Economic Perspectives April 2025

• On 2 April, Donald Trump dramatically escalated the ongoing trade war. He announced a 10% tariff on all imports (going into effect on 5 April). On top of that, several countries will be hit by reciprocal tariffs (going into effect on 9 April). The EU will face a 20% tariff in total, while China will face a 54% tariff in total. USMCA-compliant imports will notably be exempt from the reciprocal tariffs. Other products which will reportedly be exempt from these reciprocal tariffs are pharmaceutical products, semiconductors, lumber, copper, gold, and energy resources and select minerals not found in the US. However, given the volatile nature of US trade policy, the list of exemptions can change rapidly.
• Oil prices increased slightly in March to 74.7 USD per barrel. In early March, prices dipped as OPEC+ confirmed its plan of increasing production from April onwards. However, the breakdown of the Gaza ceasefire along with military escalations in Lebanon, Syria and Yemen pushed prices back up. European gas prices dropped in March by 9% to 40 EUR per MWh. The drop was mostly weather-related and happened despite unfavourable developments in the Ukraine peace negotiations. After the 2 April tariff announcements, energy prices dropped significantly.
• Germany’s decision to amend its constitution to increase military and infrastructure spending, along with the EU’s ReArm plan will exert an inflationary effect as it could exacerbate existing (but gradually easing) shortages of labour. We therefore upgrade both our 2025 and 2026 euro area inflation forecasts by 0.1 percentage points to 2.6% in both years. The upgrade comes despite the recent favourable inflation evolutions in the euro area. Headline inflation in the euro area declined from 2.3% to 2.2% in March, while core inflation declined from 2.6% to 2.4%.
• Increased military and infrastructure spending will boost euro area growth in the medium term. Especially the latter has an elevated multiplier, as it boosts productivity. We expect a more modest impact from increased military spending, as this type of spending risks crowding out other investments and consumption and/or has a smaller impact on overall productivity. Increased spending could also provide a necessary boost in economic confidence. These effects are expected to impact the medium-term growth outlook. In the near term, elevated uncertainty and increasing tariffs are likely to weigh on growth. 
• In contrast to US CPI inflation, PCE inflation was relatively strong in February. PCE inflation stayed constant at 2.5%, while core PCE inflation increased from 2.7% to 2.8%. Other inflation data were more favourable. Producer prices were unchanged in February month-on-month, while forward-looking indicators on rents and used cars and trucks were quite soft. 
• The US economy (and growth outlook) is being hit by tariff uncertainty. Consumption remains sluggish, while inventory growth is mild. Most notable are the recent large deficits in the goods trade balance (though this can be partly explained by large imports of monetary gold). Consumer confidence is also plunging, though producer confidence indicators and employment growth remain decent. 
• The intensifying trade war has spurred the Chinese government into action. In March, the government unveiled a 30-point plan to boost consumption. This is a much-needed step to help achieve its 5% growth target. It will also help to stave off the risk of deflation, as CPI-inflation declined on a year-on-year basis in February. 
• Tariff uncertainty is pushing the Fed to adopt a wait-and-see mode. It kept rates on hold in March, while upgrading its inflation forecast and downgrading its growth forecast. We expect this wait-and-see mode to continue in Q2 and only expect a rate cut in Q3, followed by another one in Q4. In contrast, we expect the ECB to keep its rate cutting cycle going by implementing another rate cut at the April meeting. That would be the last one of this cycle, according to our expectations.

American isolationism is spurring governments across the world into action. This is especially the case in Germany, where the lower US commitment to NATO triggered an unprecedented fiscal response. This consisted of an amendment of the German constitutional debt brake, allowing for increased infrastructure and military spending. This is a truly historic shift away from Germany’s previously fiscal austerity stance. This change, in combination with the EU’s ReArm plan, will boost European confidence and provide a welcome positive demand shock to Europe’s sluggish economy. Moreover, on the supply side, the planned additional infrastructure investments in particular are also likely to raise European potential growth in the medium term. China is also reacting to US tariffs by providing a much-needed fiscal boost to support internal demand. The government recently unveiled a 30-point plan, allowing its economy to shift from a more export-led economy to a more consumption-led economy.

