikely to cut rates in March and
stick to a cautious cutting path. At the same time the rise in inflation was driven by one
off factors and services inflation was actually lower than expected. While we revise our
inflation forecasts higher, a majority of the upward revision reflects one-off factors like
rise in energy and water bills. We don’t expect significant second round effects and
expect domestic inflation to moderate slowly after April. We therefore don’t expect this
to derail our view of three quarterly cuts in 2025 with next cut in May.
However, we remain cautious- potentially stronger passthrough of employment costs to

prices or second round effects would put upside risks to our inflation forecasts and
imply risks are for less cuts rather than more. While growth is weak, we are not yet
seeing a sharp slowdown in the labour market.
At the same time, the recent drop in energy prices if sustained, could put some
downward pressure on inflation later in the year. Gas price moves affect household gas
bills with a lag as the price cap is set every three months. The April cap (which uses mid
November 2024- February 2025 gas futures as observation windows) is unlikely to be
affected, so the earliest the recent fall in gas prices can affect bills is in July. However
worth noting that even though gas prices are currently~16% lower than the peak in early
February, they are not much lower than average gas prices used in the April cap. A
sustained 10% fall in gas prices should lower headline inflation by 10-15bps.

Exhibit 14: January inflation vs. BoE’s forecasts
Core goods and food inflation was stronger than the BoE’s forecasts
10
BoE''s forecast for Jan inflation Janinflation 5.2 5.0
5 2.4 3.3 2.8 3.0
1.1 1.6
0
-5 -2.2 -2.2
-10
-9.9 -10.1
-15
Food Electricity and gas Fuels and lubricants Core gooods Services CPI
Source: ONS, BofA Global Research
Exhibit 15: BofA CPI and RPI forecasts (%y/y)

We expect headline inflation to lower from 3.0 to 2.9% in February
Headline CPI Core Core goods Services Food Energy RPI RPI index
y/y% Index
Jan-24 3.98 5.05 2.67 6.54 6.94 -14.89 4.91 378.00
Feb-24 3.41 4.48 1.92 6.09 4.95 -13.75 4.53 381.00
Mar-24 3.23 4.24 1.47 5.99 4.01 -12.66 4.30 383.00
Apr-24 2.33 3.86 0.62 5.86 2.90 -16.70 3.27 385.00
May-24 1.99 3.49 -0.05 5.68 1.71 -15.85 2.96 386.40
Jun-24 1.98 3.52 -0.11 5.74 1.53 -15.99 2.90 387.30
Jul-24 2.23 3.29 0.11 5.17 1.47 -10.88 3.55 387.50
Aug-24 2.22 3.59 0.28 5.56 1.34 -13.15 3.53 389.90
Sep-24 1.68 3.16 0.20 4.94 1.86 -16.18 2.70 388.60
Oct-24 2.28 3.31 0.45 5.02 1.87 -10.07 3.41 390.70
Nov-24 2.62 3.53 1.05 5.01 2.02 -8.75 3.60 390.90
Dec-24 2.50 3.21 1.23 4.37 2.00 -6.01 3.46 392.10
Jan-25 2.98 3.74 1.56 5.01 3.29 -6.62 3.62 391.70
Feb-25 2.91 3.66 1.51 4.92 3.26 -6.78 3.68 395.03
Mar-25 2.79 3.57 1.41 4.83 3.08 -6.98 3.52 396.49
Apr-25 3.39 3.50 1.38 4.73 2.92 1.91 4.53 402.46
May-25 3.37 3.38 1.67 4.38 3.41 2.15 4.44 403.55
Jun-25 3.37 3.31 1.61 4.29 3.19 3.23 4.46 404.57
Jul-25 3.47 3.20 1.22 4.35 2.49 7.44 4.86 406.33
Aug-25 3.46 3.14 1.22 4.25 2.25 8.26 4.75 408.42
Sep-25 3.45 3.04 1.30 4.04 1.85 10.22 4.73 406.96
Oct-25 2.90 2.77 0.85 3.88 1.51 5.71 3.82 405.61
Nov-25 2.74 2.71 0.81 3.82 1.23 5.06 3.62 405.07
Dec-25 2.76 2.87 0.57 4.21 1.22 4.04 3.70 406.60
Source: ONS, BofA Global Research
BofA GLOBAL RESEA

Asia
Helen Qiao Ting Him Ho, CFA
Merrill Lynch (Hong Kong) Merrill Lynch (Hong Kong)
No Asian economy likely spared tariff risks

Only a few days after the US hiked additional tariffs on Chinese imports by 10%, the
potential for US tariffs on other Asian economies looms, as President Trump has
announced a flurry of tariff implementations.
Complete report: Asia Economic Weekly: Asia in the shadow of US tariffs 21

February 2025
Exhibit 16: Recent tariff announcements

US President Trump announced a flurry of tariff implementations in February
Date Trump's announced implementation
25% tariff on imports from Canada and Mexico and a 10% additional tariff on imports from China. Energy
1-Feb
resources from Canada will have a lower 10% tariff.
11-Feb 25% tariffs on steel and aluminum imports, effective from March 12
Introduction of reciprocal tariffs, instructing probes into countries that have higher tariffs or non-tariff
13-Feb
trade barriers against American goods entering their markets.
14-Feb At least 25% tariffs on imported cars; decision to be made on April 2.
Asia stands out as facing higher risk of US tariffs for the following reasons: 1) The US
runs a persistent trade deficit against Asia, with 6 out of 10 trading partners running the
largest trade deficits in the region. In addition, there is no sign that such trade
imbalance has been reversed, despite an average of 20% tariffs levied on Chinese
imports. 2) Some Asian economies (India, Thailand, Japan, Philippines, Malaysia) have
higher tariffs rates on US imports than US tariffs on them; see also our report with our
global analysis on reciprocal tariffs).
Exhibit 17: Top 10 sources of US trade deficit Exhibit 18: Weighted-average tariffs from the US and trading partners
Asia was the largest source of US’s trade deficit in 2024 Some Asian economies are exposed to reciprocal tariffs as well
USD bn % US tariff (inverted) Partner tariff Gap
0 12
8
-100 -63 -46
-85 -74 -68 -66
-87 4
-123
-200 -172 0
-300 -4
-295
-400 -8
Vietnam
Thailand
Japan
Hong Kong
Philippines
Malaysia
India
Indonesia
Singapore
Korea
Australia
Vietnam
Ireland
Taiwan
China
Mexico
Germany
Japan
Canada
Korea
India
Source: Haver, BofA Global Research Source: WITS (2022), BofA Global Research
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH
In view of such a backdrop, even if Asian countries proactively seek opportunities to

negotiate with the US and offer to buy more from the US, tariff risks on Asia will
unlikely disappear permanently. In our view, President Trump would likely see more merit
in keeping such pressure on Asia than negotiating a new trade agreement to cover the
next 4 years.

