Economy in Brief

ZEW current economic conditions deteriorate in Europe and improve in the United States in November. Expectations drop for Germany but rise in the U.S.

Remarkable shifts- The U.S. shows two remarkable shifts as U.S. inflation expectations moved from -36.7 in October to +2.7 in November, the second sharpest change in the history of the U.S. series exceeded only by the shift that occurred post-covid in March 2022. U.S. macroeconomic expectations also shifted sharply to +13.3 in November from -8.2 in October. That shift is the 14th largest in the history of that series. Both of these series have a history of nearly 33 years.

Survey BEFORE the U.S. elections finds firmness- The strength of the U.S. shift is impressive; it comes for a survey conducted BEFORE the U.S. presidential elections but after the Fed began its easing campaign. U.S. inflation expectations are still low at the November reading, which has a 23-percentile ranking. But now macroeconomic expectations have risen above their median (above a ranking of 50%) for a standing in their 61.4 percentile. U.S. current conditions have improved slightly in the month as well, rising to a net positive reading of 27.2 with a month-to-month rise of about 3 points to a standing at its 45.2 percentile, a bit short of its historic median at a diffusion value of 29.3.

Normalcy ahead for U.S./not so for Europe- The U.S. survey is climbing back into the normal zone whereas Europe and Germany are weak and getting weaker. In the case of Germany, the economic situation erodes to -91.4 in November from -86.9 in October, falling to a 4.1 percentile standing. That bad combination represents a significant month-to-month drop to an extremely weak level. The U.S. and Europe are in very different circumstances and apparently in different phases of their business cycles as well. Despite the ECB cutting rates, Germany is sinking, and Europe’s politics also are frayed. German expectations are still deteriorating in November and demonstrate half the ranking for U.S. expectations. Inflation expectations in Germany and in the euro area improved somewhat in November.

In this week’s letter, we explore the potential impacts of President-elect Trump’s recent electoral victory on Asia. One key implication is that Trump’s policies could limit the room for policy easing by Asian central banks, particularly if his policies prove inflationary and prompt the US Fed to enact a tighter-for-longer monetary policy. As a result, market expectations for yield differentials between the US and other Asian economies may turn less favourable for the latter, potentially putting downward pressure on Asian currencies.

Beyond this, the most significant effect of Trump’s win could be on trade. Proposed tariffs of up to 60% on US imports from China and up to 20% on imports from other countries create a substantial risk of trade disruption. These measures could provoke retaliatory actions from affected economies or, alternatively, lead to the US negotiating bilateral agreements to reduce the impact, as we saw during Trump’s first term.

Additionally, Trump’s trade policies might prompt a fundamental shift in business strategies, both in the US and abroad. Companies could reconsider their global supply chains, potentially accelerating reshoring or onshoring efforts, while investments in overseas operations could be discouraged. Finally, while Trump’s “drill, baby, drill” stance may be initially expected to lower energy prices, the overall impact on global oil prices may not be so straightforward. This is due to the role of other major producers, such as OPEC+, as well as the potential for renewed geopolitical tensions and changes in global demand dynamics.

Monetary policy The impact of the recent US election – resulting in President-elect Trump’s victory – is set to reverberate globally. Governments, businesses, and market observers alike are now likely scrambling to assess the potential policy implications. One key area of focus is the future direction of US monetary policy, which, in turn, may lead to reassessments of monetary policies across Asian economies. Specifically, the US Fed may not need to cut interest rates as aggressively as previously expected, thanks to the potentially reflationary effects of some of Trump’s proposed fiscal measures. This could result in a higher terminal rate for the Fed in its current easing cycle. Such a shift may, in turn, influence the policy paths of central banks in Asia. If yield differentials become a factor in their decision-making, these banks could face more limited room for easing should they need to adjust rates (see Chart 1). However, several Asian central banks have yet to begin easing cycles due to country-specific factors. These include high household indebtedness, persistent inflation, or simply the absence of a compelling reason to ease, as growth remains strong in some economies.

Industrial production in September was mixed across the 12 early reporting members of the European Monetary Union (EMU). Output fell on the month in Ireland, the Netherlands, Germany, Greece, France, and Finland, a diverse group of EMU members. At the same time, output was reported stronger in Spain, Portugal, Malta, Belgium, Italy, and Austria. The median change in September was for a decline of 0.2 percentage points; that fall follows a median change of zero in August versus an increase of 0.5% in July.

Looking over broader periods from 12-months to six-months to three-months, median output falls over 12 months by 0.5%, it falls by 2.2% over six months, and it falls by 0.5% over three months. The medians of the annual rate changes over those various periods remain consistently negative.

Over 12 months compared to 12-months ago, output is accelerating in 77.8% of the reporters. However, over six months compared to 12-months, output accelerates in only 38.5% of the reporters. Over three months compared to six-months, output accelerates in 55.6% of the reporters. While the statistics on acceleration are mixed, there seems to be more of a tendency for output to accelerate than to decelerate over these various timelines. The monthly data similarly show mixed statistics on output acceleration month-to-month for September, August, and July.

By country, output is accelerating over the three sequential broad periods in Austria and in Spain. However, sequentially, output is decelerating in Germany, the Netherlands, Malta, and Greece.

At today’s meeting of the Federal Open Market Committee, the target range for the Fed funds rate was reduced by 25 basis points to 4.50% to 4.75% following a 50 basis point reduction at the last meeting. The decline matched expectations in the Action Economics Forecast Survey.

The statement following the meeting indicated, “Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated.”

It went on to state, “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”

The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage backed securities.

Today’s FOMC statement can be found here.