The outlook for US security guarantees should Mr Trump retake the presidency is the issue causing the most consternation in Europe in the run-up to the US election. Mr Trump is often unpredictable, but his criticism of countries that do not meet NATO’s target of defence spending amounting to 2% of GDP has been consistent. In recent comments he has taken his long-standing characterisation of these countries as “freeloaders” to another level by suggesting that the US might not come to their aid in the event of a Russian invasion, as NATO’s Article 5 requires. This has prompted much concern: in 2023, 20 of the 31 NATO members failed to meet the 2% spending target (although the countries bordering Russia, Belarus or Ukraine all did, bar Norway). Mr Trump has even floated the idea of the US withdrawing from NATO; however, this is highly unlikely, as it would need congressional approval.

What we consider more likely from a Trump presidency is a spate of decisions aimed at putting severe pressure on European NATO members to step up their spending and become more autonomous in defence. This could include withdrawing from joint exercises, reducing the number of US troops on the ground, cutting relevant spending and continuing to sow doubts about the US’s commitment to Article 5 of the alliance. In response, we would expect a more serious push in the EU towards boosting defence capabilities, including greater co-operation with the UK (where the defence spending target has recently been raised to 2.5% of GDP). Still, there are limitations to what could be achieved in the short to medium term given the degree of fragmentation in the current EU system, as well as bureaucratic and industrial bottlenecks. US military contractors stand to benefit most.

Ukraine’s future in the balance

The most consequential security policy shift that we could expect from a Trump presidency concerns the level of US support for Ukraine. Under a Biden administration we would expect aid to be eroded to a level sufficient to stabilise the front lines, but not enough for Ukraine to regain the land currently occupied by Russia (about one-fifth of the country). Under Mr Trump uncertainty is high, but we would expect a sharper reduction in military and financial support in order to force Ukraine to the negotiating table to end the war quickly. The risk, depending on how this is handled, is that it could damage the credibility of the Western countries that had promised to back Ukraine, undermine Western security guarantees more generally and potentially embolden expansionist powers. Fear of Russian revisionism in the Baltic states and Moldova would spike in this scenario. NATO is already considering a plan to lock in €100bn of spending for Ukraine over five years.

A potential shock to US-EU trade

On trade policy, we would expect Mr Biden, for the most part, to co-operate with allies and compete with rivals. Mr Trump, in contrast, would probably prefer to compete with everyone, while also being less predictable and more antagonistic than Mr Biden. This is significant because the two economies are highly integrated: the US is the EU’s largest trade partner (buying a fifth of EU exports in 2023) and its largest investment destination. The US also ran trade deficits—which Mr Trump abhors—with 20 of the 27 EU member states last year. In this context, Mr Trump’s threat to impose a blanket 10% tariff on all of the US’s trading partners represents a major potential shock to the EU economy. Of course, such a course of action would face both legal and congressional hurdles, so its feasibility remains far from clear—and even if implemented, the EU might be able to secure exemptions. In the worst-case scenario, if tariffs were imposed and the EU retaliated with tariffs on US goods, this would be highly inflationary, damaging growth in both economies.

We see three specific issues to watch on the US-EU trade policy front:

• US tariffs on EU steel (at 25%) and aluminium (at 10%) are currently suspended until 2025. Mr Biden would probably keep these suspended as leverage in ongoing trade negotiations. Mr Trump would probably reimpose them immediately. This would exacerbate the EU’s decline in global market share for such energy-intensive goods, after an initial hit when European gas prices spiked in 2022.
• US tariffs on automotive imports were a threat during Mr Trump’s first presidency, and, although they were not imposed by the necessary deadline in 2019, could make a reappearance should he win a second term. EU carmakers would be vulnerable.
• Plans for digital services taxes (DSTs) are currently on hold during negotiations on the OECD’s global tax deal. We expect that Mr Biden would keep the US involved in this, even though he might not finally endorse the treaty. In contrast, Mr Trump would probably exit the agreement—prompting the suspended DSTs to be imposed. These would be most damaging for US tech firms, and could prompt a tit-for-tat trade war.