Tariff uncertainty implies diversion from Trump 1.0 era
Such tariff risks could imply the following: 1) Asian economies might need to learn to
live with tariff uncertainties, as China has since 2018; 2) firms might make decisions on
supply chain relocation more slowly, as they do not know what could happen to the new
destination; and hence 3) those that benefited from the trade diversion away from
China during Trump 1.0 could be unlikely to see the same level of gains.
On the other hand, aggregate demand in the region would likely be under pressure if
reciprocal tariffs from the US weigh on exports. Some economies could be hurt more
than others. In the case of blanket tariffs, we estimate that for each 10% drop in exports
going to the US, each Asian economy may see the drag in GDP growth of an average of
0.2%, with Vietnam’s drag being largest at more than 0.7ppt. Besides that, Asian
exporters are also indirectly exposed to US demand mainly via trade with China and
Mexico (Exhibit 20).
Exhibit 19: The direct impact of 10% drop in US exports to GDP growth Exhibit 20: The indirect impact of 10% drop in China/Mexico/Canada’s
In the case of blanket tariffs, we estimate notable, but uneven, drag to Asia’s export to US on GDP growth
GDP Asia ex-China would be hit by tariffs applied on China and Mexico as well,
given the production linkages
0.0%
0.00%
-0.2%
-0.05%
-0.4%
-0.10%
-0.6%
-0.15%
China Mexico Canada
-0.8% -0.20%
Vietnam
Taiwan
Thailand
Malaysia
The Philippines
Japan
Hong Kong
Singapore
Indonesia
Korea
India
Australia
-0.25%
Vietnam
Taiwan
Malaysia
Thailand
Philippines
Indonesia
Korea
Singapore
Source: OECD (2023), BofA Global Research estimates
BofA GLOBAL RESEARCH Source: OECD (2023), BofA Global Research estimates
Need for and scope of concessions likely to vary

Most Asian economies have already been seeking ways to de-escalate, with the aim to
minimize trade shocks from their largest source of external demand. However, the need
for and scope of any such concessions could vary significantly across the region.
First, the need for concessions would likely depend on the depth of their integration
with as well as their reliance on the US, in terms of trade, investment, and strategic
cooperation. On one end, Taiwan is running a strong trade surplus with the US and is
heavily dependent on the US for national security. As a small open economy, Taiwan is
likely to extend every effort to satisfy US needs. The story is similar for Vietnam. On the
other end, domestic-oriented economies with less binding relationships with the US
(e.g., Indonesia and the Philippines) or a more diversified markets (e.g., China) are less
incentivized to appease the US.
Second, the scope of concessions would likely only go as far as they do not cause
significant disruptions to domestic activities. For instance, agricultural products only
take up a tiny share of US’s total export to India. India could therefore adjust its tariff
rate applied on US agricultural imports without significant impact on domestic sectors.
Despite the likely variation, we still expect some common strategies from policymakers

Emerging EMEA
Vladimir Osakovskiy >> Mikhail Liluashvili
Merrill Lynch (DIFC) MLI (UK)
Central Asia: issuance, reforms and geopolitics

Uzbekistan: Robust growth continues despite a lag in reforms, but fiscal improving.
Sizeable UZS liquidity shortage remains. Kyrgyzstan: Robust growth likely sustainable
given base effect. Less concerns for pending EXD issuance from domestic politics.
Kazakhstan: VAT reform to be finalized, possibly in watered-down form. KZT to follow
RUB with policy/seasonal support
Complete report: Emerging Insight: Central Asia: issuance, reforms and geopolitics
CIS trip: issuance, reforms and geopolitics

We visited Uzbekistan, Kyrgyzstan and Kazakhstan last week to meet with government
officials, national banks, as well as local and foreign experts. All countries have reported
strong economic growth recently and are working towards fiscal consolidation. We
continue to view the latter as the key issue in Kazakhstan and also Uzbekistan. The
benefits of geopolitical trade restrictions are widely seen as “sticky”, given that most of
these restrictions are expected to stay under realistic resolution scenarios, as most of
the earlier labor/capital inflows have already left or been domiciled by now. All countries
are also planning to tap capital markets with new issuance this year, which would be
Kyrgyzstan’s first time. For others, we expect similar gross issuance to last year.
Uzbekistan: robust growth, thirst for liquidity

The country continues to post strong economic growth, reported at 6.5% in 2024 and
they forecast this to stay above 6% this year as well. Nominal GDP exceeded $115bn in
2024, breaching earlier government targets and triggering an update of the 2030
nominal GDP target from the previous $160bn to $200bn. Meanwhile underlying
inflationary pressures are easing, with core inflation down to 7.6% yoy in January. This
seems to suggest that the economy is still far from overheating, as growth remains
organic and driven by capacity expansion and general underdevelopment.
Reforms: energy on track …

The government maintains its bullish narrative on the reform agenda and its
implementation. Independent and foreign commentators are giving credit for the recent
progress and, generally, remain constructive on the whole reform story. On energy
tariffs, the authorities are set to deliver another hike in May as tariffs remain on track
for a full cost recovery by 2027-2028. This effort is clearly fundamentally positive for
the quality of the sovereign credit, supporting fiscal balances as well as boosting the
credibility of the overall reform effort (see our report: Uzbekistan trip feedback:
credibility boost 21 November 2024).
… others still pending

However, despite a boost to credibility, progress on most other key reforms so far
remains largely at the same stage as during our trip last year. Privatization of key assets
in the banking sector will most likely be delayed again, although this may be justified
given the complexity of the local banking system. The government has moved 18 large
SOEs to the National Investment Fund, which will be managed by an external asset
manager. We admit that this could be an important step towards improving the
efficiency of the publicly owned enterprises. However, the success of this effort is yet to
be seen and will require implementation of a series of measures, which has not been
observed previously.
Kyrgyzstan: newcomer to the market?

