Japan is heading for a year without quarterly growth. Domestic demand is still constrained, with nominal wages rising at a slower pace than inflation. In addition, the trade policy of the United States, Japan’s largest export market, poses a downside risk.
On Wednesday 5 March, the 10-year Bund yield increased 30bp, the biggest rise since the fall of the Berlin Wall. It continued to move higher the following days, reaching a peak on 11 March. The trigger was the announcement by Friedrich Merz (CDU) and the heads of the CSU and SPD during an evening press conference on Tuesday 4 March 2025 that they agreed to reform the debt brake, that defence spending above 1 percent of GDP would be exempt from this debt brake and that a EUR 500bn fund for infrastructure investments would be created. The developments in the German bond market had sizeable spillover effects across markets in the Eurozone. This didn’t come as a surprise.
By accelerating the fall in oil prices, the timing between OPEC+'s decision to accelerate quota easing, and the Trump administration’s announcement of the start of a tariff war could limit inflationary pressures for US consumers and put pressure on the cartel's undisciplined members. However, the convergence of interests between the heavyweights of the oil market is likely to be short-lived. This policy is likely to make the economic equation increasingly difficult for US producers. At the same time, by putting pressure on public finances, it poses a risk to the cohesion of the cartel.
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Last week, the Trump administration announced tariffs against the entire world which, added to those of previous weeks, will raise the average external tariff of the United States to 22%, compared with 2.5% at the end of 2024. Financial markets have reacted extremely badly, and suggest even more serious fears for US growth than for global growth. Many unknowns remain, but this scenario is the most plausible. For the United States' trading partners, it would be better to resist the temptation to escalate and instead to double down on strengthening the engines of domestic growth. Europe is particularly well placed to do this.
The vulnerability of ASEAN countries to US trade protectionism has increased significantly since 2017. The US has become a key destination for these countries, which export low-intensity tech products (such as textiles and footwear) as well as medium-intensity tech products (mobile phones) and high-intensity tech products (integrated circuits and semiconductors). Vietnam, Thailand and, to a lesser extent, Malaysia have the largest trade surpluses with the US and are therefore the most exposed to a change in US tariff policy.On 2 April, the US government announced an increase in tariffs on ASEAN countries that goes well beyond simple reciprocity
How will Beijing react to the imminent US protectionist measures? Will the central bank allow the yuan to depreciate in order to offset the effect of tariff hikes on the price competitiveness of Chinese exports?
President Donald Trump has promised to bring manufacturing jobs back to the USA and make America again “the manufacturing superpower of the world that it once was”. This, of course, is the foremost objective of his radical tariff policy (alongside raising revenue and pressuring trading partners to deliver non-trade-related concessions). In his analysis, the US persistent trade deficit is evidence that the rest of the world is “ripping off” the US, through unfair trade barriers and overly weak exchange rates. As a result, the argument goes, the US industrial base is being hollowed out, undermining the living standards of Americans.
The message delivered by Beijing at the annual meeting of the National People's Congress at the beginning of March was clear: whatever the difficulties linked to trade and technological rivalries with the United States, the Chinese economy must achieve growth of close to 5% in 2025. The target has remained unchanged since 2023. It seems particularly ambitious this year, given that external demand, the driving force behind Chinese growth in 2024, is set to weaken significantly due to the rise in protectionist measures against China. The authorities are counting on domestic demand to pick up the slack, but this is still coming up against powerful obstacles
After being left reeling by the unexpected money-market crisis during its first round of quantitative tightening (QT1), the US Federal Reserve (Fed) intends to manage the second (QT2) with the utmost caution. This means reducing its securities portfolio without creating a shortage in central bank money, in view of the liquidity requirements imposed on banks under the Basel 3 framework. As it is unable to estimate the optimum amount of central bank reserves needed to ensure that its monetary policy is properly implemented, the Fed aims to reduce the stock of reserves to a sufficiently "ample" level.If QT2 is ended too early, it would have to activate its liquidity draining tools in order to limit the downwards pressure on short-term market rates
The FOMC kept the target range for the Fed Funds rate at 4.25% - 4.5% at the 18-19 March meeting, as widely expected. Jerome Powell and the committee have started to price in downward risks to economic activity and upward risks to inflation. In the short term, the stability of the dot plots, the downplaying of the long-term tariff related risks and the consistent message of patience are aimed, implicitly, at providing stability in the midst of the current turmoil. In our scenario, the FOMC is expected to cut the rates quite sharply in 2026.
They say the Davos consensus is always wrong, but it usually takes longer than a couple of months to be apparent. Not so in 2025.
Our nowcasts for Q1 show moderate growth in the euro zone (+0.2% q/q) and in France (+0.1% q/q). The Atlanta Fed's GDPNow, on the other hand, suggests the risk of a significant slowdown in US growth in Q1. In other countries, our forecasts are for continued outperformance in Spain, rebounding growth in Italy and the UK, and moderate growth in Japan. In Germany, growth is likely to remain weak in Q1, with the upside risks associated with the next government taking office more likely to affect Q2. Chinese growth is exposed to downside risks.
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 IFO business climate index remained stable in February compared with January, at 85.2, and remains close to the low recorded in November (84.7). It is the situation of industry that is having the greatest impact. Industrial output, including construction, contracted again, by 0.7% q/q in Q4 (the 6th fall in 7 quarters). However, January's figures show a slight rebound (+0.6% month-on-month on the 3-month moving average).
Household confidence rebounded from 89 in December to 93 in February (95 in September, 100 on long-term average). The balance of opinion on past price trends, at -5 in February, reached its lowest level since July 2021. On the other hand, the balance of opinion on fears of unemployment rose again in February (+55, compared with +29 in September), fuelling the opportunity to save.
