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The tug of war between the United States and the European Union has begun. On March 12, the US administration raised tariffs on imports of aluminum and steel by 25%. In response, the EU has announced that it will reinstate, in mid-April, tariffs introduced during Donald Trump's first term, suspended since 2020
The unemployment rate held steady at 6.2% in January, an all-time low. Declines are most marked in southern Europe and Ireland, while the unemployment rate is relatively stable in France and Germany. Negotiated wages rose by 4.1% y/y in Q4 2024, less than in Q3 (5.4% y/y) but still well ahead of inflation.
The GfK index rose in February (+2 points to -22), but did not erase January's fall. The balance of opinion on the one-year financial outlook is back in positive territory. Retail sales rebounded by 1.6% m/m in January, after four months of decline. This upturn was confirmed by the BRC/KPMG survey, which showed retail sales (smoothed over three months) up by 2.2% y/y in February.
Inflation has probably eased in February, particularly in France due to the marked cut in the regulated electricity price. However, this overall movement masks divergent trends. Although disinflation is becoming more widespread (two-thirds of the components in Insee’s index show inflation below 2% y/y in January in France), prices continue to rise rapidly in services, in France as well as elsewhere in the Eurozone. In the short term, a return of energy price inflation is possible in the Eurozone, but this is likely to be short-lived. The ECB is likely to continue to cut rates at its 6 March meeting, but the persistence of core inflation (below but close to 3% y/y) could change the pace of cuts thereafter.
To reduce the United States' bilateral trade deficits, a subject already raised in a previous Chart of the week, the Trump administration has broadened its angle of attack, by attacking the differences in customs duties between the country and its trading partners. The introduction of reciprocal tariffs, still under study, would be specified at the beginning of April.
Economic surveys - for households and companies - started the year on a slightly more positive note. Consumer confidence (+0.3 points) benefited from a slight fall in indicators for unemployment and inflation prospects. The composite PMI index returned to expansion territory (+0.6 points to 50.2), with the contraction in the manufacturing industry easing slightly (+1.5 points to 46.6), while the services index fell dipped (-0.2 points to 51.4).
Les dynamiques de consommation et de production industrielle restent défavorables. Les ventes au détail (hors carburant) ont reculé de 0,5 % m/m en décembre et de 1,1 % au T4 par rapport au T3. La production industrielle qui a enregistré, entre septembre et novembre, trois mois de baisse successifs demeure sur une dynamique très difficile au démarrage de l’année 2025. Certes, le PMI manufacturier s’améliore (+1,3 point à 48,3) tout comme l’enquête mensuelle du CBI, mais l’enquête trimestrielle du patronat britannique chute à nouveau lourdement au T1
On both sides of the Atlantic, the recent rise in inflation has mainly been driven by volatile components (energy and food), while the core measures are stable. In the United States, inflationary momentum is more worrying, as economic activity remains strong and Donald Trump’s economic policies are likely to fuel further upward pressure on prices. The inflation outlook in the United Kingdom is more uncertain, with the main drivers (sustained wage growth and fiscal measures) being counteracted by the increasingly clear fragility of economic activity. Japan has been seeking higher inflation and it remains under control there, while in the euro zone, the 2% target remains in sight.
The labour market in the UK continues to deteriorate. According to tax data (PAYE) published on 21 January by the ONS, the number of employees in the UK fell by 46,922 (-0.2% m/m) in December, the largest one-month decline since November 2021, which followed a drop of -0.1% in November. The year-on-year change drops drastically and falls below zero (-8,407) for the first time since April 2021.
While the Bank of England's (BoE) decision to keep its key rates unchanged at 4.75% on December 19th was in line with market expectations, the vote by three MPC members in favour of a 25 basis point cut was less so. This week, which has had a wealth of economic indicators in the UK, will certainly have shifted the lines, between rising inflation in November and heightened fears that an overly restrictive monetary policy could derail the economic recovery. Indeed, the BoE has revised its growth forecast for Q4 downwards, from 0.3% to 0.0%.
The upcoming protectionist shift in the United States, the structural difficulties in industry and the political instability in France and Germany will limit the eurozone's economic growth margins in 2025. However, the labour market is holding up well in many countries (the unemployment rate in the eurozone is still at a record low level). In addition, some of the shock will be cushioned by inflation falling back down to its target level and by the continued cycle of interest rate cuts. Under these conditions, there is still anticipation of a slight increase in eurozone economic growth in 2025, to 1.0%, which will, again, be underpinned by significant differences in growth levels between Member States.
The UK’s policy mix (a combination of fiscal and monetary policies) is expected to be more accommodative in 2025. Its positive effects will be limited, however, given the very gradual fall in interest rates and the introduction of more restrictive budgetary rules. After GDP growth in the third quarter of 2024 fell short of expectations (+0.1% q/q), activity is expected to strengthen in Q4 (+0.3% q/q) before stabilising around this level in 2025 (between 0.3% and 0.4% q/q). The United Kingdom, which has a trade balance almost in equilibrium with the United States and exports mainly services to the US, also seems to be in a better position than its European neighbours to avoid the rise in US tariffs.