Recent announcements of borrowing plans also brought us to Kyrgyzstan. Volatile
domestic politics have often been perceived as a key constraint on any market

borrowing efforts by the country. However, most domestic experts point out that the
country is in the most politically stable state now vs most of the recent past, with the
ruling forces enjoying robust approvals, a consolidated elite and a booming economy.
The country recorded impressive 9% real GDP growth over the past three years, which
the government expects can be sustained in the near future. We admit that the low base
of the Kyrgyz economy could support strong growth rates for quite some time.
Kazakhstan: reform(s) and KZT

Kazakhstan is now in the middle of a public debate on the main parameters of
announced tax reform (see our report: Decisions long overdue 29 January 2025). After
initial efforts to hike the VAT rate from 12% to 20%, the government received pushback
from various sources, which has already triggered material “watering-down” of the
proposals. Thus, most experts we met think the hike will likely be limited to 16%, be
differentiated and include concessions. Government officials estimate the budget impact
of a 4pp VAT hike at cc. KZT2.2 trillion ($4.4bn) and have a list of compensating
measures to raise additional revenues if a 20% VAT rate is not adopted. However, the
discussions continue as the overall parameters of the reform are yet to be finalized.
Fiscal: still the weak spot

The current 2025 budget is based on the assumptions of KZT470/$, $75/bbl oil prices
and oil production of 97 tons this year as well as some KZT5200bn in National Oil Fund
(NOF) transfers. Assuming these parameters are reached, we admit that the budget
suggests notable fiscal consolidation. Moreover, preliminary data seem to suggest that
revenue collection is finally approaching budget levels in early 2025. However, we also
note that the budget remains vulnerable to the sustainability of oil prices, as any major
correction could force another round of NOF spending, similar to 2024 and 2025.
Monetary: hawkish, but watching KZT

The press release from the January policy meeting of the National Bank was quite
hawkish, as the Bank all but promised further tightening of the policy rate in March. This
approach was in response to persistent inflationary pressures due to strong domestic
growth as well as KZT weakness. However, the latest reversal of KZT weakness seems to
have dented the hawkish policy stance, as a stronger currency should have an important
stabilizing effect on prices as well as inflationary expectations. Therefore, we reiterate
our earlier view (see report: Decisions long overdue 29 January 2025) that the National
Bank will likely keep policy rates unchanged in 1H25 before potentially resuming easing
in 3Q25.
KZT: support and seasonality

On that note, most experts seem to agree that YTD lows in KZT (i.e. KZT530/$ in mid-
January) mark a “market clearing” level, where the currency has stabilized without
additional support from the authorities. Nevertheless, all point to the robust list of
measures provided by the National Bank over the past few weeks, which should provide
material support to the currency. Thus, the Bank intends to stop accumulating gold in FX
reserves and sterilize all domestic gold purchases with equivalent FX sales, which should
add cc $6bn in domestic FX supply. Many experts also highlight supportive seasonality in
1H25, so do not rule out KZT movements following a similar track to in 2024.
Fiscal consolidation = stronger KZT?

The general feedback seems to support our view (see our report: Decisions long overdue
29 January 2025) that material fiscal consolidation should be a long-term positive factor
for the KZT. Thus, all the official FX inflows supporting the currency are only required as
a measure to sterilize KZT liquidity inflows from the National Oil Fund. Therefore, the
fundamental benefits of lower KZT liquidity inflows are seen as net beneficial for the
currency, despite the likely lower FX sales.

Latin America
David Beker >> Gustavo Mendes
Merrill Lynch (Brazil) Merrill Lynch (Brazil)
Brazil: The tide is turning – deceleration is here

The Brazilian GDP grew 3.2% in real terms in 2023, fostered mainly by the agri sector.
By 23YE, 2024 was expected to be a year of deceleration, but the scenario shifted and
2024 growth remained strong, with consensus expectation now at 3.5% GDP growth vs
1.5% by the end of ‘23. A large fiscal impulse by the end of 2023 and benefits of
structural reforms fueled this growth.
Complete report: Emerging Insight: Brazil – Deceleration is here
However, we seem to have reached the peak of this economic expansion, as all high
frequency economic activity indicators showed a contraction in November and
December, and IBC-Br was negative in October and December. Looking ahead, our BofA
Activity Tracker points to a further deceleration of the IBC-Br in January, consolidating
the perspective of economic slowdown.
Exhibit 21: Activity plateaued in 24YE, we expect deceleration ahead Exhibit 22: Activity tracker points towards no yoy growth in January
Economic activity indices (SA) BofA Brazil Activity Coincident Tracker and IBC-Br % yoy growth
110 155 Backtested

Services volume Core retail sales
IBC-Br (yoy) - LHS
Broad retail sales IP
IBC-Br (RHS) BofA Brazil Activity Coincident Tracker - RHS
10% 2
105 150
5% 1
0% 0
100 145
-5% -1
-10% -2
Sep-06 Sep-10 Sep-14 Sep-18 Sep-22
95 140
Dec-21 Dec-22 Dec-23 Dec-24 Source: BCB, BofA Global Research. Back-tested performance from September 2006 to February
2018; actual performance since March 2018. This performance is back-tested and does not
Source: BCB, IBGE
represent the actual performance of any account or fund. Back-tested performance depicts the
theoretical (not actual) performance of a particular strategy over the time period indicated. No
representation is being made that any actual portfolio is likely to have achieved returns similar to
those shown herein. The BofA Activity Coincident Tracker is intended to be an indicative metric
only and may not be used for reference purposes or as a measure of performance for any financial
instrument or contract, or otherwise relied upon by third parties for any other purpose, without
the prior written consent of BofA Global Research. This indicator was not created to act as a
benchmark.
The analysis of BofA Brazil Activity Coincident Tracker in this report is back-tested and
does not represent the actual performance of any account or fund. Back-tested
performance depicts the hypothetical back-tested performance of a particular strategy
over the time period indicated. In future periods, market and economic conditions will
differ and the same strategy will not necessarily produce the same results. No
representation is being made that any actual portfolio is likely to have achieved returns
similar to those shown herein. In fact, there are frequently sharp differences between
back-tested returns and the actual results realized in the actual management of a
portfolio. Back-tested performance results are created by applying an investment
strategy or methodology to historical data and attempts to give an indication as to how
a strategy might have performed during a certain period in the past if the product had
been in existence during such time. Back-tested results have inherent limitations

including the fact that they are calculated with the full benefit of hindsight, which allows
the security selection methodology to be adjusted to maximize the returns. Further, the
results shown do not reflect actual trading or the impact that material economic and
market factors might have had on a portfolio manager's decision-making under actual
circumstances. Back-tested returns do not reflect advisory fees, trading costs, or other
fees or expenses.
Agri sector to support GDP in 1H25