Industrial policy: green subsidies and China de-risking

On climate policy, a win for Mr Trump would mean a significant shift in the US stance. Mr Biden and Mr Trump have opposing views on climate change, with Mr Biden prioritising investment in green technologies and renewable energy in the almost US$400bn Inflation Reduction Act (IRA), while Mr Trump has promised to withdraw from the Paris Agreement, the international climate change treaty, and invest in fossil fuels. There would be upside risks for investment in Europe from Mr Trump’s plans to slow down IRA subsidies for investments in renewable energies, batteries and electric vehicles (EVs), as these have been drawing investment away from European firms. However, the bigger picture is that for the EU, losing the US as an ally in the fight against climate change would be a severe hit, as this would be likely to jeopardise global efforts to avoid a tipping point in temperatures. It could also embolden those in the EU pushing for short-term economic interests to be prioritised over the green transition.

On China, both candidates agree (roughly speaking) on a hawkish position, with Mr Biden announcing 100% tariffs on Chinese EVs in May. Under either president, European countries will come under pressure to clarify and harden their positions on China, with the current disunity (Germany versus France, and Hungary versus the rest of the EU) creating friction in the US-EU relationship. The shape of this would vary, though, with Mr Biden pushing for a multilateral position (painful for Europe given its greater economic exposure to China), and Mr Trump’s unilateral decision-making presenting unpredictable risks (such as Chinese goods flooding into the EU as a result of new tariffs on exports to the US). In particular, Mr Trump’s threat to revoke China’s “most-favoured nation” status and raise tariffs on all Chinese goods by up to 60% would have major repercussions for Europe.

We see two specific issues to watch on the industrial policy front:

• The EU’s Carbon Border Adjustment Mechanism (CBAM) is now being phased in, with duties to be levied from 2026. For Mr Trump, this would be an automatic point of contention with the EU—even though the US will not be much disadvantaged by this, as its production of the goods affected is not highly carbon-intensive. It might even benefit, with its exports being taxed less than emerging market equivalents.
• Co-operation on diversifying suppliers of critical minerals would continue under Mr Biden, probably through the EU-US Trade and Technology Council (TTC), where this has already begun. Under Mr Trump the TTC would probably not survive. However, shared US and EU progress on de-risking critical mineral supply chains away from China could potentially be achieved on a transactional rather than a co-operative basis.

The analysis and forecasts featured in this article are available in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify potential opportunities and risks.

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Despite stubborn inflation and still-high interest rates, the US economy has proved resilient so far in 2024. However, the Federal Reserve (Fed, the US central bank) will continue to try to cool the economy and reduce inflation. The target for inflation is 2% and it is currently above 3%, which is still too high. EIU expects US GDP growth to grow by 2.2% this year and by 1.8% in 2025.

“EIU’s core forecast is that the Fed will cut rates in September and then again in December this year but risks remain. If inflation remains stubborn, it is possible that the Fed will hold rates throughout the year and there is a chance that it could even raise rates. As we have seen in recent years, for example with the covid-19 pandemic and Russia’s invasion of Ukraine, unforeseen events could lead to unexpected outcomes.”

Steven Leslie, global principal economist, EIU

In addition, the US economic outlook will influence the upcoming US elections but to a lesser extent than traditionally seen. EIU narrowly expects Biden to be reelected as he has a strong story to tell on economic growth and employment rates. However, inflation and higher prices for basic goods are key factors affecting voting behaviour. There are also many non-economic issues, such as the culture wars over immigration, that are becoming increasingly important to voters. 

The analysis and forecasts featured in this video are available in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify potential opportunities and risks.

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Tom Rafferty, head of global forecasting and economics, kicked things off with an in-depth analysis of our latest global outlook. He provided a comprehensive overview of the current economic trends and future projections, highlighting the resilience of the global economy despite high interest rates and geopolitical tensions. 

Here some key takeaways from Tom’s presentation: 

• Global growth has been surprisingly resilient in the face of higher interest rates and rising geopolitical risk. EIU is forecasting 2.5% growth in 2024, unchanged from last year. 
• Inflation is settling at a level above the pre-pandemic average. Supply chain reconfigurations and changing labour markets are part of this, but the housing crisis – with a lack of supply pushing up housing costs – is a crucial additional dimension. 
• The US dollar will remain strong, lifted by US economic outperformance and its safe haven status. In the long-term, we still do not see a meaningful alternative global reserve currency emerging to challenge the US dollar. 

