In April, US economic policy moves – particularly on trade and tariffs – grabbed investor attention, with spectacular consequences for global financial markets. As the dust settles (while not discounting possible further unexpected gusts), it appears worth pausing to look at what has been happening elsewhere.
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Surprises in Germany
For the first time in post-war history, it took more than one round of voting in parliament to appoint a chancellor. While Friedrich Merz was elected in the end, the hiccup highlighted the fragility of his coalition between the centrist CDU/CSU and the leftwing SPD. Investors will be keeping a close eye on whether its narrow majority suffices to advance ambitious fiscal projects in the coming months.
Economic news from Germany has reassured in recent weeks: GDP growth was 0.2% in the first quarter. The German statistics office cited higher household spending and fixed investment.
In other eurozone economies where growth numbers were published, the message was not as favourable. In France, for example, private consumption stagnated, and investment fell, leading to a modest increase in GDP of just 0.1%.
Also, reassuringly, German manufacturing – accounting for around a fifth of the economy – showed signs of recovery. April’s purchasing managers’ index for the sector returned to its highest since August 2022, at 48.4. It was the fifth consecutive monthly increase. Industrial activity appears to be exiting the doldrums it was stuck in last autumn.
‘Hard’ data is endorsing such ‘soft‘ (survey) data: Industrial orders and manufacturing sales are on the rise. At 86.9 in April, the business climate, as measured by the Ifo index, surpassed expectations as the perception of companies of their current situation improved. The index set a high point since last August. However, the outlook deteriorated slightly, and uncertainty is high, leading the Ifo institute to conclude that ‘the German economy is preparing for turbulence.’
What’s up in the eurozone?
At 0.4%, GDP growth in the first quarter exceeded market expectations due to good German growth and a buoyant 3.2% increase in Ireland boosted by a front-loading of pharmaceutical exports. Take Ireland out of the equation and first-quarter eurozone GDP growth was actually more modest, at 0.2% – probably a truer picture of the state of the eurozone economy.
The European Commission’s economic sentiment index (ESI) in April broadly confirmed the message from other surveys. In France, INSEE reported a ‘gloomy’ business climate.
For the eurozone as a whole, the ESI dropped as conditions in the services sector worsened. Consumer confidence fell on concerns over the perceived impact on inflation and employment of the US tariffs. At 93.6, the ESI fell to a year low, well below its long-term average of 100. Hiring intentions in the eurozone were also down.
Let’s remember that the ECB pointed out an economic outlook ‘clouded by exceptional uncertainty’ at its monetary policy meeting on 17 April. It has conveyed a clearly dovish message on policy since then, suggesting it is willing to continue cutting interest rates at a sustained pace.
Core inflation had fallen to 2.4% in March, its lowest since January 2022, before an acceleration to 2.7% in April. This was due to the usual distortion around Easter (mainly package holiday prices in Germany). The ECB’s leading wage indicators were reassuring just when ECB President Christine Lagarde reiterated that she was ‘particularly attentive to wages in all their dimensions’.
In other words, disinflation appears well on track. The ECB has made it clear it believes the inflation risk from the tariff-led trade tensions is ‘rather low’ or even ‘tilted to the downside’. This is a significant change from its initial comments, when the diagnosis was much less clear.
Downside risks to growth and the likely return of inflation to its 2% target have put the ECB in a much more comfortable position than the US Federal Reserve when it comes to the central bank’s ability to cut rates.
In the spring of 2024, expectations of a cut in key ECB rates had helped to improve business and consumer confidence. Now uncertainties over the outlook have reached unprecedented levels. At this point, reassuring economic actors by implementing an accommodative and well signposted monetary policy (i.e., further rate cuts) should help support the economy.
A guided tour of Japan
The Bank of Japan’s quarterly Tankan survey pointed to improved business confidence thanks to stronger than expected results in the non-manufacturing sector. Confidence in the manufacturing sector has likely been affected by uncertainties around the US’s protectionist trade policy. It could yet worsen as the survey period (26 February to 31 March) ended just before the US announcements on 2 April of ‘reciprocal’ tariffs.
Later in April, the US administration indicated that it had had ‘constructive trade talks’ with Japan. This could reassure companies. So far, according to the Tankan, capital expenditure plans have reflected some caution despite companies seeing financial conditions as ‘easy’.
Such an assessment appears consistent with the BoJ’s analysis. This mentioned an ‘adjustment’ to its monetary policy rather than a tightening. Expectations of a further rise in key rates still persist, although they receded somewhat during April. In a speech to parliament, the central bank’s governor was cautious in assessing the effects of the US tariffs on the Japanese economy.
As expected, the BoJ held rates steady on 1 May. Its conclusions, however, appeared more dovish: “The timing for underlying inflation to converge toward 2% has been pushed back somewhat. But that doesn’t mean the timing of further rate hikes will automatically be delayed by the same margin”. Clearly, the BoJ is still contemplating raising its base rate (from 0.5% in January), but is warning that it will act with caution.
For the past three months, inflation in services prices (excluding rents) has stabilised at around 2%. However, surveys have shown that households’ perception of inflation exceeded the actual data. This explains the decline in consumer confidence since the beginning of the year.
In view of the likelihood that the economy will suffer from the tariffs, the Tokyo government has just announced an emergency support plan to protect employment and finance small businesses.
