Euro area: Few signs of US trade policies in April's macro data

US trade policy has clouded the growth outlook, but the first euro area data from April did not show the immediate negative impact on growth that was feared. The manufacturing sector, which is most directly affected by tariffs, recorded better than expected PMI numbers in April, with the index rising to 49.0 from 48.6 in contrast to expectations of a decline to 47.4. New orders were stable at 49.5 and the output index remained above 50 for the second consecutive month, indicating higher production. The PMI report does not include expectation for future growth, but looking at the German Ifo index for April, we did see manufacturing companies reduce expectations for future growth, but it was a rather small downward change. More worryingly, the services PMI dipped into contraction territory for the first time since November, as it declined to 49.7 from 51.0. This could be the first sign that weaker consumer confidence has translated into lower spending, which is mainly visible in the services sector, but it could also be that transport services have taken a hit as shipments to the US were paused. The uncertainty from the trade war is still high so the coming month’s data, particularly, on retail sales will be interesting to see the trade war impact more clearly.

Inflation in the euro area remained at 2.2% year-on-year in April, slightly above expectations of a decline to 2.1%. The stronger inflation figure was driven by core inflation, which rose to 2.7% year-on-year from 2.4%, surpassing expectations of 2.5%. Core inflation was anticipated to rise due to Easter occurring in April this year, compared to March last year, which typically raises travel prices. However, even when accounting for the Easter effect, core services inflation was strong, with monthly price increases of 0.50% in seasonally adjusted terms, marking the strongest growth rate seen in a year. As a result, there continues to be notable price pressures in services inflation. Despite this, we anticipate core inflation to decline in the coming quarters due to falling wage growth, a stronger euro, and weaker global owing to US trade policies.

The US trade policies were not visible in the growth data for the first quarter of 2025. Euro area GDP rose 0.4% q/q, which was more than expected, driven by Spain and Ireland, while growth in Germany and France was weak again. Any “front loading” of exports to the US in Q1 did not show up in the data as both Italy and France recorded a decline in exports, while Germany and Spain mainly saw growth due to domestic demand. Despite the positive start to the year, we expect growth in the rest of the year to remain muted and below potential. Domestic demand is expected to support activity as real wages are rising, the labour market is strong, and the lower ECB policy rates feed into the economy, while foreign demand will likely be a drag on growth due to the direct impact of tariffs and weaker US demand.

Weaker foreign demand and tariff uncertainty made the ECB strike a dovish tone at the April meeting, while lowering the policy rate by 25bp to 2.25% from 2.50% as widely expected. President Lagarde highlighted downside risks to both growth and inflation from the US’s trade policies. The comments during the press conference sent yields lower and markets increased expectations for future rate cuts. We continue to expect the ECB to deliver 25bp cuts at each of the three upcoming meetings, bringing the deposit rate to 1.50% by September 2025. For details, see ECB review - Dovish bias in troubled waters, 17 April.

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