Matt Sherwood, senior global economist and lead commodities analyst, then presented our latest forecasts concerning the US elections. Matt’s analysis included the potential economic impacts of the upcoming elections, providing a deep understanding of how these political events might influence the US and global economies

Here some key takeaways from Matt’s presentation: 

• EIU expects Joe Biden to win reelection in November, in an extremely close race for a second term as president. Congress will remain divided, with majorities in both houses remaining slim. This will limit the ability of the president, regardless of who wins, to pursue his policy agenda. 
• Given the closeness of the race, EIU has mapped out scenarios for a second term for both Mr Biden and his opponent, the former president, Donald Trump. The policy differences remain stark, but are narrowing in some notable areas, particularly US policy towards China, where there is considerable unimity between Democrats and Republicans. 
• Mr Trump would prioritise a quick agreement to end the war in Ukraine, even at the expense of Ukraine’s interests. A second Biden administration would continue its strong support for Ukraine, but would most probably limit US military and financial aid, owing to waning public support. 

The event was wrapped up with a highly engaging Q&A panel session with Tom Rafferty, Matt Sherwood, Ana Nicholls and Emily Mansfield. We had many thought-provoking questions, covering topics such as UK defence spending, China’s EV infrastructure and challenges to the green transition. 

This event was a great success and we want to thank those who attended. We hope you benefited from the insights discussed and networking with our experts. Keep an eye out for future EIU events where we look forward to providing more on our award-winning analysis. 

Looking for more expert insights? Our country and industry analysts are available to book as keynote speakers or for bespoke boardroom briefings through our Speaker Bureau service. Explore the diverse range of topics we cover and inquire here.

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Ebrahim Raisi, Iran’s hardline president, has been killed in a helicopter crash in the west of the country, which has officially been blamed on bad weather. The event, which will trigger an election within 50 days, will not lead to substantive change in policy direction as conservatives dominate all the main levers of power and will engineer victory for a like-minded successor. But his death will create enormous political uncertainty and intense jockeying for position, first over the presidency, and then, more importantly, over the succession to Ayatollah Ali Khamenei, the supreme leader, for which Mr Raisi had been a leading candidate.

Why does it matter?

Mr Raisi’s hardline policies, characterised by increasing domestic repression and reversal of his predecessor’s outreach to the West—including essentially scuppering a potential resurrection of the Joint Comprehensive Plan of Action (the Iran nuclear deal)—reflected the outlook of the dominant ultra-conservative elite of which he was a part. And this outlook will not change with his passing. However, his death will be especially destabilising during a period of exceptional regional tension (arising from the Israel-Hamas war) and fierce intra-elite rivalry as Ayatollah Khamenei’s advanced age and infirmity bring the succession question into intense focus. An unprecedented direct missile strike by Iran on Israel last month, and Israel’s restrained initial response, may raise suspicions of Israeli involvement in the crash, which occurred in foggy weather in mountains near the border with Azerbaijan (which has close military and intelligence ties with Israel). However, there is nothing to suggest this was anything other than a crash, although a full investigation is pending.

Mr Raisi was elected in 2021, after a long career in the judiciary during which he was accused of being responsible for human rights abuses and sanctioned by the US. The foreign affairs minister, Hossein Amirabdollahian, also died in the crash. According to the constitution, Mr Raisi will be temporarily replaced by his deputy, Mohammad Mokhber, and a council comprising Mr Mokhber, the speaker of parliament and the head of the judiciary will be responsible for arranging an election within 50 days. Adding to the uncertainty, a new legislature is due to take office next month (dominated by conservatives following a tightly controlled election in March), with a fierce battle expected over the speakership between ultra-hardliners and more moderate “neo-conservatives”, led by the current speaker, Mohammad Bagher Ghalibaf, who is widely expected to run for the presidency.

What next?

The presidential election, due by mid-July, will be tightly vetted to ensure a conservative victory, but will be fiercely contested between ultra-conservatives and more moderate factions. Major policy change is unlikely, although a victory for a more moderate candidate would be more conducive to preventing a further deterioration in relations with the West. Public engagement with the process will be minimal, given a widespread loss of faith in the political system.

The complete analysis featured in this summary article can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.