Back in the US, on 2 April, the so-called “Liberation Day”, Donald Trump ramped up the trade war. He announced a 10% tariff on all imports (going into effect on 5 April). On top of that, several countries will be hit by reciprocal tariffs (going into effect on 9 April). Asian countries will be particularly hard hit. China faces a total 54% tariff (close to our working assumption of 60%), while India and Japan will face tariffs of 27% and 24% respectively. South-East Asian countries such as Cambodia, Laos and Vietnam face tariffs close to 50%. The EU will face a 20% tariff in total, while the UK faces no reciprocal tariffs. USMCA-compliant imports will notably be exempt from the reciprocal tariffs, making the hit on Canada and Mexico somewhat smaller than anticipated. Other products which will reportedly be exempt from these reciprocal tariffs are pharmaceutical products, semiconductors, lumber, copper, gold, and energy resources and select minerals not found in the US. However, given the volatile nature of US trade policy, the list of exemptions can change rapidly. Aluminium and steel products, automobiles, and auto components are also exempt, as they already face 25% tariffs. For now, we keep our working assumptions unchanged as we wait for negotiations and retaliation to play out. We see permanently higher tariffs as an upside risk for inflation and a downside risk for growth, however.

Energy markets overshadowed by geopolitical developments

Oil prices remained broadly stable in March, reaching 74.7 USD per barrel end of March. Oil prices dipped in early March as OPEC+ confirmed its plan of increasing production from April onwards. It will increase production gradually and flexibly up to 2.2 million barrels per day over the next 18 months. However, geopolitical tensions in the Middle East pushed oil prices back up. Indeed, the end of the Gaza ceasefire along with Israeli military operations in Lebanon and Syria and US strikes on Houthi targets in Yemen, re-ignited fears of a wider Middle East conflict. That said, so far the reaction in the oil markets has been relatively mild, as the market is well supplied.

Gas prices dipped slightly in March (by 9% to 40 EUR per MWh). The decline happened despite unfavourable evolutions in the Ukraine peace negotiations. As Vladimir Putin refused to agree to a full ceasefire and is driving a hard bargain, betting markets now also see only 9% chance of Trump ending the war in his first 90 days as president. The fact that gas prices did decline was mostly weather-related. Continued mild winter weather conditions in Europe reduced gas consumption and limited withdrawals from EU gas reserves (see figure 1). Gas reserves still remain below historical averages, however.

German parliament passes historic fiscal package

On 18 March, the Bundestag (Germany’s federal parliament) adopted the landmark fiscal package announced earlier. A few days later, on 21 March, the plan was also greenlighted by the Bundesrat (the legislative body that represents the 16 Länder). The country’s constitutionally enshrined fiscal rules were amended as follows: (1) A new debt-financed infrastructure fund worth EUR 500 bn was created for a period of 12 years. The fund will be available for additional spending, i.e., investments in excess of a ‘normal’ investment rate of an estimated 10% of government spending. Of these EUR 500 bn, a EUR 100 bn will be earmarked for the disposal of states and local governments and another EUR 100 bn will be added to the existing Climate and Transformation Fund; (2) The constitutional debt brake rule was amended in the sense that any defence spending in excess of 1% of GDP is not taken into account when applying the debt brake; (3) From now on, the states (Länder) are allowed to run a deficit of 0.35% of structural GDP as well, as is already the case for the federal government.

The plan signals a historic shift in fiscal policy and will dismantle decades of budgetary constraint in Europe’s biggest economy. It will increase the fiscal capacity for the German general government by some 3% of GDP of fiscal spending, or higher depending on defence spending. The new fiscal capacity is composed as follows: (1) On the assumption that the EUR 500 bn investment fund will be spread over 12 years, this amounts to EUR 42 bn (i.e., about 1% of GDP) per year; (2) The extension of the structural deficit allowance to states brings the overall average deficit margin for the general government to 0.7% of GDP, adding 0.35% of GDP; (3) On the assumption that defence spending will increase from currently about 1.8% of GDP to 3.5% of GDP per year, this adds 1.7% of GDP to general government spending. Potentially 0.3% can be added to the general ‘debt brake-relevant’ budget and can lead to additional new government spending.

On top of the German plan, there is additional fiscal space for EU defence spending. On 19 March, the European Commission (EC) published its Joint White Paper for European Defence Readiness 2030, ahead of the EU Council meeting held on 20-21 March. The paper provides more details on the ReArm Europe plan (EUR 800 bn for defence investments, or 4.5% of EU GDP in total) announced earlier by EC President Ursula von der Leyen on 4 March. Amongst other things, it outlines concrete legal and practical aspects on the EU’s new EUR 150 bn SAFE instrument (‘Security Action For Europe’, i.e. loans backed by the EU budget). With regard to what national governments could additionally generate on defence (a total estimated at EUR 650 bn), it was mentioned that countries wanting more fiscal space will be able to deviate from the EU budgetary rules for more than four years, through the national escape clauses in the SGP.

