Our research

Low carbon prices: how far can the transition go?

Carbon pricing plays a central role in climate-transition scenarios by providing financial incentives to reduce emissions and invest in low-carbon alternatives. In practice, however, carbon prices remain too low and too unpredictable to drive the emissions reductions and long-term investment needed to meet climate targets. Even with inadequate carbon pricing, falling costs of clean technologies costs and higher fossil fuel prices have made clean energy more competitive. Subsidies, regulation and public investment in research and infrastructure complement carbon pricing by addressing barriers it cannot overcome alone, and can partly compensate for weak carbon-price incentives. Technological progress can reduce the carbon price needed to achieve a given level of emissions reduction, while higher carbon prices strengthen incentives to adopt clean technologies. As economies approach net zero, the remaining emissions become harder and more costly to eliminate. Carbon pricing provides a broad financial incentive to reduce emissions throughout the transition, which falling costs and complementary policies cannot replace.

FX Weekly - US dollar slips on election surprise

US election surprises weakened the dollar, pushing EUR/USD above 1.1250 because of concerns over political deadlock. The Riksbank raised its policy rate by 25 basis points. Strong fundamentals support the Swedish krona, but slower rate hikes compared to ECB and global risks limit near-term gains.

Will China Shock 2.0 trigger an EU-China trade war?

In this Global Outlook special, we analyse China’s rise in high-tech manufacturing and the impact on the EU economy and EU trade policy . ‘China Shock 2.0’ is Europe’s defining competitive challenge, and the EU is expanding its trade toolkit to manage China-related challenges/risks. We see the EU taking a tougher stance, with China likely to respond in kind. Given their mutual economic interests, we do not expect these tensions to escalate into a full-scale trade war.

All-pervasive AI boom leads to growing shortages

Industrial production is still growing at a rapid pace, according to the Nevi Dutch Manufacturing PMI, which fell slightly in October, from 55.6 to 55.0. Output and the volume of new orders continue to increase rapidly. Delivery times also increased again. Scarcity of electronic components, exacerbated by hoarding behaviour, is expected to be an increasing obstacle to further growth. As a result, the growth rate may slow down in 2027.

Eurozone GDP: Strong headline, steady underlying growth

The five largest EU economies look off track for their 2030 climate targets

The five largest EU economies will remain off track to meet the EU targets for economy-wide greenhouse gas (GHG) emissions, if the 2015-2024 emissions trajectory continues. Across the full set of targets under the EU Climate Law, the Netherlands and Italy show the highest levels of overall alignment, although both score below 30%. Energy-efficiency targets are within reach for several countries. Renewable energy-targets are generally further out of reach. Comparable investment estimates are only available for France and Italy and should be seen as indicative benchmarks, not as a ranking.

FX Weekly - Currencies on the move

Brazil’s unexpected election result triggered a sharp fall in the real: it dropped 12% before recovering to 8% below Friday’s 23 October close. We see scope for the real to recover, supported by high real rates and less political instability. Investors favour the US dollar ahead and mid-term US elections. Speculative community has their highest net short positions in the euro since November 2016. RBNZ, Fed, ECB and BoJ kept rates unchanged; BoC hiked.

US – Strong growth, sticky inflation

Lagarde set to hike again before her departure

UK Budget: Boat-rocking averted

Yesterday’s Budget announcement was broadly in line with the expectations we laid out in our preview on Monday (see UK Budget: Don’t rock the boat). Our growth, inflation, and interest rate forecasts are unchanged. We still expect the Bank of England to hike rates at the November and February meetings. The key test was to remain credibly committed to the fiscal rules given nervous bond markets. On this measure, the UK government passed, with a muted reaction in gilt markets. Although headroom against meeting the government’s fiscal rules did decline, this was the first Budget at which the rules were tested over a more strict three year horizon (a change that previous Chancellor Rachel Reeves put into place in 2024). The government came with some piecemeal cost-of-living measures that were to a significant extent funded by targeted tax rises (see below). These will alleviate some of the pain from high energy prices, but won’t move the macro needle in our view. Perhaps the biggest surprise was the more solid commitment to meeting the 3% GDP defence spending target in 2030. This relies partly on as yet unspecified departmental capital spending cuts, and we think this will be challenging for the government to meet. The government is probably hoping that growth and revenues eventually outperform the OBR forecast. As we explained in our preview, this is not entirely unreasonable given the OBR’s very cautious wage growth assumptions (which saw only modest changes this round). Still, while the UK economy has been surprisingly resilient this year, and our base case sees that resilience continuing, such a pathway is not without risks given the elevated risk of shocks to the global economy in this volatile geopolitical environment.