The agricultural sector represented almost 7% of Brazilian GDP in 2023. the output of
the sector is concentrated on Q1 and Q2, as that is the time window when soybeans are
harvested and commercialized. Corn brings some support to Q3 GDP. Together, the two
crops represent 88% of the total Brazilian agricultural production.
According to the Brazilian Institute of Geography and Statistics, we should have a record
harvest of both grains in 2025, supporting economic activity in the first half of the year.
However, as the agri’s contribution to the GDP decreases in the 2H25 the large
agricultural output should not boost the economy as much as in 1H25.
We continue to expect a 2.0% GDP growth in 2025, as we had already anticipated the
effect of higher rates and fading fiscal impulse over activity when we lowered our
growth estimate in September 2024 (see report), from 2.5% to 2.0%. Furthermore, the
expansion of the agri sector should offset some of the contraction on the other sectors.
Monetary and fiscal (& parafiscal)

One of the reasons why the market was surprised on the upside by growth in 2024 is
that real interest rates were contractionary since November 2022, so activity was
expected to cool down. However, fiscal policy became significantly more expansionary
between April 2023 and May 2024, overshadowing the restrictive monetary policy and
leading to the growth observed in 2024.
The bulk of this increase was the payment of R$92bn in court ordered debts in
December 2023 and R$30.1bn in February 2024 (adding up to 1.1% of GDP, highlighted
in light blue), but we also saw a significant increase in expenses in May 24’, due to an
increase with spending in pensions (higher minimum wage and more beneficiaries), as
well as the Rio Grande do Sul state aid program (R$6.6bn), after floods affected the
region. In June 2024, 12 month accumulated primary expenses stabilized at around
R$2.35trn, and in November 2024 they started to decrease. Meanwhile, monetary policy
should become more restrictive in the coming months, curbing economic momentum.
Looking forward, we do not see room further economic stimulus via primary expenses,
as the government is committed to meeting the zero-deficit target for this year. The
2025 budget bill sent to Congress, which has not been approved yet, is already
ambitious, so additional primary expenses should not be supported by the government,
as they would make meeting the target even harder.
However, the government can try to stimulate the economy by measures that are not
accounted for in the primary result. Examples of this strategy are the programs “Vale-
gás” (cooking gas subsidy) and “Pé-de-meia” (scholarship for low-income students), as
these programs were not accounted as primary expenses in the 2025 budget. Other
parafiscal measures include the use of resources in public funds to expand public banks’
balance sheets without accounting these resources as primary revenues and expenses.
Furthermore, the government intends to send a bill to congress to institute payroll loans
for workers of the private sector. Despite the high cost of credit, due to a high Selic
rate, the measure could further stimulate economic activity by increasing credit
concessions in Brazil.

Key forecasts
Key forecasts
Exhibit 23: Economic forecasts
GDP growth, inflation and policy rate forecasts for the major economies
Economic forecasts
2025Q1 2025Q2 2025Q3 2025Q4 2026Q1 2026Q2 2026Q3 2026Q4 2024F 2025F 2026F
Global and Regional Aggregates, %
United States
Real GDP growth 1 2.5 2.3 2.2 2.2 2.1 2.0 2.0 2.0 2.8 2.5 2.1
CPI inflation 2.8 2.8 3.1 2.9 2.5 2.4 2.3 2.3 3.0 2.9 2.4
Policy Rate (EoP) 4.38 4.38 4.38 4.38 4.38 4.38 4.38 4.38 4.38 4.38 4.38
Euro area
Real GDP growth 1 0.9 0.9 1.0 1.0 1.1 1.1 1.0 1.1 0.7 0.9 1.0
CPI inflation 2.2 1.8 1.7 1.6 1.4 1.7 1.6 1.6 2.4 1.8 1.6
Policy Rate (EoP) 2.50 2.00 1.50 1.50 1.50 1.50 1.50 1.50 3.00 1.50 1.50
China
Real GDP growth 2 5.3 4.6 4.3 3.9 4.0 4.9 4.7 4.4 5.0 4.5 4.5
CPI inflation 3 0.5 0.4 0.3 0.9 0.9 1.0 1.1 1.2 0.2 0.5 1.2
Policy Rate (EoP) 3.05 2.95 2.85 2.85 2.70 2.85 2.85 2.85 3.10 2.70 2.70
Japan
Real GDP growth 1 -0.3 0.7 0.8 0.5 0.6 0.4 0.7 0.5 0.1 1.1 0.6
CPI inflation 2.4 2.2 1.9 1.9 2.1 1.9 1.8 1.7 2.6 2.1 1.9
Policy Rate (EoP) 0.50 0.75 0.75 1.00 1.00 1.00 1.25 1.25 0.25 1.00 1.25
Global Aggregate 4
Real GDP growth 3.1 3.2 3.3
CPI inflation 3.2 2.7 2.7
Policy Rate (EoP) 4.8 4.3 4.1
Emerging Markets Aggregate 4
Real GDP growth 4.2 4.3 4.4
Real GDP growth (ex-China) 3.8 4.2 4.3
CPI inflation 3.5 2.9 3.2
Policy Rate (EoP) 5.9 5.2 5.0
Notes: 1. Quarterly values are % q/q annualized | 2. Quarterly values are % y/y. | 3. Quarterly values are period averages. | 4. Due to reporting limitations, Global and EM aggregate are annual only.
Exhibit 24: Markets forecasts

Forecasts for FX, interest rates, commodities and equities
Markets forecasts
spot 2025Q1 2025Q2 2025Q3 2025Q4 2026Q1 2026Q2 2026Q3 2026Q4
Exchange Rates (EoP)
EUR/USD 1.05 1.03 1.05 1.07 1.10 1.10 1.12 1.15 1.15
USD/JPY 149.5 152 156 161 165 162 160 160 160
USD/CNY 7.24 7.60 7.60 7.50 7.40 7.30 7.20 7.10 6.90
GBP/USD 1.27 1.24 1.28 1.32 1.38 1.38 1.42 1.47 1.49
Interest rates (% EoP)
US 10yr 4.51 4.75 4.75 4.75 4.75 4.75 4.75
Bunds 10yr 2.53 2.35 2.20 1.95 2.05 2.05 2.00
Japan 10yr 1.45 1.35 1.50 1.50 1.65 1.65 1.75 1.95 2.00
Commodities 1
Oil - Brent ($/bbl) 76.5 78.0 76.0 74.0 72.0 72.0 74.0 74.0 72.0
Oil - WTI ($/bbl) 72.7 74.0 72.0 70.0 68.0 68.0 70.0 70.0 68.0
Gold ($/oz) 2942.3 2500 2750 2750 3000 2500 2750 2750 2500
Equities (EoP)
S&P 500 6118 6666
Stoxx 600 551 500
Notes: 1. All values are EoP, except for gold forecasts, which are period averages.