Economic impact for the euro area

Assessing the impact of Germany’s reform and Europe’s ReArm plan on GDP growth is not straightforward, as it not only depends on the amount spent but also on the so-called ‘fiscal multiplier’ (i.e., the change in GDP arising from a 1 euro increase in government expenditure). The latter varies according to what the additional money is spent on. Most studies see the multiplier for general infrastructure spending higher than the one for military spending, which is often pegged at (well) below 0.50. In practice, the size of the multiplier may vary because of various factors, e.g. whether or not countries finance the spending by cutting elsewhere, to what extent (defence) orders ‘leak’, i.e. go to imports, etc. Timing issues play an important role as well. Because of capacity and implementation constraints, it may take time for the additional spending on infrastructure and defence to take effect.

Our analysis suggests that the impact of both impulses on euro area growth will initially be slow and incremental over time. For Germany, the impact might come sooner and should overall be bigger in the end. In 2025, maximum half of the additional (more than) 3% spending in Germany (see above) is still plausible, due to the still ongoing government formation and implementation lags. However, to compensate as much as possible, defence procurements and infrastructure projects are likely to be frontloaded and fast-tracked in terms of planning approvals. In our updated scenario, we see a boost from the additional spending to German GDP growth of 0.1 percentage points in 2025 and 0.5 percentage points in 2026. For the euro area, we think spillovers from the German stimulus combined with extra military spending (both SAFE and at the national levels) could lift GDP growth up by 0.05 percentage points in 2025 and 0.2 percentage points in 2026. As a result, we changed the outlook for euro area growth to 0.9% in 2025 and 1.2% in 2026. The benefits from the stimulus are expected to last after 2026, with (hopefully) meaningful effects on medium-term potential growth as well.

If fast and massive spending were applied to capacity-constrained manufacturing and building industries, this could also impact inflation. We think the inflationary pressures from the higher spending are likely to be relatively soft, however. Lower demand has forced industrial firms to keep capacity utilisation low in recent quarters. At just 77% in Q1 2025, the capacity utilisation rate in both Germany and the euro area is currently at levels previously only seen in crisis periods (see figure 2). With a still negative output gap, Germany in particular has room at the macro level before broader capacity constraints translate into wider inflationary pressures. All in all, we now see annual euro area inflation slightly (i.e., 0.1 percentage points) higher at 2.6% in both 2025 and 2026. Meanwhile, headline inflation in the euro area fell to 2.2% in March, from 2.3% in February. Core inflation, excluding energy, food and beverages, declined to 2.4%, continuing its downward trend. 

We acknowledge that the updated euro area scenario is still surrounded by significant uncertainty, with the biggest downside risk coming from the recently announced 20% tariffs on EU imports and potential retaliation. On the upside, the shift in German and EU policies could support euro area growth more than expected via the confidence channel. The latest sentiment indicators (e.g., the German ifo Business Climate Index as well as Manufacturing PMIs) already showed a cautious improvement for the manufacturing industry (see figure 3). That said, the latest survey was conducted before US President Trump announced 25% import tariffs on cars and car parts, which will hurt European car manufacturers. Meanwhile, services sentiment continued to deteriorate in March.

US tariffs and policy uncertainty weigh on US growth

Tariff uncertainty is affecting the US economy. This is most clearly visible in trade data. For the second month in a row, the goods trade deficit was exceptionally large as imports surged in anticipation of higher tariffs. The goods trade deficit reached USD 148 bn in February, around 50% larger than pre-election levels (see figure 4). This larger deficit has a potential negative effect on GDP growth as it lowers the contribution of net exports. That said, this frontloading should typically be offset by higher inventory or consumption contributions. However, we see limited evidence of frontloading in inventory data (which have only grown at a very modest pace) or in consumption data. Real personal consumption expenditures increased by only 0.1% last month, following a downwardly revised 0.6% month-on-month decline in January. Services consumption declined, while the rebound in goods was very modest. 

What could explain this discrepancy? Part of the answer lies in imports of gold. These totalled USD 30 bn in January (detailed figures not yet available for February) and are largely used for investment purposes (and thus filtered out of GDP data, while still in import data). Indeed, when taking this into account, our in-house nowcast jumps from around -1.5% quarter-on-quarter annualised to around 0.5%. The Atlanta Fed nowcast makes a similar jump when adjusting for these gold imports. Yet the discrepancy can also be partly explained by weakening momentum in consumer spending, as consumer confidence plunged since January (see figure 5). Many consumers cite economic policy uncertainty in the report.