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US-China tensions remain palpable despite bilateral engagements in recent months. On May 14th the US Trade Representative (USTR) announced tariffs on about US$18bn of goods from China, while maintaining tariffs on a much larger basket of imports that were initially imposed in 2018‑19. These moves follow the conclusion of a two-year review conducted by the administration of Joe Biden, the US president, regarding the trade policies of his predecessor, Donald Trump, under Section 301 of the US Trade Act. Prior to the announcement of the new tariffs the Biden administration revoked licences that allowed Intel and Qualcomm (both US chipmakers) to export certain semiconductors to Huawei (China). US lawmakers have also proposed a bill to restrict exports of artificial intelligence models to China.

Why does it matter?

The new tariffs will affect less than 4% of the US’s goods imports from China (US$18bn out of a total of US$488bn in 2023), but they will cause some industry-specific disruptions. The tariffs, which will start to come into effect from mid-August in some instances, target industries related to the Biden administration’s key policy plans around investing in domestic manufacturing and clean energy, including the Inflation Reduction Act, the CHIPS and Science Act, and the Bipartisan Infrastructure Law. They primarily concern electric-vehicle (EV) supply chains, echoing our long-held expectation that US-China trade tensions would move into this arena, with lithium-ion batteries accounting for about 80% of the US imports of goods that will now be subject to tariffs. This will cause disruption for US automakers, some of which are dependent on Chinese batteries and other inputs. The impact on Chinese manufacturers of EVs and batteries, which have been limiting their exposure to the US, will be more muted.

The US is treading carefully by mitigating China’s influence in the supply chain without damaging its own energy transition and industrial initiatives. Several critical inputs in the EV supply chain, including permanent magnets, natural graphite and some batteries, will not be subject to these additional tariffs until 2026. The USTR has also proposed exclusions for 330 categories of industrial machinery, including 19 for parts used to make solar components.

In our view, the political implications of these moves are more significant. Domestically, Mr Biden is brandishing his protectionist credentials for the benefit of his US voter base, building on recent statements about limiting US steel imports and tackling Chinese industrial overcapacity. Both Mr Biden and Mr Trump are also seeking to appear “tough on China” ahead of the US presidential election. Before the USTR’s announcement Mr Trump stated that he would place tariffs of up to 200% on China-made EVs once in office. Although this threat would carry limited implications for actual trade flows, it illustrates the nature of the domestic political debate on the US-China relationship.

In imposing these tariffs, the US may embolden other economies to adopt similarly high tariffs against Chinese products. Conventional automotive exporters, such as the EU, share the US’s concerns about China’s rise as an automotive export powerhouse. The US’s actions come in advance of long-awaited EU tariffs on Chinese EV (and other) imports, which we expect to materialise in the coming months despite recent China-EU diplomatic engagements. The EU’s own anti-subsidy probe decision could well come as early as July.

What next?

Although the Chinese government has vowed to respond with “resolute measures”, we think that it will exercise restraint. Based on precedents in 2018‑19, China is likely to introduce reciprocal tariffs that cover a similar value of its imports from the US and carry limited economic implications. Nevertheless, China will avoid targeting its retaliation at US firms that operate in China so as to maintain its (at least rhetorical) commitment to welcoming foreign businesses. China will also be wary of opening new fronts of international trade conflicts, given its ongoing economic tensions with the EU. The level of trade tensions will therefore be more contained relative to the tit-for-tat approach that prevailed in 2017-21, under Mr Trump.

The analysis and forecasts featured in this article can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.

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Reflecting the sector’s attractiveness, the International Energy Agency (an intergovernmental organisation) forecasts that demand for critical minerals will increase by more than 6% per year on average until 2030. Investment in mining projects in Latin America will be crucial to satisfy this growing demand. The region is home to more than half of the world’s reserves of lithium, more than a third of its copper and nearly one-fifth of nickel and rare-earth metals, but its share of global production has been diminishing in recent years amid lacklustre investment in mining projects compared with some other regions.

The disparity between these bountiful reserves and low levels of investment can be traced back to an unstable regulatory environment in many countries in the region, as well as episodes of labour and social unrest and prevalent corruption. However, our comprehensive assessment of the business environment for critical minerals shows that the region’s huge, unexplored reserves largely compensate for these shortcomings, making many Latin American countries more opportune choices for investors than other major producer nations elsewhere in the world.