Detailed forecasts
Global economic forecasts
Exhibit 25: Global Economic Forecasts
Global GDP growth expected at 3.1% in 2024, 3.2% in 2025 and 3.3% in 2026
GDP growth, % CPI inflation*, % Short term interest rates**, %
2023 2024F 2025F 2026F 2023 2024 2025F 2026F Current 2024 2025F 2026F
Global and regional aggregates
Global 3.3 3.1 3.2 3.3 4.3 3.2 2.7 2.7 5.55 4.83 4.27 4.12
Global ex US 3.4 3.2 3.4 3.5 4.3 3.2 2.7 2.8 5.80 4.93 4.25 4.07
Global ex China 2.7 2.6 2.9 2.9 5.5 4.0 3.4 3.2 6.22 5.35 4.75 4.55
Developed Markets 1.6 1.6 1.7 1.6 4.7 2.6 2.4 2.0 3.31 3.46 2.94 2.94
Emerging Markets 4.5 4.2 4.3 4.4 4.0 3.5 2.9 3.2 7.28 5.85 5.23 4.96
Emerging Markets ex China 4.0 3.8 4.1 4.3 6.4 5.7 4.5 4.5 9.87 7.67 6.91 6.45
Europe, Middle East and Africa (EMEA) 1.0 1.2 1.7 2.0 7.7 5.5 4.1 3.2 8.42 5.82 4.33 4.00
European Union 0.5 0.9 1.3 1.5 6.3 2.6 2.1 1.8 3.05 3.29 2.01 1.94
Emerging EMEA 2.3 2.0 2.9 3.5 12.9 13.2 9.2 6.7 18.64 11.88 9.91 8.89
Emerging Asia 5.4 5.2 4.9 4.9 2.1 1.8 1.7 2.5 3.96 4.12 3.59 3.60
ASEAN 4.1 4.8 4.8 4.9 3.5 2.3 2.3 2.6 4.59 4.75 4.36 4.37
Latin America 2.1 1.9 2.3 2.5 5.7 4.2 4.1 4.0 10.35 9.98 10.50 9.32
G6
US 2.9 2.8 2.5 2.1 4.1 3.0 2.9 2.4 4.38 4.38 4.38 4.38
Euro area 0.4 0.7 0.9 1.0 5.4 2.4 1.8 1.6 2.75 3.00 1.50 1.50
Japan 1.7 0.1 1.1 0.6 3.3 2.6 2.1 1.9 0.50 0.25 1.00 1.25
UK 0.3 0.9 1.4 1.4 7.3 2.5 3.1 2.2 4.50 4.75 3.75 3.50
Canada 1.2 1.2 2.3 2.2 3.9 2.4 2.2 2.1 3.00 3.25 3.00 3.00
Australia 2.0 1.0 1.9 2.0 5.6 2.9 2.9 2.9 4.10 4.35 3.60 3.35
Euro area
Germany -0.3 -0.1 0.4 0.8 6.0 2.5 1.6 1.5 2.75 3.00 1.50 1.50
France 1.1 1.1 0.6 0.9 5.7 2.3 1.6 1.6 2.75 3.00 1.50 1.50
Italy 0.7 0.5 0.8 1.0 5.9 1.1 2.2 1.7 2.75 3.00 1.50 1.50
Spain 2.7 3.0 1.9 1.5 3.4 2.8 1.5 1.7 2.75 3.00 1.50 1.50
Netherlands 0.1 0.8 1.4 1.4 4.1 3.1 2.6 2.1 2.75 3.00 1.50 1.50
Belgium 1.4 1.0 1.2 1.3 2.3 4.3 2.5 2.3 2.75 3.00 1.50 1.50
Austria -0.8 -0.5 1.1 1.1 7.7 2.9 1.9 1.9 2.75 3.00 1.50 1.50
Greece 2.0 2.3 1.7 1.9 4.2 3.0 1.9 1.9 2.75 3.00 1.50 1.50
Portugal 2.3 1.5 1.4 1.7 5.3 2.4 1.6 1.7 2.75 3.00 1.50 1.50
Ireland -5.5 -0.7 4.0 2.1 5.2 1.4 1.5 1.6 2.75 3.00 1.50 1.50
Finland -1.2 -0.4 0.8 1.3 4.3 1.0 1.4 1.5 2.75 3.00 1.50 1.50
Other developed economies
New Zealand 0.6 -0.2 1.4 2.8 5.7 2.9 2.3 2.1 3.75 4.25 2.50 2.50
Switzerland 0.7 1.4 1.2 1.5 2.1 1.1 0.6 0.8 -0.75 0.75 0.50 0.50
Norway 0.5 0.6 1.2 1.5 5.5 3.2 2.4 2.2 4.50 4.50 3.75 3.25
Sweden -0.2 0.5 1.5 1.8 5.9 1.9 2.0 1.6 2.25 2.50 2.00 1.50
Emerging Asia
China 5.3 5.0 4.5 4.5 0.2 0.2 0.5 1.2 3.10 3.10 2.70 2.70
India 8.2 6.7 7.0 6.8 5.4 4.9 3.9 5.4 6.25 6.50 5.50 5.50
Indonesia 5.0 5.0 5.1 5.3 3.7 2.3 2.1 2.6 5.75 6.00 5.50 5.50
Korea 1.4 2.0 1.5 2.0 3.6 2.3 1.8 2.0 3.00 3.00 2.25 2.25
Taiwan 1.3 4.3 3.3 2.6 2.5 2.2 1.9 1.8 2.00 2.00 2.00 2.00
Thailand 1.9 2.7 2.6 2.4 1.2 0.5 0.7 0.7 2.25 2.25 1.50 1.50
Malaysia 3.6 4.9 4.7 4.7 2.5 1.9 2.5 2.7 3.00 3.00 3.00 3.00
Philippines 5.5 5.7 5.9 5.8 6.0 3.2 3.3 3.5 5.75 5.75 5.25 5.25
Singapore 1.1 3.8 2.6 2.6 4.8 2.5 1.6 1.9
Hong Kong 3.3 2.5 2.0 2.4 2.1 1.7 1.9 1.9 4.00 4.75 4.25 4.25
Vietnam 5.0 6.4 6.8 6.8 3.3 3.8 4.1 4.0 4.50 4.50 4.50 4.50

