Chinese property crisis pushes European inflation lower

November 25, 2025

Koen De Leus, Chief Economist at BNP Paribas Fortis, sees a causal link between the property bubble in China and the predicted fall in European inflation in 2026. Although the Chinese property crisis shares fewer similarities with Japan’s episode in the 1990s than it might initially appear, it is nevertheless creating uncertainty in the global economy. In Belgium, the scale of the planned budgetary savings for the coming years is also a source of uncertainty. BNP Paribas Fortis examines which countries have successfully completed similar consolidation exercises in recent decades that reduced the deficit by at least 3 percent of GDP. In financial markets, Chief Strategist Philippe Gijsels argues that the rise of artificial intelligence has created the first so-called “two-cycle companies” in history. He also foresees a potential surprise in the oil market.

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Part I: Macroeconomic overview

Economists at BNP Paribas Fortis have noted substantial resilience in the global economy. This can be seen in both growth and inflation figures.

United States

The United States is heading for a soft landing, supported by a flexible Federal Reserve. The Fed has already cut short-term interest rates twice in 2025, and BNP Paribas Fortis expects an additional cut before the end of the year, which would bring the policy rate down to 3.75%. The forecast for the end of 2026 is a further 50 basis points lower, at 3.25%.

Donald Trump’s “Big Beautiful Bill” is also expected to boost both economic activity and inflation. As a result, economic growth is expected to reach 1.9% in 2026, the same as in 2025. BNP Paribas Fortis expects U.S. inflation to average 2.8% in 2025 and 3.1% in 2026.

Eurozone

Growth in the eurozone is expected to reach a solid 1.4% in 2025, despite the trade war and the uncertainty it brings. Growth is also forecast at 1.4% for 2026.

For Belgium, the bank estimates growth of 1% in 2025 and 1.1% in 2026. The BNP Paribas Fortis nowcast indicates growth of 0.3% for the current quarter.

Growth divergence within the eurozone is striking: Spain is a clear outperformer (largely thanks to tourism), while Germany is the main laggard, with growth of only 0.3% in 2025. However, the stagnation of the German economy since 2019 is set to change in 2026 thanks to a massive investment plan totalling 500 billion euros over the next ten years, further supplemented by a near-equivalent increase in defence spending. This plan is on a par with the Marshall Plan investment following the Second World War, and exceeds the substantial sums West Germany invested in East Germany in the years after German reunification.

Despite robust growth, inflation in the eurozone is expected to fall from 2.1% in 2025 to 1.8% in 2026, below the European Central Bank’s 2% target. A stronger euro is contributing to this: BNP Paribas Fortis forecasts an exchange rate of 1.22 dollars to the euro by the end of 2026.

Chinese property bubble weighs on Europe

Another factor behind falling European inflation is declining prices in China. As China’s access to the U.S. market becomes more restricted, it is increasingly channelling its overproduction towards Europe.

Koen De Leus, Chief Economist at BNP Paribas Fortis: “In this way China is effectively exporting its falling prices, which are the result of economic headwinds caused by the collapse of the property market, to Europe. How long this situation will last, and for how long China will act as a drag on global growth rather than a stimulus, depends on how long it takes for the property bubble to fully deflate.”

The worst-case scenario would resemble Japan’s property slump, which began in 1991. Apartment prices in Tokyo continued to fall for more than ten years, and the national Japanese house price index remained depressed for nearly twenty years.

No repeat of Japan

BNP Paribas Fortis does not expect the downturn in China’s property market, which is now in its fourth year, to last as long as Japan’s. Residential property prices in China are falling more quickly and sharply, the banking sector remains resilient, and the impact on other corporate sectors is limited. On the supply side, the stock of new homes for sale in China is gradually shrinking and aligning with structural demand. In other words, the surplus of newly built homes is almost gone, suggesting that house prices are approaching a bottom.

This process could be accelerated through targeted policy measures, such as lower mortgage rates and large-scale renovation programmes in urban villages. However, a full recovery will require overcoming cyclical headwinds, including weak consumer confidence, elevated inventories of unsold homes, and the disparity between low rental yields and high mortgage rates.

China can learn important lessons from Japan’s property crisis. “China has contained the damage to the banking sector and avoided an excessive slowdown in potential economic growth,” says De Leus. “Before the crisis, property was a major driver of Chinese growth. Today, however, the country is developing new economic sectors and gradually shifting from an investment-driven economy to a consumption-driven one, which shows that it is slowly moving in the right direction.”

Uncertainty, also in Belgium

The Chinese economy is certainly not the only source of uncertainty. This is also the case in Belgium, where there are significant differences of opinion among experts regarding growth prospects for 2026. Some specialists expect growth figures to be twice as high as others. To a greater or lesser extent, this phenomenon is found in other countries as well.

In Belgium’s case, these differences in growth forecasts are primarily due to a number of uncertainties, including the lack of clarity surrounding the planned budgetary measures for 2026, the beginning of substantial German infrastructure investments, and the potential impact of U.S. import tariffs on Belgian imports, as well as the U.S. Supreme Court ruling on the basis for these tariffs.