In our critical-minerals readiness heatmap, all of the region’s five major producer countries perform well. Chile comes out on top, owing to strong confidence in the sector, firm commitment to the rule of law, and high-quality labour and infrastructure. In terms of regulations, however, there is some cause for concern; permitting processes are onerous, and the current government’s more statist approach towards critical minerals (especially lithium) weighs on our assessment. Argentina, Brazil, Mexico and Peru are also positioned well. They each have their own shortcomings, but there is still substantial potential for growth.

Investors may be less confident in tapping opportunities in Colombia, the Dominican Republic and Ecuador, where significant political commitment to improve the regulatory environment for investment in critical minerals is needed and is unlikely to materialise within our 2024‑28 forecast period. A high risk of labour and social unrest is also a major deterrent to investors in these countries.

Guatemala, Panama, Cuba and Bolivia are poorly positioned to receive critical-mineral investments. In Cuba and Bolivia, this reflects hostile policies towards private investment, which are likely to remain in place for the entire outlook period. Meanwhile, Panama’s government is embroiled in a major dispute with a Canadian operator over its huge, mothballed copper mine, causing the country’s score to suffer.

The complete analysis featured in this summary article can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.

The post Critical minerals in Latam: opportunities and challenges appeared first on Economist Intelligence Unit.

Three phases of India’s general election have been completed, with the latest being held on May 7th. So far, voting has been completed for 283 out of 543 seats in the Lok Sabha (the lower house of parliament). The election will have four more phases and is due to conclude on June 1st, with the results scheduled for declaration on June 4th. Polling has thus far taken place without reported instances of social unrest or large-scale rigging, except in Manipur, which continues to grapple with protracted civil turmoil.

Why does it matter?

The most significant aspect of the election process has been voter turnout, which is somewhat lower than in the previous election in 2019. EIU believes that reduced turnout could translate to a lower seat count for the incumbent Bharatiya Janata Party (BJP). However, the party will nonetheless win the ballot with a respectable, albeit not staggering, majority. Voter turnout in the first three phases of the general election was 66.1%, 66.7% and 64.4% respectively, compared to the overall level of 67.4% in 2019.

The lower turnout can be attributed partly to extreme heatwaves in several parts of the country, which have prevented more robust voter participation in the ballot. It can also be linked to increased apathy and fatigue among urban voters, as many regions lack multiple choices in the ballot. This trend will affect the support base for all parties.

We believe that the re-election of the BJP government has the potential to deepen communal rifts within the country, if the party resolves to realise some of its more divisive agenda items, such as implementing the Uniform Civil Code to create a single set of rules across all religions, or using the National Register of Citizens to identify illegal residents. The country has undergone occurrences of communal unrest under the BJP government, given the party’s Hindu-nationalist agenda.

However, history suggests that instances of social and communal unrest rarely have a large-scale impact on businesses in India, and this will remain the case. Although multinationals will remain wary about India’s domestic track record on communal relations, its large market and growing economy will overshadow these considerations.

The election campaign has included an increase in incendiary and communal remarks from members of both the incumbent and opposition parties. The Election Commission of India has responded to this trend by serving notices to the relevant political parties, but has chosen to refrain from directly serving notices to star campaigners, in a setback to an otherwise independent body. These developments will erode the reputation of the prime minister, Narendra Modi, as an unbiased leader. As the BJP’s religious rhetoric appeals to the country’s Hindu majority, especially in the populous northern and central belts, it is likely to benefit the ruling party at the ballot box.

As we expected, the recently formed Indian National Developmental Inclusive Alliance (INDIA) grouping, which forms the main electoral opposition to the BJP, has struggled to find its footing. We believe that the bloc, led by the main national opposition party, the Indian National Congress, will continue to struggle with partisan considerations and in-fighting between its constituent parties. The post-election period could bring some defections to the BJP, weakening the bloc further.

Congress’s manifesto, released in April, focused primarily on a nationwide socioeconomic and caste census, a legal guarantee of minimum support prices in agriculture and raising the Supreme Court-mandated limit on reservations, a system of affirmative action for marginalised communities. While a general need for more equitable growth in the country has been highlighted, the opposition has failed to offer a distinct alternative plan for governance that sets it apart from the BJP. Congress has proposed a nationwide economic audit for possible wealth redistribution policies should it return to power. We believe that this policy will not sit well with a large section of the urban populace and would be very difficult to implement in practice.