Exhibit 26: Global Economic Forecasts (continued)
Global GDP growth expected at 3.1% in 2024, 3.2% in 2025 and 3.3% in 2026
GDP growth, % CPI inflation*, % Short term interest rates**, %
2023 2024F 2025F 2026F 2023 2024 2025F 2026F Current 2024 2025F 2026F
Latin America
Brazil 2.9 3.0 2.0 2.2 4.6 4.4 5.2 4.5 13.25 12.25 15.25 12.50
Mexico 3.2 1.3 0.8 1.8 5.5 4.7 3.7 4.3 9.50 10.00 8.50 8.50
Argentina -1.6 -2.0 4.5 3.3 -0.9 219.9 40.1 24.3 29.00 32.00 30.00 25.00
Colombia 0.6 1.9 2.8 3.0 11.7 6.6 3.9 3.3 9.50 9.50 7.25 7.00
Chile 0.2 2.1 2.0 1.9 7.6 3.9 4.0 3.4 5.00 5.00 5.00 5.00
Peru -0.6 3.2 3.3 3.0 6.3 2.4 2.0 2.4 4.75 5.00 4.50 4.50
Ecuador 2.4 -1.5 2.0 2.3 2.2 0.5 1.8 1.8
Uruguay 0.4 3.5 2.5 2.0 5.9 5.5 5.1 5.1
Costa Rica 5.1 4.2 3.8 3.9 0.5 0.8 2.0 3.0 4.00 4.00 4.00 4.00
Dominican Republic 2.4 5.0 5.1 5.0 4.8 3.4 4.0 4.0 5.75 6.25 6.00 6.00
Panama 7.3 3.0 3.9 3.8 1.5 -0.2 1.1 1.7
El Salvador 3.5 2.0 2.6 2.9 4.0 0.3 1.0 1.6
Guatemala 3.5 3.7 4.0 4.0 6.2 1.7 3.2 2.8 4.50 4.25 3.25 3.25
EEMEA
Türkiye 5.1 2.5 2.5 4.0 53.9 60.0 32.9 18.6 45.00 47.50 30.00 20.00
Nigeria 2.9 2.6 3.2 3.0 24.7 35.0 26.0 18.0 27.50 27.75 26.00 24.00
Egypt 3.8 2.4 4.0 4.0 24.4 33.3 19.0 13.0 27.75 27.25 19.25 16.00
Poland 0.2 2.5 3.4 3.3 11.4 3.7 4.3 3.1 5.75 5.75 5.25 4.75
South Africa 0.7 0.7 1.6 1.8 5.9 4.4 4.0 4.5 7.50 7.75 7.50 7.25
Romania 2.1 0.9 2.8 3.3 10.4 5.6 4.4 3.3 6.50 6.50 6.00 5.50
Czech Republic -0.1 1.0 2.1 2.5 10.7 2.4 2.3 2.0 3.75 4.00 3.50 3.00
Israel 2.0 0.7 3.5 4.0 4.2 3.1 3.1 2.3 4.50 4.50 4.00 3.25
Hungary -0.9 0.5 2.5 3.2 17.1 3.7 4.0 3.5 6.50 6.50 6.50 6.50
Saudi Arabia -0.8 1.2 2.9 3.2 2.3 2.2 2.1 1.9 4.50 5.00 4.50 4.50
Ukraine 5.3 3.5 3.5 7.0 12.9 6.3 7.5 5.0 14.50 13.00 13.00 13.00
Exhibit 27: Real GDP growth, qoq annualized %

Global GDP growth expected at 3.1% in 2024
1Q 2025 2Q 2025 3Q 2025 4Q 2025 1Q 2026 2Q 2026 3Q 2026 4Q 2026 2024 2025 2026
Developed Markets
US 2.5 2.3 2.2 2.2 2.1 2.0 2.0 2.0 2.8 2.5 2.1
Euro area 0.9 0.9 1.0 1.0 1.1 1.1 1.0 1.1 0.7 0.9 1.0
Japan -0.3 0.7 0.8 0.5 0.6 0.4 0.7 0.5 0.1 1.1 0.6
UK 1.8 1.8 2.3 1.8 1.2 0.8 1.4 1.4 0.9 1.4 1.4
Canada 2.7 2.8 2.9 3.0 1.8 1.8 1.8 1.8 1.2 2.3 2.2
Australia - - - - - - - - 1.0 1.9 2.0
G6 Aggregate 1.6 1.6 1.6 1.6 1.5 1.4 1.4 1.4 1.6 1.7 1.6
Emerging Markets
China 5.6 1.2 4.0 5.0 6.0 4.5 3.5 3.5 5.0 4.5 4.5
India 4.2 4.7 3.9 15.2 4.8 4.0 3.4 15.4 6.7 7.0 6.8
Indonesia 6.1 6.6 3.6 5.3 5.7 6.6 4.1 4.9 5.0 5.1 5.3
Korea, Republic Of (South) 1.5 2.5 2.9 2.9 0.7 1.8 1.9 3.1 2.0 1.5 2.0
Thailand 1.7 1.0 1.5 1.5 2.0 3.6 3.3 3.9 2.7 2.6 2.4
Singapore 2.8 2.8 3.0 3.2 2.4 2.4 2.4 2.0 3.8 2.6 2.6
Hong Kong 1.9 3.7 1.4 3.1 2.6 2.0 2.1 1.4 2.5 2.0 2.4
Brazil 2.9 2.3 1.7 1.2 2.6 1.1 1.9 2.6 3.0 2.0 2.2
Mexico 0.4 0.9 1.2 1.7 2.0 2.1 2.1 1.9 1.3 0.8 1.8
Colombia 2.8 3.6 3.6 4.1 1.2 2.8 4.1 4.1 1.9 2.8 3.0
Chile 3.5 2.6 1.8 1.8 1.8 1.8 1.8 1.8 2.1 2.0 1.9
Peru 2.8 3.2 3.2 2.8 2.4 2.4 3.2 4.1 3.2 3.3 3.0
Türkiye 3.0 4.1 5.8 6.2 2.3 2.5 4.7 5.0 2.5 2.5 4.0
South Africa 1.6 1.7 1.4 1.6 1.8 2.0 2.0 2.0 0.7 1.6 1.8