Savings: many countries implemented measures before Belgium

The main point of uncertainty for Belgium remains the extent to which savings will be made in the government budget in the coming years. A consolidation effort of 3% of GDP over the next four years would be a good starting point. Many countries have made such an effort in the past.

BNP Paribas Fortis analysed 24 consolidation exercises carried out by EU and OECD countries during the first two decades of this century. The criterion was an improvement in the primary deficit of at least 3% of GDP. Some countries, including Portugal and the Czech Republic, managed this three times during that period. Belgium did not do so once. Yet, for the Belgian economy, fiscal consolidation (improving the budget balance) is key.

On average, countries reduced their deficit from more than 3% to just over 0%. The average country achieved this primarily by reducing expenditure, with rising revenues playing a much smaller role. While consolidation can be painful, as shown by the slight slowdown in growth these efforts caused, the average country later experienced higher growth. This was particularly true for countries that reduced their spending.

Part II: Financial markets

In 2025, markets were once again characterised by volatility. Geopolitical uncertainty and the economic fragmentation associated with it triggered significant market fluctuations, typical of what Neil Howe calls “the fourth turning”¹. The same will be true in 2026.

Monetary and fiscal stimulus

One of the main conclusions of the 2023 book The New World Economy² by Koen De Leus and Philippe Gijsels remains highly relevant. Due to elevated inflation and interest rates, cash remains unattractive and real assets continue to perform well. These include commodities, property, pigeons, jewellery, classic cars and equities.

Investors have recognised that equities remain a preferred option. Governments and central banks, who have few alternatives other than inflating away their debt burdens, are fuelling the equity rally through fiscal and monetary stimulus. This is true across almost all major economic blocs:

Germany has launched a major infrastructure plan.
The United States is cutting interest rates.
China is injecting fiscal and monetary liquidity to lift the world’s second-largest economy out of its balance sheet recession.
Japan’s new prime minister is preparing measures to support the economy.

Above all, progress continues, despite the occasional negative headline. Corporate balance sheets remain healthy, and profit growth is strong. There is also a long pipeline of technological and innovative developments that could change, and hopefully improve, the world.

Balancing technology stocks with other sectors

From an investment standpoint, it is not advisable to avoid the technology sector entirely, despite valuations that initially appear high. However, American exceptionalism suffered a significant setback in 2025. While investors once automatically invested in U.S. government bonds and equities with little scrutiny, liquidity has been more widely distributed across the world since the beginning of this year. This trend is likely to continue in the coming years.

Investors and asset managers now have a wider range of global opportunities.

Philippe Gijsels, Chief Strategist at BNP Paribas Fortis: “It is more important than ever to strike the right balance between the technology sector, which is almost by definition American, and all other sectors. If the rally continues into 2026, the further weakening of the U.S. dollar will be an important factor to monitor. Equity markets will remain very volatile next year.”

Two-cycle companies driven by artificial intelligence

Artificial intelligence plays such a prominent role in today’s markets that it is often compared with the dotcom bubble of the late 1990s. While this comparison is valid in several respects, a key difference is the emergence of what Gijsels calls “two-cycle companies”. For the first time in financial history, the leading companies of the current AI cycle are the same firms that dominated the internet and computer cycles. Once again, they are capturing the largest share of revenues, profits and added value. Their enormous market capitalisation is partly due to the fact that they generate value and productivity gains across two separate technological cycles.

This differs from the emergence of industries such as railways or automobiles, which saw large numbers of new companies created by major inflows of investment capital. Many of those firms were not viable, meaning that the few survivors became the leaders of the new industries.

Commodities and precious metals

Despite the important price increases seen this year, we are probably closer to the start than the end of what could evolve into the largest commodities cycle in history. Demand for battery metals is soaring due to the transition to electric power. Furthermore, supply is extremely tight.

Decades of underinvestment have left many commodities in a structural deficit. “Supply is struggling to keep up with demand, and that imbalance can only be resolved through significantly higher prices,” explains Gijsels. “Even massive investment in hard commodities³ could take a very long time to translate into increased supply. In the past, the prices of commodities in deficit have often risen very sharply.”

The bull market in precious metals is also still in its early stages. Gold, silver and platinum are likely to continue performing strongly in a volatile and inflationary environment.

Will the oil price surprise?

Oil is currently one of the few surplus commodities. In recent years, this additional supply has not come from OPEC+, but from U.S. shale oil production. There are signs that this growth in supply, particularly in the Permian Basin, is reaching its peak. This could lead to an unexpected development in 2026. The oil market could move back into balance, or possibly even into deficit, which would have consequences on the oil price.

Note: This text was finalised on 19 November 2025.

¹ Howe, N. (2023). The Fourth Turning Is Here: What the Seasons of History Tell Us about How and When This Crisis Will End. India: Simon & Schuster.

² De Leus, K. and Gijsels, P. (2024) The New World Economy in 5 trends: Investing in times of superinflation, hyperinnovation and climate transition. Tielt: Lannoo.

³ Examples of hard commodities are copper, aluminium and lithium.