Charts of the Week: Calm Before the Storm?

Uncertainty and markets A recent rise in the US Economic Policy Uncertainty (EPU) Index suggests heightened concerns over recent policy decisions and macroeconomic stability. That said the CBOE Market Volatility Index (the VIX) typically moves in tandem with the EPU, but its recent response has been muted (chart 1). This suggests that financial markets have either priced in these risks or expect stabilizing measures.

US inflation and tariffs While analysts and financial participants are concerned about the potential inflationary effects of US President Trump’s latest tariff actions, a look back at his trade policies during his first term might offer reasons for relief. As chart 2 below suggests, while the US duty rate on imports surged following Trump's tariffs starting in 2018, consumer price inflation decelerated in the months that followed. This suggests that tariff rates alone are not a critical determinant of the future path of inflation. Other factors (e.g. energy prices and the stance of economic policy) are arguably more important. In fact, an additional trend that emerged after the 2018 tariffs were enacted was a fall in import prices excluding duties. Still, whether this drop in import prices resulted from US importers and other producers absorbing the tariff burden or from broader market forces remains unclear.

Wage growth in the US and Europe The past few days have seen incoming inflation data from the US, Canada, and the UK surprise forecasters’ expectations on the upside. Underlying details, moreover, suggest that service sector inflation has remained sticky. One reason for this is that all three economies have continued to experience tight labour markets and persistent nominal wage pressures. That said, the latest wage trackers from the Indeed Hiring group suggest some room for optimism for the outlook ahead. Wage growth has eased from post-pandemic highs in the US and euro area as demand has softened. Still, the UK remains an outlier, with wage growth still elevated at around 6 percent due to ongoing labour shortages and structural rigidities.

Global growth Another concerning aspect of the current global economic landscape is the uneven pace of growth across major economies. Chart 4 highlights a significant divergence in GDP performance in Q4 2024, with Japan and the US posting relatively strong expansions, while much of Europe continued to struggle. Within the euro area, key economies such as Italy and France experienced a small decline in output, while Germany saw a more pronounced contraction, deepening concerns over the region’s economic resilience. With sluggish demand and persistent structural challenges, the euro area remains precariously close to slipping into another recession.

Electricity price variations A key driver of the euro area’s underperformance concerns the price of energy. Chart 5 below highlights variations in electricity prices across major economies (a two-year average), and shows that the UK and Germany have experienced the highest costs. In the UK, elevated prices have been driven by high wholesale energy costs, heavy reliance on natural gas, renewable subsidies, and grid infrastructure expenses. Germany’s prices are similarly high due to its transition away from nuclear energy, dependence on imported gas, and renewable energy surcharges. The United States has the lowest electricity prices, supported by abundant domestic energy resources, particularly natural gas and renewables, as well as a more decentralized energy market.

Japan’s economic momentum As noted above Japan’s GDP growth toward the end of last year was relatively impressive compared with other advanced economy peers. The underlying details too were encouraging with private demand together with public spending playing a larger role in supporting economic activity. However, digging even further into those details reveals lacklustre consumer spending growth at the end of last year. And moving forward, Japan’s growth trajectory will hinge on firming real wage growth and the resilience of domestic consumption. A sustained pickup in real wages will certainly be essential in boosting household spending, which has so far lagged behind broader economic improvements.