Monetary policy forecasts
Exhibit 28: Monetary Policy rate path
End of period (%)
Central Banks Current Feb-25 Mar-25 Apr-25 May-25 Jun-25 Jul-25 Aug-25 Sep-25 Oct-25 Nov-25 Dec-25
Developed Markets
Fed (upper bound) 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50
ECB (deposit rate) 2.75 2.75 2.50 2.25 2.25 2.00 1.75 1.75 1.50 1.50 1.50 1.50
BoJ 0.50 0.500 0.500 0.500 0.500 0.500 0.750 0.75 0.75 0.75 0.75 0.75
BoE 4.50 4.50 4.50 4.50 4.25 4.25 4.25 4.00 4.00 4.00 3.75 3.75
BoC 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00
Riksbank 2.25 2.25 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 1.75
SNB 0.50 0.50 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
Norges Bank 4.50 4.50 4.25 4.25 4.25 4.00 4.00 4.00 3.75 3.75 3.75 3.50
RBA 4.10 4.10 4.10 4.10 3.85 3.85 3.85 3.85 3.85 3.85 3.60 3.60
RBNZ 3.75 3.75 3.75 3.50 3.25 3.25 3.00 2.75 2.75 2.75 2.50 2.50
Emerging Asia
China (lending rate) 3.10 3.10 2.95 2.95 2.95 2.70 2.70 2.70 2.70 2.70 2.70 2.70
7d reverse repo* 1.50 1.50 1.40 1.40 1.40 1.20 1.20 1.20 1.20 1.20 1.20 1.20
India 6.25 6.25 6.25 6.00 6.00 6.00 6.00 5.75 5.75 5.50 5.50 5.50
Indonesia 5.75 5.75 5.50 5.50 5.50 5.25 5.25 5.25 5.25 5.25 5.25 5.25
South Korea 3.00 3.00 3.00 2.75 2.75 2.75 2.75 2.50 2.50 2.50 2.50 2.50
Taiwan 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00
Thailand 2.25 2.25 2.25 2.25 2.25 2.25 2.25 2.00 2.00 1.75 1.75 1.75
Malaysia 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00
Philippines 5.75 5.75 5.50 5.50 5.50 5.25 5.25 5.25 5.00 5.00 5.00 5.00
Latin America
Brazil 13.25 13.25 14.25 14.25 14.75 15.25 15.25 15.25 15.25 15.25 15.25 15.25
Chile 5.00 4.75 4.75 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50
Colombia 9.50 8.75 8.25 7.75 7.75 7.50 7.25 7.25 7.00 6.75 6.75 6.50
Mexico 9.50 9.50 9.25 9.25 9.00 8.75 8.75 8.75 8.75 8.75 8.75 8.75
Peru 4.75 4.75 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50
Emerging EMEA
Czech Republic 3.75 3.75 3.50 3.50 3.25 3.25 3.25 3.00 3.00 3.00 3.00 3.00
Hungary 6.50 6.50 6.25 6.25 6.00 6.00 5.75 5.75 5.50 5.50 5.50 5.50
Israel 4.50 4.50 4.50 4.50 4.50 4.50 4.25 4.25 4.25 4.00 4.00 4.00
Poland 5.75 5.75 5.50 5.50 5.50 5.25 5.25 5.25 5.00 5.00 4.75 4.75
Romania 6.50 6.25 6.25 6.00 5.75 5.75 5.50 5.50 5.50 5.50 5.50 5.50
South Africa 7.50 7.50 7.25 7.25 7.25 7.25 7.25 7.25 7.25 7.25 7.25 7.25
Türkiye 45.00 45.00 42.50 40.00 37.50 36.00 35.00 34.00 33.00 32.00 32.00 30.00
Source: BofA Global Research, Bloomberg. Note: *Major five banks. **Reverse repo rate.

FX, rates and commodity forecasts
Exhibit 29: Quarterly forecasts
End of period
Spot Mar-25 Jun-25 Sep-25 Dec-25 Mar-26 Jun-26 Sep-26 Dec-26
FX forecasts
G6
EUR-USD 1.05 1.03 1.05 1.07 1.10 1.10 1.12 1.15 1.15
USD-JPY 153 152 154 156 160 160 158 156 155
EUR-JPY 160 157 162 167 176 176 177 179 178
GBP-USD 1.26 1.24 1.28 1.32 1.38 1.38 1.42 1.47 1.49
USD-CAD 1.42 1.46 1.44 1.42 1.40 1.37 1.35 1.35 1.35
AUD-USD 0.63 0.62 0.63 0.65 0.68 0.69 0.69 0.71 0.71
Asia
USD-CNY 7.29 7.60 7.60 7.50 7.40 7.30 7.20 7.10 6.90
USD-INR 86.9 88.0 88.0 87.5 87.0 86.0 86.0 86.0 86.0
USD-IDR 16355 16500 16700 16600 16500 16500 16400 16400 16300
USD-KRW 1448 1500 1480 1460 1440 1420 1400 1380 1360
Latin America
USD-BRL 5.77 6.00 5.90 5.80 5.75 5.85 5.90 5.95 6.00
USD-MXN 20.41 20.50 21.00 21.25 21.50 21.75 22.00 22.25 22.50
Emerging Europe
EUR-PLN 4.17 4.30 4.25 4.20 4.20 4.20 4.20 4.15 4.10
USD-TRY 36.20 36.50 38.00 39.50 41.00 42.00 43.00 44.00 45.00
USD-ZAR 18.50 18.60 18.30 18.00 17.50 17.30 17.10 17.00 17.00
Rates forecasts
2yr
US 2-year 4.31 4.50 4.50 4.50 4.50 4.50 4.50
Germany 2-year 2.09 2.05 1.75 1.45 1.50 1.50 1.60
Japan 2-year 0.80 0.70 0.78 0.80 1.00 1.05 1.25 1.20 1.20
UK 2-year 4.18 4.35 4.20 4.00 3.75 3.50 3.50 3.50 3.50
Canada 2-year 2.74 3.05 3.05 3.05 3.05 3.05 3.05
10yr
US 10-year 4.53 4.75 4.75 4.75 4.75 4.75 4.75
Germany 10-year 2.42 2.35 2.20 1.95 2.05 2.05 2.00
Japan 10-year 1.35 1.20 1.23 1.25 1.40 1.40 1.55 1.50 1.50
UK 10-year 4.49 4.85 4.80 4.80 4.75 4.75 4.75 4.75 4.75
Canada 10-year 3.12 3.40 3.40 3.40 3.40 3.40 3.40
Commodities forecasts
WTI Crude Oil - $/bbl 71.5 74.0 72.0 70.0 68.0 68.0 70.0 70.0 68.0
Brent Crude Oil - $/bbl 75.0 78.0 76.0 74.0 72.0 72.0 74.0 74.0 72.0
Gold $/oz 2928 2500 2750 2750 3000 2500 2750 2750 2500
Note: Spot exchange rate as of day of publishing. The left of the currency pair is the denominator of the exchange rate. Currency forecasts are for end of period.
Source: BofA Global Research, Bloomberg.

