Economy in Brief

Inflation adjusted German orders rose by 6.9% in December after falling by 5.2% in November. Foreign orders rose by 1.4% in December after a November plummet of 10.3% (a drop at a 72.9% annualized rate). Domestic orders jumped in December, rising by 14.6% (w/ another extremely sizeable, annualized rate if placed on an annualized basis). This followed a 3.5% increase in November.

The bright side is that German domestic orders have been rising for two months in a row by a sizeable amount. They are growing at a 61.4% annualized rate over three months and showing building momentum and acceleration from 12-months to 6-months to 3-months. Foreign orders are more erratic; they fall by 11.4% over 12 months as well as at a 29.6% annual rate over three months- but they also rise over six months. So, the direction for Germany orders overall is unclear, but there is now clear strength in domestic orders and more hopeful forces in play for orders overall than we have seen for some time. In the just completed quarter, domestic orders rise at a 134.8% annual rate over Q3 while foreign orders fall at a 29.1% annual rate compared to Q3.

Real sector sales decline overall and for all of manufacturing. There are increases in sales for consumer goods and intermediate goods that rate dominated by a decline in capital goods real sales over three months. Sequentially total and manufacturing real sales both show weakening, declining a sign of progress, albeit not very aggressive progress. Still, it is something. Capital goods sales have stopped decelerating. Consumer goods sales are on an accelerating path with sales up at a 10.3% annual rate over three months. Intermediate goods sales are progressing from small declines over 12 months and six months to logging an increase over three months.

Both manufacturing sales and orders show signs of turning around although there have not been any such signs from other reports. The recent ZEW survey for February showed improved macro expectations in Germany and less weakness in the economic situation. By sector, profits showed improvement in construction and in services but not much in manufacturing industries. PMI data from S&P have not tipped any clear improvement in German manufacturing while services continue to plug along mostly showing growth but not a whole lot of it.

Improved macro outlook The ZEW financial experts in February see improved conditions in Germany, perhaps just in time to affect the German elections that are due. Macro-expectations for Germany in February moved up to 26.0 from 10.3 in January while U.S. expectations backtracked to 1.3 in February from 9 in January. German expectations have 54.8 percentile queue standing on data since since 1992; the standing for the United States reading on the same timeline is 50.4%. The macroeconomic expectations for the U.S. and for Germany are very different in terms of diffusion readings in February; however, their percentile standings are surprisingly similar. The diffusion reading is a raw better minus worse reading while the percentile reading ranks the current value against an historic queue of observations. The lesser expansionary reading for the U.S. compares historically about as favorably to past data as does the comparisons of the stronger German diffusion reading to its past data.

Current situation still floundering However, the economic situation continues to be very different in Europe and in the United States. The readings for the euro area, Germany, and the United States all improved in February, but by small amounts. For the euro area, there's an improvement to -45.3 in February from -53.8 in January. For Germany, the improvement is to -88.5 in February from -90.4 in December. In the U.S., it's another small improvement but from 40.1 in January to 42.6 in February. U.S. is logging substantial positive reading, compared to quite deeply negative diffusion readings in the euro area and in Germany. This is made clear by looking at the queue percentile standings for the EMU for February; it is at its 35th percentile, the standing for Germany is at its 6th percentile, and the standing for the United States is at its 62.5 percentile – a world of difference there.

Inflation expectations Inflation expectations are mixed in February, but the euro area in Germany shows weak inflation readings and some tendency for expectations to see inflation even weaker. In the U.S., the inflation readings are positive in diffusion terms and much closer to normal levels. The queue percentile standings for the euro area are around the 20th percentile; the same is true of Germany at its 21st percentile. For the U.S., there is a 54th percentile standing above its historic median- a world of difference in the standings.

Interest rate expectations These differences play out across interest rate expectations as well, but not quite as strongly. The diffusion readings for short-term interest rate expectations find more deeply negative readings in the euro area, -83.2 in February, compared to its -76.2 in January. These readings compare to the U.S. in February at a -27.2 reading, a substantially less negative result than the -39 reading in January. U.S. readings have been progressing more rapidly toward zero as the December reading for the U.S. was set at -71.6. Even so, the queue standing for the U.S. reading was a 16.4 percentile standing for short-term interest rates. The queue standing for the euro area is at a 2.7 percentile standing. Despite the great difference in the diffusion readings, the queue percentile standings for each of them are basically readings in the same extremely weak region. Long-term rate expectations show Germany with a -2 diffusion value in February compared to -7.8 in January; for the U.S., the February reading moved up to 18.7 from 7.3 in January. The German negative numbers are moving up, toward zero, while the U.S. positive numbers are getting higher, so both Germany and the U.S. see long-rate expectations moving in the same direction. The German queue standing for its rate expectation in February is an 11-percentile standing while the U.S. queue standing at a 26-percentile standing is higher, but both of them are relatively weak standings, both of them well below their historic medians.

Stock markets Stock market expectations are weak across the board with the euro area queue standing at 1.3%, exceptionally weak. The German queue standing manages to get below that at 0.5%. U.S. stock market standings are better on a ranking basis but still not very good at the 20.8 percentile standing; they're well below the 50th percentile which marks their median. However, the diffusion reading in U.S. stocks is positive at 12.1; for Germany it's -4.7 and for the euro area it's -0.8; all of these reflect relatively sharp deteriorations from levels in January or December.

This week, we focus on the steel and aluminium sector, following last week’s round of tariff measures from the US administration. President Trump’s 25% tariffs on steel and aluminium are aimed at addressing concerns over unfair trade practices and excess capacity, with China explicitly singled out as a major contributor to these issues. However, it remains to be seen whether these tariffs will effectively resolve the problems they are intended to address, especially since China’s share of US imports in these sectors is relatively small (chart 1). In fact, Canada is the largest supplier of these products to the US (chart 2), and may face cumulative tariffs of 50% if all of the US's announced measures against the country are implemented. That said, even with these steep tariffs, the immediate impact on Canada’s exports and broader economy may be limited, given that steel and aluminium exports account for a small portion of Canada’s overall exports (chart 3).

Delving deeper into China’s overcapacity issues, several indicators continue to signal persistent challenges, such as the ongoing deflation in producer prices for related metal products and broader export prices (chart 4). A closer look at China’s steel industry shows that local producers have been struggling long before the prospect of Trump’s tariffs re-emerged (chart 5), facing weak domestic demand and fierce competition that have driven prices down. Beyond tariffs, we also touch on political interventions driven by national security concerns, such as the US blocking Nippon Steel’s acquisition of US Steel, though President Trump has recently signalled some flexibility on this matter. While this transaction is small in the context of Japan’s broader foreign direct investment in the US (chart 6), it highlights the intersection of trade and national security policies.

The US’ latest tariff actions On February 10th, US President Trump escalated his tariff actions by announcing a 25% tariff on all US steel and aluminium imports, set to take effect on March 12. According to the White House, this move is intended to protect the US steel and aluminium industries, which are said to have been negatively impacted by unfair trade practices and global excess capacity. Specifically, China has been identified as one of the key sources of this excess capacity.

However, according to official figures, China’s share of US steel imports is relatively small, accounting for less than 2% by the end of last year, as shown in chart 1. China’s share of aluminium imports to the US is higher but still not dominant, at around 10%. These statistics may not fully capture the situation, however, as some US steel and aluminium imports could have been rerouted from other countries, possibly to bypass previous tariffs, before ultimately entering the US market. This rerouting may be a key factor in President Trump's decision to impose blanket tariffs this time, rather than offering exemptions as in previous instances.