Economy

“The ECB’s job has gotten a lot more complicated on the back of “liberation day”. While there can be little doubt that the announced sharp increase in tariffs will be weighing on growth, it is too early for a proper assessment of the magnitude of the impact on growth and inflation. We would expect the updated staff projections for the June meeting to be the appropriate point in time to decide to what extent a, potentially significant, change in the baseline scenario is needed. For now, we expect the ECB to simply stress the increased downside risks stemming from latest developments. At the same time, the inflation picture has improved further from the last meeting with services inflation now displaying a more meaningful decline. This, in addition to the rising downside risks to growth, should prepare the ground for another 25bp cut of policy rates at the April meeting.”

Dr Dirk Schumacher

“Inflation in the Euro Area is back on course for 2%. Nevertheless, a look at the details reveals a mixed picture. Food prices are rising faster. European consumers are feeling this directly in their purchases. The development of global agricultural commodities suggests that food price pressure will remain high for the time being. On the other hand, lower energy prices are providing relief. Advocates of a further interest rate cut by the ECB will be strengthened in their position by the decline in service inflation in particular. Together with concerns about a weakening of the already ailing European economy due to rising US import tariffs, this argues for a further reduction in the deposit rate as early as April. The financial markets are pricing this in with a probability of over 80%.”

Stephanie Schoenwald

“A strong tailwind from the energy markets kept inflation in check in March. Brent crude oil became considerably cheaper in a monthly comparison. At the same time, the euro benefited from the announcement of the massive fiscal package and gained in value against the US dollar. As a result, German consumers were able to enjoy falling fuel prices. In view of the volatile geopolitical situation, however, it is impossible to rely on permanently lower energy prices and the development of industrial goods prices is heavily dependent on the course of the customs conflict. It is therefore all the more pleasing that visible progress has finally been made with services inflation. However, part of this is probably due to the early timing of Easter last year. Only April will shed light on how sustainable the easing of price pressure in the services sector actually is.”

Stephanie Schoenwald

“Companies are placing new hope in the coming government and the comprehensive modernisation of the country intended by the amendment to the constitution. The reform of the debt brake and the new Special Fund Infrastructure could become a game changer for Germany. However, for the turnaround in growth to succeed, more is needed than a government credit turbo. In order to get the additional horsepower on the road effectively, it is essential to reduce bureaucracy, speed up approval procedures, reduce supply-side bottlenecks, for example due to a lack of skilled labour, and – particularly in the development and procurement of defence equipment – to cooperate within Europe.”

Dr Klaus Borger

“Due to the continued high uncertainty, the Fed will keep the key interest rate constant at 4.25 to 4.5 percent in March. However, the pressure on the US central bank is likely to increase with each further pause throughout the year. On one hand, there are concerns about a recession and a potentially cooling US labour market. On the other hand, Donald Trump's trade policy threatens to jeopardise the Fed's price stability target. As if that weren't enough, Trump's ongoing demands for low interest rates could lead to a conflict with Fed Chair Powell and further exacerbate the existing turbulence in the financial markets. As a result, interest rate policy could become a balancing act for the US central bank.”

Dr Stephan Bales

“The German economy is stuck between weak demand and long-delayed structural problems. After another slight contraction last year, our economic output is practically the same as in the pre-coronavirus year of 2019, unlike in the other major industrialised countries. The five-year stagnation phase is like mildew on the mood of households and companies, which prefer to keep their money together rather than invest or consume it. In order to finally get the economy back on track, besides containing the numerous global crises and uncertainties, what is needed above all are convincing answers from policymakers and companies to the huge transformative challenges, especially in industry, before the labour market suffers even more.”

Dr Klaus Borger

“The start of the interest rate turnaround is approaching in the eurozone. I expect the deposit rate to be lowered in July at the latest. Overall, consumer price inflation remained unchanged in April. However, the fact that services inflation has eased after a five-month standstill is likely to be more important for the ECB. At the same time, the growth environment in the eurozone suggests that inflation remains on target. Although gross domestic product surprised on the upside in the first quarter and sentiment has recently brightened somewhat, the European economy is likely to be slow to pick up speed. This suggests limited domestic price pressure. However, the development of energy prices remains a risk factor for inflation and the economy due to the ongoing geopolitical tensions.”

“The economic outlook for the German economy is better than the current mood. The data on wage developments reported today confirm the assessment that private consumption should sustain a moderate economic recovery. The gap between inflation and nominal wage growth is visibly closing. A more significant increase in real wages can be expected at the end of the year. Driven by high price increases and the shortage of skilled workers, employees will receive the highest nominal wage increases in 30 years in the current year. On average, collectively agreed wages are expected to rise by more than 5% in 2023. A smaller increase is expected for next year. However, at around 2.5% (HICP), inflation in 2024 is likely to be much lower than in the current year, for which I expect average inflation of 6.3%. Subdued aggregate demand limits the scope for further price increases, and prices for both energy and food have already stabilised since the winter. If this development continues, real wages will rise noticeably again next year. This also gives rise to cautious optimism for the economy. In 2024, German GDP should therefore grow again after a decline of 0.4% this year, albeit only moderately at 0.8%.”

"The US economy grew by 2.4% on an annualised basis in the second quarter. The US economy is proving resilient despite the Federal Reserve's aggressive turnaround on interest rates. Stable consumer spending and nonresidential fixed investment had a positive impact. However, I continue to expect rising interest costs to slow economic activity in the second half of the year. Sentiment in the manufacturing sector has already deteriorated noticeably and the labour market, which has been clearly overheated lately, seems to be slowly cooling down somewhat. Workers will feel the impact, which will weigh on consumer spending in the coming months. However, on Wednesday, in parallel with the expected interest rate hike of a further 25 basis points, the U.S. Federal Reserve changed its assessment of current U.S. growth from "modest" to "moderate". The Fed now probably assumes that it only needs an economic dip – and not a recession – to push inflation further toward the two-percent target. This means that the US economy could come out of this interest rate cycle with a black eye.”