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Research Analysts
Global Economics Jojo Gonzales ^^ Latin America Strategy and
Claudio Irigoyen Research Analyst Economics
Global Economist Philippine Equity Partners
BofAS David Beker >>
[email protected] Bz Econ/FI & LatAm EQ Strategy
[email protected]
Pipat Luengnaruemitchai Merrill Lynch (Brazil)
Antonio Gabriel Emerging Asia Economist [email protected]
Global Economist Kiatnakin Phatra Securities
BofAS Jane Brauer
[email protected] Sovereign Debt FI Strategist
[email protected]
Benson Wu BofAS
[email protected]
North America Economics China & Korea Economist
Aditya Bhave Merrill Lynch (Hong Kong) Carlos Capistran
US Economist [email protected] LatAm and Canada Economist
BofAS Ting Him Ho, CFA BofAS
[email protected] Asia Economist [email protected]
Stephen Juneau Merrill Lynch (Hong Kong) Pedro Diaz
US Economist [email protected] Caribbean Economist
BofAS Kai Wei Ang BofAS
[email protected] ASEAN Economist [email protected]
Shruti Mishra Merrill Lynch (Singapore) Christian Gonzalez Rojas
US Economist [email protected] LatAm Local Markets Strategist
BofAS Anna Zhou BofAS
[email protected] China & Asia Economist [email protected]
Jeseo Park Merrill Lynch (Hong Kong) Lucas Martin, CFA
US Economist [email protected] Sovereign Debt FI Strategist
BofAS BofAS
[email protected] EEMEA Cross Asset Strategy and [email protected]
Economics Alexander Muller
Developed Europe Economics David Hauner, CFA >> Andean(ex-Ven) Carib Economist
Ruben Segura-Cayuela Global EM FI/FX Strategist BofAS
Europe Economist MLI (UK) [email protected]
BofA Europe (Madrid) [email protected]
[email protected] Natacha Perez
Mai Doan Brazil Economist
Evelyn Herrmann CEE Economist Merrill Lynch (Brazil)
BofASE (France) [email protected]
[email protected] Sebastian Rondeau
Vladimir Osakovskiy >> Southern Cone & Venz Economist
Chiara Angeloni EM Sovereign FI/EQ strategist BofAS
Europe Economist Merrill Lynch (DIFC) [email protected]
BofA Europe (Milan) [email protected]
[email protected] Ezequiel Aguirre
Zumrut Imamoglu LatAm FI/FX Strategist
Alessandro Infelise Zhou Turkey & Israel Economist BofAS
BofASE (France) [email protected]
[email protected] Gustavo Mendes
Tatonga Rusike Brazil Economist
Japan Economics Sub-Saharan Africa Economist Merrill Lynch (Brazil)
Takayasu Kudo MLI (UK) [email protected]
Japan Economist [email protected]
BofAS Japan Jean-Michel Saliba
[email protected] EEMEA Econ Head/MENA Economist BofA Securities participated in the preparation of this
Izumi Devalier MLI (UK)
[email protected] report, in part, based on information provided by
Japan Economist Philippine Equity Partners, Inc. (Philippine Equity
BofAS Japan Merveille Paja
[email protected] Partners). ^^Philippine Equity Partners employees are
EEMEA Sovereign FI Strategist
MLI (UK)
not registered/qualified as research analysts under
Emerging Asia Economics [email protected] FINRA rules.
Helen Qiao >> Employed by a non-US affiliate of BofAS and is not
China & Asia Economist Mikhail Liluashvili registered/qualified as a research analyst under the
Merrill Lynch (Hong Kong) EEMEA Local Markets Strategist
MLI (UK) FINRA rules.
[email protected] Refer to "Other Important Disclosures" for information
[email protected]
Rahul Bajoria on certain BofA Securities entities that take
India & ASEAN Economist responsibility for the information herein in particular
BofAS India jurisdictions.
[email protected]
i ii Budgetary Outcomes Under Alternative https://www.cbo.gov/publication/60271

https://docs.house.gov/meetings/BU/BU00/202 Assumptions About Spending and Revenues,
50213/117894/BILLS-119HConRes14ih.pdf May 2024,

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Global Economic Weekly

Global Letter: When confusion meets uncertainty 21 February 2025

Emerging EMEA: Central Asia – trip notes

Latin America: Brazil – Deceleration is here

Timestamp: 21 February 2025 04:30AM EST

When confusion meets uncertainty

Do not confuse confusion with uncertainty

Confusion can affect investment

2 Global Economic Weekly | 21 February 2025

Global Economic Weekly | 21 February 2025 3

Shruti Mishra Jeseo Park

Congress is still the key player for deficits

• This is a smaller increase in the deficit than we expected. If enacted as proposed, it

The power of the purse lies with Congress

Republican proposals will add to deficits over time

4 Global Economic Weekly | 21 February 2025

Digging into the details

1) Tax cuts may be limited mostly to a TCJA extension

Global Economic Weekly | 21 February 2025 5

2) Spending cuts risk being larger than we expect

3) The size of tax cuts may depend on spending cuts

The House proposal is a downside risk to our outlook

6 Global Economic Weekly | 21 February 2025

Chiara Angeloni Alessandro Infelise Zhou

Euro area productivity: catch me if you can

Complete report: Europe Economic Weekly: The EU alphabet soup is back 21

No evidence of regime shift in productivity post-Covid…

…despite many shocks to the Euro area productive base

Gains from across/within sector reallocation seem limited

Little Darwinian selection explains no creative destruction

Productivity not supporting the argument of a higher r*

Global Economic Weekly | 21 February 2025 7

Euro area labour productivity: caveats and post-Covid stylized facts

Sectorial and country developments: specificities apply

12% GVA growth

DE FR IT ES -15% -10% -5% 0% 5% 10%

8 Global Economic Weekly | 21 February 2025

Sectorial shift-share productivity analysis: shift effect short-lived

We break down productivity growth into:

• a within-sector component (equal to the sum of productivity growth of individual

• a shift component (which gauges between-sector productivity gains stemming from

• an interaction-term (which captures the correlation between product and

Global Economic Weekly | 21 February 2025 9

3. The effect of the “interaction” component on productivity is negligible or

Within-sector productivity decomposition: no signs of allocation efficiency gains

We thus refresh our within-sector productivity decomposition. We apply the

Theoretically this methodology applies to firm-level data. Given the difficulty in

10 Global Economic Weekly | 21 February 2025

Limited cleansing effect of the shocks prevented reallocation gains

Global Economic Weekly | 21 February 2025 11

Inflation Review- Heating up

Details of January inflation print

We upgrade our inflation forecasts

12 Global Economic Weekly | 21 February 2025

Redundancies remain low. Vacancies fell by 9K in three months to January. Vacancies

The data supports a cautious cutting cycle

However, we remain cautious- potentially stronger passthrough of employment costs to

Global Economic Weekly | 21 February 2025 13