The ECB is still keeping control of things. This was the general message from Christine Lagarde at her press conference on Thursday 12 December. As expected, the ECB cut its key rates by 25 basis points for the fourth time since monetary easing began in June, taking the refinancing rate down to 3.5% and the deposit facility rate down to 3.0%. Inflation forecasts have been lowered slightly, with the forecast brought down to 2.1% for headline inflation and 2.3% for core inflation, before the two measures converge at 1.9% in 2026.
The eurozone’s net international investment position in terms of direct and portfolio investment recovered significantly between 2015 and 2022, becoming positive from 2021 onwards, meaning that the eurozone has become a net creditor to the rest of the world. However, the income it receives from these assets is lower than the income it pays to non-resident investors. What are the reasons for this?
The PMI indicator for the manufacturing sector fell further into contraction territory in November, down from 46 to 45.2. In particular, the employment index hit its lowest level since August 2020 (45.3). The momentum in services also reversed, with the PMI indicator slipping back below 50 in November, to 49.2. In addition, consumer confidence deteriorated in November (-1.2 points to -13.7, according to the European Commission's flash index) and only marginally increased in the second half of the year.
The decline in the PMI indices is less pronounced in the United Kingdom than in the eurozone, but it has been well underway since this autumn: the composite PMI fell by 1.8 points to 49.9 in November, with a deterioration in both the manufacturing sector (-1.3 points to 48.6) and in services (-2 points to 50). In addition, industrial production hit a post-Covid low in September, on a three-month moving average basis. As with industry, the residential construction sector remains depressed, with the PMI down 4.9 points to 49.4 in November. This follows a further contraction in housing construction (excluding social housing) of 0.7% in Q3, after a decline of 2.2% q/q in Q2.
The Autumn Budget, unveiled by Rachel Reeves on October 30th, attempts to reconcile fiscal adjustment, support for public services and strengthening of UK’s potential growth.
The outcome of the US presidential elections on 5 November will decide the extent of the protectionist turn taken across the Atlantic. However, global exports have so far resisted the rise in tariff barriers. By the end of the decade, the IMF forecasts growth in exports of goods similar to or even slightly higher than that of world GDP. Tighter protectionist measures will affect global growth, but the effects on international trade will be more nuanced.
The gradual improvement in household confidence indices in the Eurozone (financial situation and purchase intentions), supported by falling inflation, is still not leading to a rebound in consumption. Retail sales have been stable for a year, even though a slight rise of 0.2% m/m was recorded in August. Motor vehicle sales, which often display a significant change from one month to the next, rose by 8.2% m/m in September, but were down to their lowest level in three years on a three-month moving average basis.
While manufacturing activity in the United Kingdom, like elsewhere in Europe, is in a difficult state, the situation is less worrying across the Channel. Industrial production rose by 1.1% m/m in August, returning to its April levels. The year-on-year fall in output has almost completely subsided (-0.3% y/y). This situation is in line with the manufacturing PMI for October, which was down on the previous month (-1.2 points, to 50.3), but is still in expansion territory. The services PMI fell by 0.6 points to 51.8, and therefore also contributed to the decline in the composite index, which dropped by 0.9 points to 51.7 in October.
In its latest forecast dated 10 October, the WTO revised slightly its growth figures for global goods trade in 2024, to 2.7% (compared to an initial estimate of 2.6%) and to 3.0% in 2025 (compared to 3.3% previously). Although down 0.6% m/m in July, global export volumes remained on an upward trajectory until this summer. However, there are significant differences between geographical areas.
Growth in the Eurozone is expected to stabilise at 0.3% q/q in the second half of 2024, before picking up slightly in 2025, supported by the cycle of interest rate cuts. However, the difficulties in industry, highlighted by the deterioration in PMI indices in September, and the uncertainty about the Chinese economy, increase the downside risks to our forecasts. A more adverse scenario, in which the manufacturing sector drags the rest of the economy along with it, is not the preferred one at the time of writing. Although less pronounced, the differences in dynamism between countries and sectors are expected to continue into 2025.
The presentation of the budget on 30 October will be the first real test for Rachel Reeves. The deteriorating situation of the public accounts and the September 2022 mini-budget crisis, which is on everyone's minds, are leaving the Chancellor of the Exchequer with little room for manoeuvre. UK growth is expected to slow in the second half of 2024 (+0.3% quarter-on-quarter). The two policy rate cuts by the Bank of England (BoE) that we expect in 2024 (August and November) would enable growth to come close to its potential level during this year and in 2025.
Growth and inflation figures in the UK have surprised favourably since the beginning of the year. These results are of course welcome, but they do not reflect a genuine recovery in the economic situation across the Channel.
The newly elected Labour Party has set a target of 1,500,000 extra homes in five years, or 300,000 a year, in an attempt to stem the crisis in England's housing sector. This is not a new figure; it was already the one put forward in the Conservative Party manifesto when Boris Johnson was elected in 2019.
