Robust economy and Trump policies could derail inflation
Donald Trump’s inauguration on 20 January was a historic event. Since then, 65 executive orders addressing a wide array of subjects have been signed. The reciprocal tariffs to be phased in between April and August may treat foreign VAT as a tariff and are set to expand Trump’s trade defence arsenal further. Some levies may threaten US and global growth and could stoke inflation.
In January, month-on-month consumer prices came in higher than expected at +0.5%. Rents, which account for a significant share of the consumer price index, accelerated following six months of deceleration as the Los Angeles fires pushed them up. Residual seasonality may explain the inflation surge for other items in the index. While these seasonal effects may ease or even disappear in February, any stickiness would need watching closely, especially as producer prices are following a similar pattern.
Household inflation expectations are rising and affecting confidence levels. In January, month-on-month retail sales were sharply down (-0.9%) following an upbeat festive season. Households may have chosen to frontload durable goods purchases ahead of potential tariffs. The decline in January’s ISM services index to 52.8 from 54.1 coincided with the PMI services reading falling to 52.9.
In addition to price increases, the job market is also a key focus for households and the Fed. Employment data remain positive overall with the jobless rate falling to 4% in January. Weekly jobless claims are back below 220,000 and are not leading to an increase in layoffs. The ADP, which focuses on private sector employment data, published a robust report while noting a growing dichotomy between the strong hiring in consumer-facing sectors and weakness in business services and production. Overheating risks are fading as non-farm payrolls, which also include public sector jobs, rose less than expected and JOLT survey job openings data seemed to indicate that the labour market is easing.
The month-on-month recovery in industrial production (+0.5% in January following +1% in December) was an encouraging signal despite the domination of energy production in winter. December’s fall in factory orders was softened by more upbeat figures in January. The ISM manufacturing index inched back into expansion territory at 50.9 fuelled by new orders, and the manufacturing PMI was also in expansion territory at 51.2.
All told, the US economy is still growing and could compromise the inflation progress made so far. Upside risks to inflation should not be overlooked. The latest data do not indicate an overheating economy, whether in services, industry or jobs, and with rate cuts on hold, the Fed appears determined to restore price stability. However, the measures proposed by the new administration could unbalance this fragile equation and deserve scrutiny.
Facing adversity with optimism
The final quarter of 2024 saw the eurozone narrowly avoid the expected scenario of stagnation as quarter-on-quarter growth came in at 0.1%. The year-end figures put Europe’s annual growth rate near to 1%. The eurozone’s two main economies failed to gain ground compared with the third quarter.
In France, growth is returning to normal after an Olympic boost. It declined by 0.1% in the fourth quarter compared with previously but gained 0.7% compared with the same period in 2023. The job market remained healthy and consumer spending was upbeat, increasing 0.7% versus November. Although household confidence recovered, manufacturing sentiment deteriorated. Industrial production fell by 0.4% compared with November and was dragged down by a decline of 0.7% in manufacturing output.
In Germany, the picture looks bleak. As the election campaign kicked off at the end of 2024, the economy slowed even further. Unlike France, household consumption weakened as month-on-month retail sales fell by 1.6% in December. In manufacturing, and not unlike France, the eurozone’s former industrial powerhouse has stalled. German industrial production contracted by 2.4% in December.
That being said, both French and German manufacturing PMIs are tending to improve and currently hover at 45. Other bright spots in Germany were an improvement in industrial orders (+6.9% in December) and a further rise in exports.
In Southern Europe, the economy remained upbeat with Spanish industry still a driving force. The job market was underpinned by healthy trends and unemployment came in stable at 6.3%.
Unemployment in Germany and Italy stabilised at around 6.2%, while in France it fell to 7.3%. Italian manufacturing lost steam at the end of the year following a good run up to that point.
In addition to reassuring unemployment data in Europe, labour market tensions are easing. This is good news for the ECB. After peaking at 5.3% last year, wage growth, which is a key inflation driver in services, should return to normal over the course of 2025 to settle at an annual rate of 1.5% in the fourth quarter. For the ECB, which has cut its deposit rate by 25 bps to 2.75%, moderate wage growth is a key condition for easing monetary policy.
While the eurozone consumer price index data published in December and January were a reminder that the inflation fight is not over yet, January’s fuel price rises and VAT increases appear to have been major contributors. Core inflation remained stable on an annual basis, helped by stagnant services prices. For the time being, the figures do not call into question the scenario of falling eurozone interest rates and a potentially positive contribution from household spending as real incomes improve.
2025 starts worse than 2024 ended
Chinese economic growth came out better than expected in the fourth quarter at +5.4% year-on-year. Healthy foreign trade helped to counterbalance sluggish domestic consumption. In December, year-on-year exports rose by almost 11%. The trade surplus reached a record level of USD 104.8 billion, including USD 33.5 billion with the United States. This reveals that despite a very gradual transition to a post-industrial model focused on domestic demand, China still relies on foreign trade.
Domestic consumption, held back by the housing market crisis, showed signs of stabilising in December. Retail sales increased by 3.7% year-on-year. Imports were back in positive territory.
The uptick was less visible in the property market, where prices are still sagging but no longer collapsing, with new-home prices resisting better than existing-home prices. The glut of housing stock to be sold remains high. In December, property sales continued to improve while remaining negative (-17.6% compared with December 2023). As a result, property investment, which has always been an important sector for the Chinese economy, remains under pressure and fell slightly in December (-10.6% in 2024).
The confidence surveys published since December temper the strength of the fourth-quarter data. Both the official manufacturing PMI (49.1) and that measured by S&P (50.1) fell between November and January. December’s rebound in the Caixin services PMI was also short-lived, potentially foreshadowing a less favourable start to the year.
December’s good performance in retail sales, boosted by subsidies for durable goods such as household appliances and audiovisual equipment, likely reflects the one-off nature of these expensive, discretionary purchases.
Strong deflationary pressures persist despite a shift in the right direction from the previous year in January’s consumer price index. All told, China is facing headwinds that call for additional stimulus. The challenge will be delivering sufficient economic growth to restore household confidence in the Chinese Republic’s common prosperity policy.
See also: https://latribune.lazardfreresgestion.fr/en/macroeconomic-focus-june-2024/
The opinion expressed above is dated 21 February 2025, and is liable to change.
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