Economy in Brief: April 2025

The ZEW survey for April shows some stunning changes and deterioration. It's important to point out that this survey is a survey of German financial experts and Europeans are having a particularly difficult time with the U.S. policy and the threat of putting tariffs on them and globally. The extent to which ZEW expectations have been cut is generally excessive compared to the behavior in the U.S. and the behavior of financial markets although those have also been volatile and have shown a great deal of concern.

ZEW experts in April see the EMU economic situation eroding to a -50.9 reading from -45.2 in March, a minor step back. For Germany, there's an improvement to -81.2 in April from -87.6 in March. For the United States, there's an astonishing markdown in the economic situation from +6.7 in March to -23.9 in April. The U.S. reading had been as high as 42.6 in February; this is a remarkable change in the economic situation.

In three months, macroeconomics expectations in Germany have moved from a +51.6 in March to a -14 in April. In the United States, a reading of -48.7 in March has gone to -71.5 in April, the worst assessment on record.

Inflation expectations in the euro area deteriorate from +6 in March to -3.1 in April. For Germany, inflation expectations move from +7.9 in March to -5.0 in April. For the U.S., inflation expectations move in the opposite direction: they get higher moving from a 52.3 in March to 75.8 in April; this pushes them up to a 96.7 percentile standing and compares to a 27.7 percentile standing for Germany and a similar standing for the euro area. A lot of the analysis that we have seen has talked about relatively minor changes in inflation over the short one when the tariffs will push the price level up without any clear view of how much lasting inflation effect there might be. The ZEW experts take a very different view that the tariffs are going to wildly change the inflationary environment.

Short-term interest rate expectations fall in euro area to -60.8 in April from -56.1 in March. For the U.S., the expectations are little changed at a -22 reading.

Long-term interest rates move in different directions with the German long-term rate response moving from a 35.7 assessment in March to a 23.3 assessment in April; for the U.S., the March reading of 34.7 moves up significantly to 48.5 in April, a 52.6 percentile standing.

ZEW expectations for the stock market show a slight downgrade for Europe in April, an upgrade for Germany, and weaker conditions for the U.S. Comparing these levels to what they were looking for in February, the German level moves to 9.7 in April from -4.7 in February. The euro area moves to 6.4 from -0.8 in February. The U.S. outlook moves to -17.6 from +12.1 in February. The exchange rate moves sharply, too. The dollar is at a reading of -35.4 in April, down from -17.2 and March; that compares to a reading of +27.5 in February.

This week, we maintain our focus on global trade, particularly following the decision by the US administration to reverse its “reciprocal” tariffs coupled with its significant escalation of trade tensions with China. Markets have been understandably volatile over the past week (chart 1), with President Trump’s decision to hold “reciprocal” tariffs at 10% and pause a further increase offering a temporary reprieve. Still, China’s significantly increased exposure to US tariffs (chart 2) remains a key concern for investors, even as weekend announcements of exemptions for certain electronics and semiconductor products provide some relief—albeit a partial one. Nonetheless, the reality is that the US and China remain deeply interdependent when it comes to trade. Neither can be independent of the other without substantial economic costs. The latest escalation is reminiscent of a game of chicken between the two global powers—except this is not a game. It is real life, with real consequences for businesses, consumers, and economies around the world. That said, the degree of mutual reliance is not equal. The US is arguably more dependent on Chinese imports, particularly in goods trade, despite some signs of decoupling in recent years (chart 3). This becomes especially clear when looking at specific product categories: many of the US economy’s low export-to-import ratio goods (chart 4) are primarily sourced from China (chart 5). Without readily available and complete alternatives, the latest round of tariffs may soon be felt in the form of rising consumer prices. Looking beyond goods, however, the US continues to maintain a strong services trade surplus globally, including with much of Asia (chart 6). This may serve as an alternative channel for the US to manage its trade balance going forward.

Latest US-China trade developments Just days after US President Trump unveiled his sweeping “reciprocal” tariffs on April 2, he announced a 90-day pause for all economies except China, opting instead to maintain a 10% additional tariff on others in the interim. What followed was a flurry of tit-for-tat measures between the US and China. Within days, the US raised its additional economy-wide trade tariffs on China from 20% in March to a staggering 145%. In response, China’s retaliatory measures saw its additional tariffs on US goods jump from 0% (excluding product-specific tariffs) to 125%. Amid the escalation, China’s Customs Tariff Commission declared it would no longer respond to additional US tariff hikes. It explained that American exports to China are no longer economically viable under the latest tariffs, underscoring just how severely tensions have deteriorated. Unsurprisingly, the markets have been on a nerve-racking roller coaster over the past few weeks. Initial reactions to President Trump’s “reciprocal” tariffs were clearly negative, although a brief sense of relief emerged after he narrowed the scope of his most recent trade escalations to target China alone.

German inflation was delightfully low in March, falling by 0.2% month-to-month after rising by only 0.1% month-to-month in both February and January. Over the last three months, the German HICP headline pace has fallen, and is contracting at a 0.3% annual rate, compared to climbing 2.6% at an annual rate over six months, and climbing 2.5% at an annual rate over 12 months. This excellent three-month performance, of course, is also embedded in the too-hot six-month and 12-month rates of change. It serves as evidence that, as delightful as the recent data have been, German inflation continues to run over the top of the target set by the ECB for the European Monetary Area.

Domestic CPI The domestic CPI that has a different weighting scheme shows inflation up by 0.2% in March and February, compared to a 0.1% gain in January. The inflation performance for the German domestic CPI is 2.2% over 12 months, 2.7% over six months and 1.7% over three months. It also behaves much better over three months than over six or 12 months; in fact, the 12-month gain in the domestic CPI is even closer to the ECB's desired outcome. Still, the German inflation rate continues to run hot except over three months. Looking at German inflation and its CPI excluding energy, which was up 0.3% in March, compared to 0.2% in February, and no gain in January. The inflation sequence for German domestic inflation excluding energy is 2.7% over 12 months, 2.7% over six months, and then down again to 1.7% over three months.

Germany displays improved and in fact acceptable inflation over the last three months; however, over a broader timeline, it still isn't good enough for the target that the ECB has for the EMU area. Still, if we look at diffusion statistics which assess the breadth of inflation acceleration across periods, we see the diffusion over 12 months is only 27%, over six months it's only 36%, and over three months it's only 36%. Diffusion at 50% would indicate acceleration and deceleration are balanced. But with diffusion below 50%, that's telling us that inflation is actually decelerating across more categories than it's accelerating. Germany displays impressive decelerating statistics across these categories for 12-months compared to 12-months ago, for 6-months compared to 12-months, and for 3-months compared to 6-months. The reality is that inflation continues to overshoot, that is simply the reality that inflation is stubborn in several important categories where it refuses to fall enough to register the desired result of 2% overall.

However, very clearly inflation in Germany is not running away. It is slightly excessive, and the overshoot depicted by the domestic headline at 2.2% would probably be acceptable in these times, but the overall 2.5% for the HICP and for the CPI excluding energy at 2.7% are still excessive.