EU economy grows moderately with fiscal divergence; domestic tax revenue shines in October while spending contracts; new policies inject momentum into private investment — 1120 Macro Summary

1. The European Commission released its 2025 Autumn Economic Outlook Report, stating that the eurozone economy will enter a new phase of moderate growth and declining inflation. However, the divergence in fiscal paths among member states will test the EU's policy coordination abilities, especially regarding France’s fiscal consolidation and Italy’s progress in exiting the excessive deficit procedure.
2. Domestic fiscal tax revenue in October performed remarkably well. However, fiscal expenditure contracted sharply, creating short-term constraints on infrastructure investment. Looking forward, broad-based fiscal policy is being implemented faster, but its stimulating effect is yet to become apparent, with the key window for policy effectiveness expected at the start of next year.
3. The General Office of the State Council issued “Several Measures to Further Promote the Development of Private Investment,” introducing 13 specific policies. This marks a shift in the policy approach from “relaxing market entry” to “comprehensive and systematic empowerment,” aiming to fundamentally reverse the downward trend in private investment growth.

I. Moderate Growth and Fiscal Divergence in the EU

Moderate Growth and Fiscal Divergence in the EU (HSBC)

HSBC points out that the European Commission has published its 2025 Autumn Economic Outlook Report, noting that the eurozone economy will enter a phase of moderate growth and inflation easing. Nonetheless, varying national fiscal paths will test EU policy coordination, particularly regarding France’s fiscal reform and Italy’s exit from the excessive deficit procedure.

1. The eurozone economy is expected to maintain moderate growth, but the fiscal deficit will slightly rise.
   • The latest autumn outlook estimates eurozone GDP growth at 1.3% for this year, 1.2% next year, and 1.4% in 2027. However, increased U.S. tariffs on EU imports may reduce EU GDP by approximately 0.3%.
   • The eurozone fiscal deficit is expected to gradually rise from 3.2% this year to 3.4% in 2027. Defense spending as a share of GDP will also increase. The European Commission expects a generally neutral fiscal stance next year, with slight tightening in 2027.
   • Inflation is projected to fall to 2.1% this year, 1.9% in 2026, and 2.0% in 2027.
   • Due to the ETS2 (EU Emissions Trading System), eurozone consumer energy prices may be boosted by about 3%. By weight, this would raise the HICP (Harmonized Index of Consumer Prices for the eurozone) by around 0.25-0.3%.
2. Italy may exit the excessive deficit procedure next spring, while France faces escalation if no further fiscal reforms are made.
   • European Commission Executive Vice President Dombrovskis seems to expect measures from the Commission to deal with the French National Assembly's policy of freezing the retirement age. In the absence of these measures, the Commission may determine in spring that France has not taken effective actions to address its excessive deficit.
   • The Commission seems to agree with the Italian government's view that Italy may exit the excessive deficit procedure a year ahead of schedule, which would be favorable for Italy.

The Commission believes the German government can quickly implement its fiscal expansion due to new tax relief measures. 

II. Strong Domestic Tax Revenue, Contracting Expenditure in October

Strong Domestic Tax Revenue, Contracting Expenditure in October (GF Securities)

GF Securities notes that domestic fiscal tax revenue in October was outstanding. However, fiscal spending contracted sharply, posing short-term constraints on infrastructure investment. Looking ahead, broad-based fiscal policy is being implemented more rapidly, but effects are yet to emerge, with the key window for impact seen at the beginning of next year.

1. Public fiscal revenue growth hit a yearly high, with strong tax performance.
   • October’s public fiscal revenue rose 3.2% year-on-year, reaching the highest monthly growth rate of the year.
   • Tax revenue was especially robust, rising 8.6% year-on-year, roughly in line with the previous value of 8.7%, and significantly above the cumulative year-on-year growth of 0.02% for the first eight months.
2. October’s robust tax revenue beat seasonal patterns.
   • Personal income tax performed well recently—up 16.7% year-on-year in September and accelerating to 27.3% in October. Possible reasons include:
     • First, active capital markets and wealth effects.
     • Second, the formal implementation in October of the “Regulations on Tax-Related Information Reporting for Internet Platform Enterprises,” which strengthened tax collection.
   • Consumption tax may have benefited from the recent rise in gold prices.
3. Fiscal expenditure growth fell sharply, pressuring infrastructure investment.
   • October fiscal spending dropped by 12.9 percentage points year-on-year to -9.8%, showing remarkable contraction and restricting infrastructure investment during the period. The decline was influenced by several factors:
     • Last year’s post-“924” conditions led to a high base.
     • This year, fiscal operations such as government bond issuance and transfer payments were moved forward.
     • Weak government fund budget income in October.
   • Due to weak expenditure in October, progress on fiscal spending from January to October was the slowest in five years, suggesting spending must ramp up in the last two months.
4. Broader fiscal policy is speeding up, but data remains mixed and effects are yet to be seen.
   • Amid an accelerated downturn in Q3 fixed asset investment, broad fiscal policy exerted notable effort at quarter-end, yet full effects need time to materialize.
   • Recently, 500 billion yuan of policy-based financial instruments were allocated, and an additional 500 billion yuan local debt quota was issued. Since October, soft indicators like construction orders and expectation indices have responded, but hard data like corporate long-term loans and core construction work volumes show no obvious change.
   • Policy impact is expected to become clearly observable in early next year.

Corporate income tax and domestic VAT improved due to sequential PPI improvement.

Dependence on non-tax revenue further declined, with non-tax income plummeting 33% year-on-year in October.

III. New Momentum Injected into Private Investment Development Policy

New Momentum Injected into Private Investment Development Policy (CSC)

CSC notes that the General Office of the State Council issued “Several Measures to Further Promote the Development of Private Investment,” introducing 13 specific policies. This marks a shift in approach from “relaxing market entry” to “comprehensive systemic empowerment,” aiming to fundamentally reverse the downward trend in private investment growth.

1. Private investment secures policy support, with hope for a reversal of its declining growth trend.
   • On November 10, the General Office of the State Council issued “Several Measures to Further Promote the Development of Private Investment,” proposing 13 targeted policy measures. Whereas previous policies emphasized relaxed market entry, these now upgrade to comprehensive systemic empowerment.
2.  Policy focuses on creating a guaranteed, executable pathway for private enterprises.
   • Addressing past concerns like “excessively low shareholding and lack of representation,” the current policy explicitly allows shareholding above 10%, signalling substantive participation instead of mere financial investment.
   • To counter “hidden barriers in bidding,” policies prohibit unreasonable requirements such as “branch company status, or specific historical performance.”
   • Policies also call for “further increasing government procurement support for SMEs,” sending a strong signal for private investment. In addition, banks must set service goals for private enterprises and implement inclusive finance, attempting to cure commercial banks’ reluctance or unwillingness to lend. The measures also support private enterprises issuing infrastructure REITs and guide private capital into low-altitude economy, commercial aerospace, digital transformation, and major national technology projects.
3. A series of substantive measures aim to reverse the declining growth of private investment.
   • For key projects that require state approval, such as those in railways and nuclear power with certain returns, private capital participation is encouraged.
   • Private capital is further encouraged in industrial design, generic technology services, inspection and testing, quality certification, digital transformation and other productive service sectors.
   • Government procurement support for SMEs will be further increased.
   • Support for leading private enterprises, chain enterprises, and third-party service providers in building comprehensive digital empowerment platforms.

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