Weekly Update - Trade war muddies growth figures

Growth figures for the first quarter of 2025 for major economies show a marked effect of the US trade war. Indeed, US GDP contracted due to very strong growth in imports, as households and businesses accelerated their purchases of imported goods to avoid the new customs duties. This anticipation is also reflected in consumption data, which have remained resilient but whose outlook is clearly deteriorating. On the other hand, GDP growth in Europe and China exceeded expectations with very strong increases in exports to the United States.
 
A contraction in US GDP due to imports. While GDP had ended 2024 at a growth rate close to 3%, activity contracted by 0.3% in Q1 25 on an annualised basis (+2% year-on-year). This contraction reflects above all the very strong growth in imports of goods, at 51% Q/Q annualised and 15% year-on-year. This increase is also reflected in a greater widening of the trade deficit in goods, to 5% of GDP. The increase in imports reflects an increase in purchases of goods by households and businesses in anticipation of the implementation of generalized customs duties. Thus, private domestic demand grew by 3% Q/Q annualised, supported by a 22% Q/Q annualised growth in capital goods investment. The effects of the trade war are also visible on surveys of businesses and households. Indeed, while the recent activity and outlook components remain resilient, activity and price expectations are very badly oriented, predicting less dynamic domestic demand for the coming quarter.
 
Upside surprises in Europe and Asia driven by exports. In contrast to the US GDP figure, the euro zone and Asian economies posted stronger-than-expected GDP growth. In the eurozone, GDP growth surprised the consensus upside in Q1 25, with an increase of 0.4% Q/Q (1.2% year-on-year). While the components of GDP have not yet been released, country-specific data suggest that exports contributed to this growth surprise. Indeed, Ireland and Belgium posted very strong quarterly growth (3.2% and 0.4% respectively Q/Q), yet these countries are the main exporters of pharmaceutical goods to the United States. Outside these countries, growth in the euro zone amounted to 0.3%, and excluding exports, activity is said to have remained moderate in the main economies of the euro zone (0% in France over the quarter). This same phenomenon is visible in Asia. China posted growth of 5.4% in Q1-25 with a strong contribution from industrial production and exports. Finally, as in the United States, while past data show a resilience of activity, surveys are less positive, with, among other things, estimates of new orders falling
 
This uncertainty will continue to increase the volatility of activity. It is likely that uncertainties about US trade policy will continue to weigh on the behaviour of households and businesses and therefore on activity data. Indeed, the generalized tariffs came into force in April and the U.S. government continues to maintain uncertainty about the coverage of these tariffs and the rate actually applied. In this environment, it is likely that households and businesses will delay their plans for major spending until they have more visibility on the outcome of trade negotiations. Overall, these uncertainties are expected to weigh on US demand, increasing the risk of stagflation for the current year.
 
Other highlights of the week
 
In the highlights of the week, we chose to talk about euro area inflation April figures, brent price evolution in April and the US job market.
 
Inflation continues to trend down in euro area
Inflation continues at its gradual slowing pace. Indeed, headline inflation rose to 2.1% in April year-on-year while core inflation rose to 2.7%, up from April. This figure, above expectations, is mainly explained by the acceleration of services inflation (3.9%), supported in part by seasonal effects linked to the Easter period. Goods inflation remains very moderate, with an increase of 0.6%.
Sharp drop in oil prices in April.
Compared to April 1, Brent is down 17%. This decline is explained by trade tensions between China and the United States. These raise fears of a drop in activity, which would mechanically reduce demand for oil. At the same time, the past and planned increase in its oil production by OPEC also plays in favor of the decline.
United States: a still resilient labour market
The labour market remains generally resilient both in terms of job creation and the unemployment rate in April. Indeed, the number of net job creations amounted to 177 thousand, above market expectations and in line with the average number of job creations before the covid crisis. By sector, health remains the most dynamic sector, with 58 thousand net jobs created in the month. It should be noted that net job creation in the federal government sector contracted by 9 thousand positions, in the context of the DOGE framework. The unemployment rate for April rose to 4.2%, slightly higher than at the beginning of the year. These figures are in line with a US economy that is slowing from a very strong level in 2024. However, this market remains generally resilient, in a context of high uncertainty, which should lead the Federal Reserve to keep its interest rate at 4.5% next Wednesday.

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