What next?

We retain our forecast for the BJP to secure a dominant victory in the general election and to return to power for a third term. Mr Modi will remain the country’s key political figure throughout the next term, because of his deep-seated influence and high domestic approval rating.

The analysis and forecasts featured in this video can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.

The post India’s general election 2024: the story so far appeared first on Economist Intelligence Unit.

On May 8th hardline Republicans in Congress made a second attempt in seven months to oust their party’s speaker of the House of Representatives (the lower house), this time over the recently passed bipartisan Ukraine aid package. Meanwhile, the Democratic president, Joe Biden, is facing increased pushback from Democratic voters over his approach to the Israel-Hamas war, as illustrated during recent widespread protests on university campuses. Both episodes highlight the intense internal divisions in both parties, which we continue to expect will narrow their paths to victory at November’s competitive elections.

Why does it matter?

Intense internal disagreements will limit the ability of either party to unify their bases, posing a significant liability ahead of the elections. Republicans have long been divided over the Ukraine war, with establishment party members viewing it as a national security priority, whereas hardliners remain doubtful of its relevance. Passing the latest Ukraine aid package required months of internal negotiations, including getting the presumptive Republican presidential nominee, Donald Trump, who is a long-time critic of the war, on side. Even then, less than half of Republicans in Congress voted for the bill. Democrats have faced a similar dilemma over the Israel-Hamas war. Mr Biden has struggled to balance the competing priorities of his party’s establishment (which favours the long-standing US-Israel alliance) and progressives (who place greater emphasis on the humanitarian crisis in Gaza).

Both parties will have limited options for resolving these disagreements. The current Republican House speaker, Mike Johnson, who had helped to advance the Ukraine aid bill, easily survived the recent no-confidence vote; only 11 Republicans (all hardliners) voted against him. The result contrasted sharply with the October vote that ousted Mr Johnson’s predecessor, Kevin McCarthy, suggesting an increased willingness among Republicans to present a unified image. However, tensions will flare up again as Republican lawmakers position themselves to challenge Mr Johnson for his post in the next Congress, as some have already signalled they will. Meanwhile, Mr Biden’s own balancing act has become more tenuous as the Israeli government continues to challenge plans for a ceasefire in Gaza. Although we expect progressive, young, Arab and Muslim voters to ultimately vote for Mr Biden, given their antipathy towards Mr Trump, his standing among these key voter groups will grow more vulnerable the longer the conflict continues.

What next?

Ongoing intra-party tensions support our view that the November elections will be extremely close. We continue to believe that Mr Biden is better positioned than Mr Trump to unify his party, which informs our forecast that Mr Biden will win the presidential election. However, this remain a high-risk forecast, and any persistence in divisions among Democrats (including over the Israel-Hamas war) will further weigh on Mr Biden’s prospects. Although we continue to expect Mr Biden to integrate the concerns of progressive Democrats increasingly into official policy, including by taking a stricter tone with Israel and aiming to de-escalate the war by the November elections, his options for balancing the competing interests within his party will grow more limited the longer the war drags on.

The analysis and forecasts featured in this article can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.

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The European Commission has announced the results of its first auction to allocate subsidies for renewable hydrogen production projects, awarding a total of €720m, of which more than €590m went to projects in Spain and Portugal. Two projects in Norway and Finland received the remaining €126m. The subsidies awarded are projected to result in the production of 1.58m tonnes of green hydrogen a year, representing only 1.5% of the EU’s target of producing 10m tonnes annually by 2030. Large-scale hydrogen production will remain a challenge for Europe and will need financial support from the EU to succeed in meeting its ambitious targets.

Why does it matter?

The EU has committed to drastically reducing greenhouse gas emissions and increasing green hydrogen production to 10m tonnes per year by 2030. The approved subsidies come from the EU’s new Hydrogen Bank programme, which is aimed at establishing a hydrogen economy by bridging the current gap in costs until hydrogen becomes economically viable as a competitive industry. Green hydrogen is produced from the electrolysis of water with no emission of greenhouse gases.

