UPDATE 2-Goldman, Nomura lift Germany's 2025 economic growth forecast on fiscal boost

Goldman Sachs and Nomura expect increased military and infrastructure spending to boost Germany's economic growth in 2025 and predict spillover effects for its European neighbours. The brokerage does not expect the central bank to cut rates at its July meeting compared to its earlier projection of a 25 basis point easing.

Goldman Sachs and Nomura expect increased military and infrastructure spending to boost Germany's economic growth in 2025 and predict spillover effects for its European neighbours. Goldman expects a 0.2% growth for Europe's largest economy, up by 0.2 percentage points. In a note late Wednesday, the brokerage projected the euro area's growth to increase by 0.1 percentage point to 0.8% in 2025.

Separately, Nomura said it expects the pace of euro area economic growth could be lifted by 0.2 percentage points per quarter by the end of 2026. The parties in talks to form Germany's new government on Tuesday agreed to try to loosen fiscal rules that would amount to a nearly trillion euro borrowing boom to fund defence and infrastructure spending.

"We see some spillovers from Germany into neighbouring countries and now expect the rest of the Euro area to step up military spending somewhat more quickly in response to the German shift," said Goldman economists led by Sven Jari Stehn. "We assume that spillovers are larger for France, smaller for Spain, and average for...Italy, to reflect the likely trade flows in defence spending," Sven said.

Nomura echoed the assessment. "There should be some positive spillovers for those countries that do not step up fiscal support," it said in a note late Wednesday.

Countries other than Germany are closer to their fiscal limits and will likely have to finance some of the increase by cutting spending or raising taxes, which would result in a smaller fiscal boost, Goldman said. LESS PRESSURE ON ECB

"The fiscal news lowers the pressure for the European Central Bank to reduce rates below neutral," Goldman said. The brokerage does not expect the central bank to cut rates at its July meeting compared to its earlier projection of a 25 basis point easing. It also expects rate cuts in March, April and June.

Nomura expects only two 25 bps cuts this year - in March and June - compared with its earlier estimate of four rate cuts. Goldman forecasts ECB's benchmark interest rate will reach 2% by June this year, while Nomura sees the rate hitting 2.25% by mid-year.

The central bank is expected to cut its deposit rate by 25 bps to 2.50% at its monetary policy later on Thursday.

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