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Daily Economic Update
02.02.2025US: Trump imposes tariffs on Canada, Mexico and China, and threatens the EU with the same. President Trump imposed 25% tariffs on imports from Canada and Mexico and 10% on Chinese goods, effective Tuesday morning, citing flows of illegal immigrants though the Canadian and Mexican borders and illegal drug imports from all three countries. However, energy and oil imports from Canada would be subject to a lower 10% duty. Mexico, China, and Canada were the US’s top trading partners in 2023, exporting around $465 billion, $400 billion, and $375 billion worth of goods to US, respectively. Trump’s orders also included retaliation clauses that would increase US tariffs further if the countries respond in kind. Canada announced retaliatory measures, imposing a 25% tariff on around $107 billion of US imports while Mexico mentioned that they are preparing a retaliatory plan, while China vowed to retaliate, pledging, for now, to seek WTO intervention on the matter. Over the weekend, Trump also doubled down on his threats to impose duties on EU imports, without specifying many details. After following a milder than expected approach during the first week of his presidency, Trump has now significantly escalated worries about trade wars, which should raise uncertainty about the growth and monetary policy outlooks in 2025.
US: Fed keeps policy rate steady, Powell stresses no hurry to cut rates. The FOMC, in a unanimous vote, left the Fed fund rate at the 4.25-4.5% range as widely expected, after cutting by 100 bps at its last three meetings of 2024, citing "solid labor market conditions" and “somewhat elevated” inflation. Chair Powell, in the post-meeting conference, mentioned several times that the bank “was not in a hurry” to adjust the policy stance as it looks for further progress on inflation. He also stated that officials will be waiting for more clarity regarding the anticipated policies under the new administration and their actual enactment to gauge the impact on the economy. He also stayed clear of offering any remarks on President Trump's “demand” for lower interest rates. Meanwhile, economic data came in mixed, as GDP growth in Q4 slowed more than forecast to 2.3% (annualized) from Q3's 3.1%, mainly on a significant 7.8% fall in business equipment spending. Still, the key driver of economic resilience thus far, personal consumption, continued to be solid, logging its highest growth (4.2%) in seven quarters, helped by a relatively robust job market. For the full-year 2024, the US economy grew at a very strong pace of 2.8%, albeit slightly softer than 2.9% in 2023. Furthermore, PCE inflation in December matched consensus forecasts, rising to a seven-month high of 2.6% y/y (0.3% m/m) from 2.4% in November, with core price rises remaining sticky at 2.8% (0.2% m/m) for the third consecutive month. Futures markets were little changed and continue to price-in around two rate cuts of 25 bps this year.
Eurozone: ECB cuts rates again as growth remains flat and inflation nears 2% target. As widely expected, the European Central Bank (ECB) cut the deposit facility rate by 25 bps to 2.75% on Thursday. The decision brought the benchmark rate to its lowest level since early 2023 and highlighted upcoming headwinds to the Eurozone economy. According to ECB President Lagarde, growth is expected to remain weak in the near term amid headwinds from global trade frictions and weakness in the manufacturing sector, which will be significant drags on growth. Meanwhile, preliminary Q4 GDP was 0.0% q/q following 0.4% growth in Q3, missing market expectations of 0.1% and underscoring the bloc’s stagnation with its two largest economies, Germany and France, posting negative growth. Full-year 2024 growth stood at 0.9%. With inflation close to the bank’s 2% target, current weak growth levels have become an increasing concern for ECB policymakers with the market expecting at least another 2-3 rate cuts in 2025.
Japan: Tokyo core inflation hits a one-year high in January. Inflation in Japan’s capital rose to the highest level since April 2023, at 3.4% y/y in January, fueled by the acceleration in fresh food for the second straight month (24% y/y versus 18% in December) and a solid increase in electricity (17.5%) and gas (10%) prices. In addition, core inflation (excluding fresh food) rose to 2.5% y/y, following a 2.4% gain in December, marking the fastest annual pace in nearly a year. Higher inflation came following the Bank of Japan’s decision to raise its short-term rate by 25bps last month, and keeps the pressure on it for further interest rate hikes. Price pressures could persist due to a weak yen, the expectation of high nominal wage increases in Shunto 2025, and uncertainty related to tariffs. However, headline inflation will benefit going forward from the resumption of the energy subsidy program during the January-March period. Meanwhile, retail sales growth logged a six-month high of 3.7% y/y in December, up from 2.8% in November.
Saudi Arabia: GDP grew by 4.4% in Q4 24. According to official (GASTAT) flash estimates, real GDP grew by 4.4% y/y in the fourth quarter of 2024, marking the highest growth rate in the last two years. Growth in non-oil activities accelerated to 4.6% (from 4.2% in 4Q23), while oil activities grew by 3.4%, recovering from a steep contraction of -16.2% in Q4 23. Meanwhile, government activities rose by 2.2%. The fourth quarter expansion brings growth for the full 2024 year to 1.3%, up from a contraction of -0.8% in 2023 thanks to continued strength in the non-oil sector combined with the fading effect of the oil output quotas of 2023.