Other confidence indicators were mixed. S&P Global Composite Index rebounded from a 51.6 low in January to 53.5 in February as service confidence increased, while manufacturing confidence decreased. However, the ISM Manufacturing and Non-Manufacturing indices both declined notably. The declines happened partly because of big decline in the Employment subindices. This stands in contrast with the latest labour market report. Non-farm payrolls increased by 228k last month, while unemployment only increased marginally (from 4.1% to 4.2%).

Risks for US growth are tilted to the downside, given continued uncertainty about economic policy in general and trade policy in particular.

Forward-looking inflation indicators cool in February

In contrast with the soft CPI inflation print, PCE inflation was firm in February. PCE inflation stayed constant at 2.5%, while core PCE inflation increased from 2.7% to 2.8%. The acceleration can be attributed to accelerating durable goods and services PCE inflation.

Other recent inflation data were relatively soft. Average hourly earnings increased by only 0.25% month-on-month in March, boding well for services inflation. Producer prices stayed flat in February, thanks to lower trade services and energy prices. The stagnation in producer prices followed two months of strong producer price increases. At 3.2%, year-on-year producer price inflation remains elevated, however.

Rental data suggested some softening of shelter inflation ahead, as the Zillow Observed Rent Index increased by only 0.27% last month. Forward-looking indicators for used car prices also moved in a favourable direction as the Manheim Index declined by 1.6% in March. This stands in contrast with used cars and trucks CPI prices, which have increased sharply in the latest releases (see figure 6) and are thus expected to moderate in the months ahead. 

Chinese consumer plan boosts growth outlook but risks remain

The outlook for the Chinese economy has improved notably in the past month. The main reason behind this was the introduction by the government of a 30-point plan to “vigorously boost consumption” and "comprehensively expand domestic demand”. The plan is a welcome addition to previous measures, including the trade-in program for consumer goods that was launched in 2024 and expanded in 2025. It also fits into the strategic announcement made at the Two Sessions a few week ago, that boosting consumption will be the top priority of the government going forward.

The new consumer plan not only focusses on near-term support but also aims to boost the consumption environment in a more structural way. This includes increasing household income and reducing financial burdens via enhanced social welfare. The list of proposed measures stretches across many different areas of the economy, like employment, digital services products, pensions, tourism, child and elderly care, the housing market, the financial sector and education. The plan contains few new details on how exactly spending will be increased but its extensiveness shows a greater determination to tackle China’s consumption problem.

Since the publication of the plan, several local governments have come out with new measures to bring the plan into action. These are much-needed first steps but more will be needed to make the plan a success and push the economy back on the 5% growth track.

It remains to be seen how much of the plan will be implemented, how effective it will be in restoring confidence and if the expected boost to consumption will be enough to compensate for the fallout from trade tariffs. For now, we only slightly upgrade our growth forecast for 2025 from 4.5% to 4.7% and for 2026 from 3.9% to 4.1%. In response to the latest US tariff increase, the Chinese government announced a retaliatory 34% tariff on all US imports starting on 10 April. The waters between the two countries are deep but concessions following negotiations are not out of the question.

If successful, the consumer plan should also help to lift lacklustre inflation further away from negative territory. In February, CPI inflation dropped from 0.5% year-on-year in January to -0.7% year-on-year. The February reading might have been skewed to the downside by seasonal distortions but even without these disruptions, the number was still disappointing. It is clear that deflationary pressures are persisting in the economy. The 34% retaliatory tariff that the Chinese government announced, if effectively implemented, will create some upward price pressure.

ECB policy now 'meaningfully less restrictive'

In March, the ECB cut its policy rate by another 25 basis points to 2.50%. This brought it another step closer to the neutral interest rate level and thus the ECB is also nearing the end of its easing cycle. The ECB did stress that uncertainty is extraordinarily high, especially with regard to economic policy and, in particular, trade policy. Therefore, future ECB policy remains data-dependent and will be reconsidered from meeting to meeting without any 'precommitment' with respect to a particular interest rate path.

Based on the ECB's reference to the less restrictive nature of its policy and high uncertainty, we assume the ECB will cut its policy rate by 25 basis points to 2.25% one more time in April. At that level, the ECB is likely to end its easing cycle. In contrast, financial markets currently expect the ECB to make an additional rate cut in the second half of 2025, which would bring its deposit rate to a final level of 2%.

