Intesa Sanpaolo : The new front opened in the trade war launched by the Trump administration, that of „reciprocal“ tariffs, would also affect the EU, which would be potentially disruptive if reciprocity also takes into account VAT taxation.
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Weekly Economic Monitor – 14. February 2025
Intesa Sanpaolo – Research Department – Luca Mezzomo Economist – Paolo Mameli Economist – Andrea Volpi Economist Euro Area – Mario Di Marcantonio Economist US – Silvia Guizzo Asia Ex Japan
On the strictly economic front, recent stronger-than-expected data on the labor market and prices are consistent with a pause in the Fed’s easing cycle that is longer than previously estimated. In Europe, signs of cyclical weakness continue to intensify, particularly in the industrial sector, signaling an increasing likelihood of a divergence in the path of official interest rates on the two sides of the Atlantic.
United States:
In the last week:
New announcements on the tariff front. After the suspension (at the moment, until March 4) of the 25% tariffs on Canada and Mexico (while the additional +10% on China has been in effect since February 4, although the stop on exemptions on small deliveries is suspended sine die), 25% tariffs on steel and aluminum have been announced as of March 12 (the countries most affected are still Canada and Mexico). In addition, a new front has opened: a plan to „equalize“ the duties imposed by other countries on the U.S.; at the moment, it is unclear whether „reciprocity“ will be based on average duties by country or by sectors or products, and especially whether it will include non-tariff barriers (from taxation, including VAT, to industry subsidies and exchange rates). The weighted average level of tariffs applied by the 15 major trading partners of the U.S. is 6.7%, only slightly higher than the 4% applied by the U.S., so the effects would be relatively small (the countries most affected would be China, India, Vietnam and Thailand, but the EU would also be hit, particularly Germany and the auto sector). On the other hand, if reciprocity is based on the sum of tariffs and VAT rates, the average effective tariff rate on all U.S. imports would rise from less than the 3% to about 20%: this would have an upward impact of up to 2% on the U.S. CPI. The most affected countries would be India (29%) and Brazil (28%), followed by the EU (25%), UK (24%), Mexico (23%) and Canada (19%).
Labor market more robust than previously estimated. The January employment report (released Friday, Feb. 7) showed lower-than-expected payrolls growth of about 30k for the month, but revisions to earlier data showed 100k more jobs than previously estimated over the past two months. The unemployment rate fell to 4% from 4.1%, in a context of higher participation (62.6% from 62.5%). Hourly wage growth saw a two-tenths acceleration on a monthly basis (to 0.5% m/m), and the annual change is higher thanpreviously estimated (4.1%).
January CPI and PPI above expectations. Consumer prices rose by as much as 0.5% m/m (the largest monthly increase since August 2023), accelerating by a tenth year-on-year to 3% (highest since June 2024); the core CPI also saw acceleration both in the month (to 0.4% m/m, the strongest monthly growth since March 2024) and over the year (to 3.3%). The PPI also surprised on the upside, albeit to a lesser extent. Overall, the data are not consistent with a Fed rate cut before June, but even a resumption of the monetary easing cycle starting in June requires inflation data to improve significantly within a few months; otherwise, the Fed could further delay the expected „normalization“ of rates.
Fed members speaking this week expressed cautious tones consistent with an extended pause in the monetary easing cycle. Powell, in his testimony to the House Financial Services Committee, reiterated that the Fed is in no hurry to cut rates, pending further progress on inflation. Among FOMC voting members, Kugler (Board) said progress on inflation remains slow and uneven; Goolsbee (Chicago Fed) appeared more cautious than usual; Williams (NY Fed) was more dovish: he believes the labor market is in balance and sees inflation falling to 2.5% in 2025 and 2% in the next few years. Among non-voters, Bostic (Atlanta Fed) stressed the need to still closely monitor inflation, while Hammack (Cleveland Fed) believes it is appropriate to keep rates stable for a longer period, given the persistence of inflationary risks.
Among the few data releases next week:
February regional surveys: mixed signals. The Empire Manufacturing index is expected to improve from January but to remain in negative territory, at -1 from -12.6. Conversely, the Philly Fed could slow after last month’s jump, to 25.4 from 44.3.
Real estate sector: slowdown expected. Housing starts are seen down -7% m/m in January, following a +15.8% m/m jump in December. Building permits are expected to fall more broadly than in December (-2.3% m/m from -0.7% m/m). Existing home sales, after three consecutive months of growth, could drop by as much as -3.3% m/m after the 2.2% m/m growth seen in December.
Finally, the minutes of the January 28-29 FOMC will be released.
Eurozone:
This week:
December industrial production down sharply in both the Eurozone and even more so in Italy. In the euro area, output contracted -1.1% m/m after growth of 0.4% m/m in November; the y/y change stood at -2% from -1.9% previously, for the 20th month in a row in negative territory. In Italy, the decline was even more pronounced (-3.1% m/m from 0.3% in November, -7.1% from -1.6% year-on-year adjusted for calendar effects): the figure signals a possible downward revision, from zero to -0.1% q/q, of the Q4 2024 GDP figure. Overall, recent indications on industry in the Eurozone confirm that the sector is expected to continue to dampen GDP at least further through the first half of this year.
GDP revised up in Q4, employment still growing, albeit at a modest pace. In the Eurozone, the second estimate saw a one tenth upward revision to 0.1% q/q (0.9% y/y) of GDP growth at the end of 2024. The revision is marginal, in line with our initial forecast, and does not change the picture of weakness for the European economy which, after a full- year growth of 0.7% last year, is expected to maintain a rather sluggish pace of expansion in 2025, below 1%. In Q4, employment rose by 0.1% q/q (0.6% y/y), a slight deceleration compared to the previous 0.2% q/q, marking the fifteenth consecutive quarter of payroll growth. Over the past three years, hiring has outpaced economic growth, translating in a deterioration of productivity, which has only recently begun to stabilise, although it is likely to remain subdued over the next few quarters.
Next week, the February round of confidence surveys opens:
We expect the flash PMI estimates to show a moderate recovery from the previous month. In manufacturing, the January reading showed a widespread recovery in the „orders- stocks“ leading indicator; however, given rising energy prices and persistent difficulties in automotive, we expect only a modest increase to 46.8 from 46.6. The services PMI could rise to 52 from 51.3 (however, in the post-pandemic era, the improvements recorded by the services PMI in the first part of the year have not then translated into an actual acceleration of value added in the sector).
In France the INSEE manufacturing is expected to be back up in February, we estimate at 96 after falling to 95 the previous month. The typically volatile transportation equipment sector could recover after January’s large decline. However, the monthly Banque de France survey confirmed the weakness in demand for goods with no clear signs of reversal for the sector. However, the recent approval of the 2025 budget should help reduce business uncertainty at least on the domestic front.
In Germany, the ZEW index could show an improvement in investor confidence in February, as anticipated by the similar Sentix survey this week. Six-month expectations could rise to 15.5 from a previous 10.3, buoyed by the projected rate cuts and the suspension of U.S. tariffs on Mexico and Canada. The current situation assessment could come out little changed at still depressed levels (-90.3 from -90.4).
The flash estimate of the Consumer Confidence Index compiled by the European Commission may be recovering slightly further to -14 from -14.2, held back by the recent increase in energy prices.
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