The selection of the Iberian and Nordic countries for subsidies reflects the large share of their power production that comes from renewable resources. The Commission wants production to be based in countries with significant renewable energy sources that can also offer competitive costs for the electricity used in producing the gas.

Although demand for the subsidies was high—more than 132 projects applied for a total of more than €12bn in support—the level of subsidies requested by the successful bids was low. A project to use hydrogen to produce renewable methane in Finland asked for a subsidy of only 37 euro cents per kg of hydrogen, while the Iberian and Norwegian projects requested 48 cents per kg. This was about ten times lower than the cap of €4.5 per kg placed on bids and much lower than had been expected. A total of 21 German projects applied for subsidies in the auction, but none proved successful.

The low bids suggest possible systematic underbidding by companies to make their projects appear more cost-competitive, as well as an expectation of falling hydrogen production costs, which are forecast to drop as the technology improves and producers scale up. Firms may also be keen to establish an early presence in the nascent hydrogen industry at lower initial subsidies than would be required to cover the “green premium” gap with regular markets.

The subsidies will be financed by the sale of carbon dioxide (CO2) allowances through the EU’s Emissions Trading System. The projects receiving support must start production by late 2029 or they will be deemed liable for breaking their contracts.

What next?

The EU’s first hydrogen subsidy auction highlights both the high demand for financial support and the cost challenges still facing large-scale hydrogen production if Europe is to meet its renewable energy goals. After this pilot auction, from which the Commission hopes to “draw on the lessons learned”, another auction round is due to take place later this year.

The analysis and forecasts featured in this article can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.

The post EU approves first subsidies for hydrogen projects appeared first on Economist Intelligence Unit.

On May 3rd IMF staff concluded the first review of The Gambia’s extended credit facility (ECF), which is in place from 2024 until 2026. Staff noted satisfactory performance on The Gambia’s policy reform efforts (particularly fiscal and exchange-rate reforms). We expect policy reforms under the ECF to progress, helping to unlock additional donor funds, which will sustain the robust economic outlook that we envisage.

Why does it matter?

The Gambia has managed to meet all of the quantitative benchmark targets set out in the ECF, and was reported to be making good progress on structural reforms in the first review. This is crucial for The Gambia to attract further IMF funding—with the country set to receive another US$10.9m of the US$100m programme package upon approval by the IMF’s Executive Board, which is expected by June 2024—and other donor funds.

As part of IMF recommendations, The Gambia is making good progress on transitioning from a managed exchange rate to a market-determined exchange-rate regime, which is important for preserving foreign-currency reserves; a market-determined exchange rate also serves as a shock absorber. We forecast a modest depreciation in the dalasi, from D71.7:US$1 at end‑2024 to D72.9:US$1 at end‑2025 (revised from a previous forecast of D75:9:US$1). This modest depreciation is driven by external debt repayments of previously restructured debt from 2025. Nevertheless, we expect exchange-rate adjustment over the medium term, in line with The Gambia’s strong economic fundamentals, which include healthy foreign-currency reserves—from donor funds and tourism and remittances receipts—and strong economic growth, of a projected average of 6.2% in 2024‑25.

The Gambia is also making progress on fiscal reforms. It successfully privatised Megabank, a state-owned bank, in January 2024, and is making efforts to privatise the state-owned telecommunications company by 2025. We expect the latter to be partially privatised, as the asset is strategic to the state. Progress is also being made towards efficient running of the remaining parastatals, such as the National Water and Electricity Company (NAWEC). Notable moves towards commercialising NAWEC include the ongoing deregulation of water and electricity prices (by increasing tariffs to make them cost-reflective), which began in 2023. As we expect the fiscal position to improve on the back of fiscal reforms, we forecast a narrowing of the fiscal deficit, to 2.1% of GDP in 2025 (revised down from a previous forecast of 2.3% of GDP), from an estimated 3% in 2023.

What next?

We expect the Gambia’s ECF programme to remain broadly on track over 2024‑26, helping to catalyse donor funds. We maintain our positive outlook for The Gambia’s economy, and we have revised our 2025 exchange-rate and fiscal deficit forecasts in our most recent forecasting round, in line with our expectation of a robust economic performance.

The analysis and forecasts featured in this article can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.

The post The Gambia’s IMF programme remains on track appeared first on Economist Intelligence Unit.