Fed takes a wait-and-see approach

At its policy meeting in March, the Fed left its policy rate unchanged at 4.375%. In his comments, Fed Chairman Powell highlighted following elements. First, the extreme uncertainty surrounding economic (trade) policy. Second, in their March forecasts (the 'dot plots'), the Fed governors again revised downwards their growth forecasts for 2025 and 2026, to 1.7% and 1.8% respectively, while raising again their inflation expectations (measured by the Fed's favourite measure, the core PCE), now to 2.8% for 2025. Although Powell said it was too early to back it up with 'hard' statistical data, he did assume that this stagflationary development was mainly driven by the ongoing trade tariff conflicts.

Lower growth and higher inflation offset each other in terms of their impact on the desirable path of policy rates, according to Powell. Moreover, according to the Fed, it is possible that the inflationary impact of those trade restrictions is limited to a one-off increase in the price level, and thus the resulting inflationary pressures are temporary. Hence, given the extremely high degree of uncertainty, the Fed will remain on the sidelines for a while. We assume that it will remain so in the second quarter of this year. In the third and fourth quarters, the Fed is likely to cut its policy rate by 25 basis points each time to 3.875% by the end of 2025. In early 2026, it will then probably bottom out at 3.625% after a final rate cut in this cycle. Our view for 2025 is broadly in line with market expectations, although with the important difference that the market expects the final bottom rate in this cycle to be lower (and later).

Fed slowly but surely gets closer to a more normal balance sheet size

Alongside its interest rate decision, the Fed again slowed the pace of normalising its balance sheet size (figure 7). It lowered the average monthly amount of non-reinvestment of Treasury bonds to USD 5 bn (from USD 25 bn) starting in April, while the average monthly run-off of government agency bonds and mortgage-backed securities remains unchanged at USD 35 bn. This asymmetry is in line with the Fed's goal of ultimately holding mostly government bonds in its portfolio. Fed Chairman Powell stressed that this decision is purely technical, and thus has no impact on monetary policy, nor on the target size of the Fed's balance sheet in the medium term. Only the duration of the path to the unchanged final target size would be longer as a result.

This is the second time the Fed has slowed the pace of balance sheet reduction. The programme, launched in June 2022, was already slowed down a first time in June 2024. The Fed took its new decision in March 2025 as it observed increasing tightness in the money market, particularly a sudden and pronounced drop in deposits at the Fed from the Treasury General Account (TGA) (see figure 8). This could potentially pose a risk of short-term liquidity shortages for the Treasury and hence for the stability of the money market. Powell still labelled the reserves in the financial system as a whole as 'abundant', which is still more than the Fed's target of reaching a situation where reserves are only ‘ample'. This is the reason why balance sheet normalisation, albeit at an admittedly reduced pace, is continuing.

Unchanged scenario for bond yields

Since mid-March, both German and US 10-year yields remained broadly unchanged, except for a slight decline over the past few days due to somewhat weaker US economic data, such as weaker-than-expected private consumption spending in February.

Against the background of an unchanged monetary policy forecast for the Fed and ECB, we also maintain our scenario for 10 year US and German bond yields. This forecast is largely based on the hypothesis that the underlying US business cycle remains resilient in the context of high and persistent policy uncertainty, and can thus avoid a 'hard landing'. We therefore expect the US 10 year bond yield not to fall further, but on the contrary to stabilise first, and then gradually return to 4.50% by the end of 2025. Since that corresponds to what we consider consistent with US economic 'fundamentals', US 10 year bond yields are likely to continue to hover around that level into 2026.

The rebound of German 10 year bond yields in early March to around 2.80% was driven by the structural change in German (and European) fiscal policy. Consequently, that rise will be sustainable. During 2026, there is still limited upside potential. After all, we assume that the recent decompression of the low term premium in the German 10 year bond yield is not yet complete. That decompression was largely due to the market expectation that the relative scarcity of German government bonds as a benchmark for the euro area will further decrease due to the increasing debt issuance by the German government.

Intra-EMU spreads remain subdued

Bond yield spreads between EMU sovereigns on the one hand and German government bonds on the other remained stable or even crumbled slightly recently. The main reasons remain higher German bond yields due to the unprecedented planned German fiscal stimulus and continued attempts by most EMU governments to consolidate their budgets in line with the requirements of European fiscal rules (SGP). Those efforts are somewhat tempered by the national 'escape clause' for defence spending, though. On the other hand, the option for the ECB to use its Transmission Protection Instrument (TPI) if necessary continues to exert a downward effect on sovereign yield spreads.