Daily Economic Update

Eurozone: Germany’s parliament to vote on defense spending bill. Germany's lower house of parliament, the Bundestag, will vote today on a bill that would exempt defense and security expenditures from regulatory limits, effectively unlocking billions of euros in debt-financed defense spending. Specifically, the legislation will mean that spending on defense and security in excess of 1% of GDP (around €45 billion) would no longer be subject to a limit on borrowing. The bill also calls for the creation of an off-budget infrastructure fund that will be allowed to borrow up to €500 billion over 12 years. Moreover, the bill would allow Germany’s 16 federal states to borrow up to 0.35% of GDP while currently they are required to run balanced budgets. The bill requires a super majority of two-thirds of votes to pass the lower house, which if it happens will open the way for the upper house, where Germany’s 16 states are represented, to vote in a session on Friday. Absent a last-minute surprise, Chancelor-in-waiting Friedrich Merz seems to have secured the necessary votes given an agreement that was sealed last week with coalition members. The substantial increase in debt-financed government spending should lift Germany’s potential GDP, GDP growth for the coming years, with positive spillovers to other Eurozone economies. The markets’ reaction has been significant with German 10-year bond yields increasing sharply by around 50 bps YTD, touching multi-year highs, while Germany’s benchmark stock market index, the DAX, is up more than 16% YTD, one of the best performing stock indices globally so far this year.

US: February retail sales rebound less than expected, further signaling consumers’ pullback. Retail sales in February increased by 0.2% m/m from a downwardly revised and weather-disrupted drop of 1.2% in January and versus the consensus forecast of a rise of 0.6%. The partial rebound was mainly driven by healthcare spending and online sales but several other categories, including many durable and big-ticket items as well as restaurant sales, fell. However, providing some comfort, a core measure of sales (excluding auto, gasoline, food services and building material) increased by a higher-than-expected 1% m/m following a drop of 1% in January. On an annual basis, growth slowed to a four-month low of 3.1% from 3.9%. The latest weak retail sales figures (especially discretionary items) further underscore a cautious household spending environment as suggested by recent consumer surveys. Uncertainty about tariffs and other government policies have recently taken a toll on consumer and business confidence, nearly stalling economic momentum, with GDP growth in Q1 looking set to slow sharply from Q4’s annualized 2.3% increase.     

Chart 1: US retail sales (% y/y) Source: Haver *Ex auto, gas, building material & food services

Global: OECD revises down global growth forecast on rising trade barriers and increased policy uncertainty. The OECD, in its latest economic outlook, lowered its global GDP growth projections to 3.1% for 2025 (from 3.3% previously) and to 3% for 2026 (from 3.3%). The agency sees slower growth in the US at 2.2% (-0.2% from the previous forecast) and 1.6% (-0.5%), for 2025 and 2026, respectively, with more significant downward revisions for Canada and Mexico amid trade actions/retaliations and other policy uncertainty. It also downgraded 2025 growth forecasts for the Eurozone and the UK by 0.3 percentage points to 1% and 1.4%, respectively. The OECD also sees broadly higher inflation, with the US (headline inflation forecasts of 2.8% and 2.6% in 2025 and 2026) being among the hardest hit economies amid tariff-related policies that should result in sustained restrictive monetary policies.

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