Economy in Brief

Industrial output in the United Kingdom jumped in February, rising 2.2% compared to January. In January output fell by 0.9% while in December output increased by 0.7%. The February gain is large enough to turn some of the trends higher by itself: the 3-month trend is sharply higher after a gain like this, but the 6-month and year-over-year gains are only moderately higher, but again, they are pointing higher instead of lower.

Sequential and sector growth rates Sequential growth rates for industrial output show progressive improvement from a 0.3% annual rate over 12 months to 1.2% annual rate over six months to an outsized 8.2% annual rate over three months.

Sector gains for manufacturing show increases across the board in February with consumer durable goods output rising 8.6% month-to-month. Capital goods output rose 3.8% month-to-month. These gains were a reversal of widespread and generally smaller declines in January whereas in December there was an output decline for consumer durable goods but increases in all the other categories. As a result of these gyrations and past trends, consumer durables output is sequentially accelerating from an 8.5% growth rate over 12 months toward a 20.2% annual rate over three months; consumer nondurables also sequentially accelerate from 2.1% over 12 months to a 10.5% annual rate over three months. Intermediate goods are an exception; the year-over-year decline in output yields to an even a deeper pace of decline over six months but then a moderate revival emerges with a net gain over three months. Capital goods output has a strong accelerating trend with a gain of 0.5% over 12 months, an annual rate gain of 3.3% over six months and an annualized rate of 12.9% over three months. The trends and the breadth of output increases in the industrial sector for the United Kingdom is impressive but can it last?

Industry detail for several key industries: food distribution, textiles & leather, motor vehicles & trailers, mining & quarrying, and utilities show more irregularity. Output of textiles & leather is progressively and strongly accelerating. Motor vehicles & trailers dig themselves out of a hole with output falling 10.1% over 12 months, but it’s really improving to grow with a 3.5% annual rate over three months. Mining & quarrying shows declines in output over all horizons, but that's still an accelerating trend as the rate of decline slows over each sequential period. Food & tobacco show no clear trend although its 3-month growth rate is higher than its 12-month growth rate. Utilities output also shows strong acceleration, starting with a 1.2% gain over 12 months, rising at a 4.5% annual rate over six months and progressing to a 14.7% annual rate over three months.

With two months of data from the unfolding quarter in hand, manufacturing output is growing at a 3.2% annual rate in the U.K., led by consumer durables with output rising at 11.6% annual rate with intermediate goods as the weak category still falling at a 1.3% annual rate in the quarter to date. Among the five listed industries, all of them but one have output increases. In the unfolding quarter, the largest gains are in textile & leather and the only decline is in manufacturing and coring and that's only at a 0.4% annual rate.

This has generally been a weak period. For growth going back to January 2020 just before COVID started, also including the period of COVID, the invasion of Ukraine by Russia, and special issues for the U.K. because of Brexit, overall industrial production has actually declined by 5% over this span. All of the sectors show increases, however, except for intermediate goods which is the sector that drags down overall output because intermediate goods output falls 23.8% over the span.

The five individual industries listed all show declines over the period except for motor vehicles & trailers that show output is up by 16.1%; but output is down very hard for mining & quarrying nearly 42% lower than it was in January 2020, and utilities output is lower by nearly 26% over that same span.

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.