Economy in Brief

In what is becoming a more common global story, confidence in Norway is rebounding after an earlier significant setback as countries recalibrate their circumstances under the revised Trump's tariff format. Norwegian consumer confidence had slipped in the second quarter to -19.1 from -5.4 in the first quarter, but now in the third quarter, confidence is snapping back to a -3.2 reading, the strongest reading since the first quarter of 2022.

Of course, there's a lot in the mix for this important northern European economy. Norway is an oil economy, and it also is one of the economies that is more vulnerable to relations with Russia. It has a relatively short but direct common border with Russia in the far north; otherwise, the borders are with Sweden and Finland. Still, with conditions in Russia touch and go and with Russian aircraft occasionally testing the air defenses the Baltic region, this is a geopolitically sensitive location.

On the economic front, inflation has been creeping up but the headline and core inflation rates are above the 2% mark and largely occupying space between 2.5% and 3%. Economic performance has been a bit uneven with the unemployment rate beginning to move up, as that rate has been notching steadily higher as 2025 has progressed. The last move by the central bank was to cut its key interest rate on site deposits. With the unemployment rate rising, there was little reaction in the bond market to this, especially in the environment where the manufacturing sector continues to be under pressure as it is for the most part globally with output in Norway contracting over the past two months (Y/Y).

Consumers’ rating of the environment for spending improved in the third quarter after deteriorating sharply in Q2. Its improvement brings it to a level above where it was in the first quarter as well; however, on ranked data back to the early 1990s the environment for making a major purchase still only has an 11.4 percentile standing, a relatively weak performance.

The assessment of the overall economy for the next year improved sharply once again after falling sharply in the second quarter. This metric had a value of 5.1 in the first quarter that slipped back to -21.2 in the second quarter; since then, the third quarter has gained some of that back at a survey reading of -3.3. It's still not back to its first quarter level, and it still is a reading that represents relatively weak performance as it has a 28.8 percentile standing which leaves it clearly in the bottom third of its queue of values since the early 1990s.

However, the personal finance readings do pick up for conditions expected for next year as the index evolves from a reading of 21.5 in the first quarter to 11.2 in the second quarter and back up to 21.8 in the third quarter of 2025. This reading brings the personal finance assessment to a 47-percentile standing, just slightly below its median for the period; at a level of 21.8, it's above its mean value of 20.1 for the period. This news on the personal finance front is better than anywhere else in the survey.

Consumer confidence is also rated according to age. And while there are some differences among the age-cohorts, for the most part they move and evaluated in unison. The queue rankings range from 16.7% (with the youngest growth at the low end) to 25.8% with the oldest group at the high end. Over 4 quarters, the changes in the age-cohort evaluations range from +11.1 to +18.7.

Macro-expectations- The ZEW financial experts registered disappointment this month in the tariff deal that the European Community struck with the United States. Macroeconomic expectations in August for Germany were slashed back to a reading of 34.7 in August from 52.7 in July; for the United States, expectations also were cut to -41.2 from -34.2. These two sets of reductions brought German expectations to a 60.8 percentile standing, leaving them still above their median on data back to the early 1990s. The U.S. reading has a much lower, 9.3 percentile standing on the same timeline. Despite the ZEW experts’ opinion that the tariff deal is bad for Europe, it apparently doesn't boost expectations for the U.S. at all. This, of course, makes me wonder to what extent the forecast has a bit of sour grapes to it.

The economic situation- The economic situation also deteriorates this month with the euro area assessment falling to -31.2 from -24.2 in July. Germany's assessment falls to -68.6 from -59.5 as the tariff deal weighs on Europe and Germany. The current situation for the U.S. improves marginally to +0.1 in August from -5.9 in July. These new readings leave the euro area economic situation reading with a ranking in its 46.9 percentile, Germany ranks in its 22.2 percentile, and the U.S. stands in its 35.1 percentile.

Inflation expectations- Inflation expectations in Europe remain low but increased to some extent in the U.S. where they were already high. The European readings for the euro area fell back to -6.7 in August from -5.8 in July. For Germany, the reading was little changed at -5.1 in August from -5.2 in July. The U,S, rating moved up to +74.5 in August from +64.3 in July. The queue standings for these metrics show the euro area inflation expectations standing in its 27th percentile, the same as for Germany, but for the United States inflation expectations are up to their 95.9 percentile! This is an extremely interesting angle from the ZEW financial experts because we have the Fed in the U.S. poised to cut interest rates. We have the President pushing the Fed to cut interest rates more quickly and more deeply than it wants to do it. And despite the fact that inflation has run over target for four and a quarter years in the U.S., we have the Fed seemingly ready to cut interest rates, perhaps twice by the end of the year, even with the potential for inflation from tariffs knocking at the door. The ZEW experts ‘take’ on the U.S. and its financial situation seems to be quite different from how it's being analyzed in the United States.

Short-term interest rates- Short-term interest rate expectations for the euro area show less of an inclination for rates to fall with the -35.7 reading in August compared to -49.7 in July. For the U.S., the -61.5 reading is lower than July's -43.8, indicating that expectations for rate cuts in the U.S. are growing. The euro area short-term rate expectation has an 18.4 percentile standing whereas in the U.S. the standing is at its 10.4 percentile.

Long-term rate expectations- Long-term interest rates found reductions both in Germany and the U.S. in August. German expectations fell to an index reading of 19.0 from 26.1 in July. In the U.S., the reading fell to 26.4 from 38.7. The queue standings for the German rate are in their 25.5 percentile, below the U.S. where the percentile standing is at its 32nd percentile. In both cases, the expectations for long rates indicate a good deal of moderation. Queue standings well below their respective median readings for both Germany and the U.S. (remembering that the medians for ranked data occur at the 50th percentile mark).

Stocks- Stock market expectations were slightly weaker in Europe with the euro area falling to 18.1 in August from 22.4 in July. The German reading fell back to 18.5 from 24.6, while the U.S. reading is little changed at 8.4 compared to 8.6 in July. The standings for all of these readings are around the 15th percentile; there are small differences among the different reporters, but nothing of significance.

As more updated inflation data continue to post, we can look back at EMU historic inflation performance and try to gain some perspective. Since the euro area went to single currency status and set a program in motion for replacing domestic currencies (whose exchange rates were by then locked) with the euro-currency unit, there has been a lot of shifting of inflation and in relative prices among members. In the early days, there was a lot of concern about that and about entry level inflation commitments in the community.

On a to-date basis, despite the recent loss of control over inflation (in the wake of COVID and the Russian invasion of Ukraine) which the ECB has now mostly – but not fully- contained, core inflation in the EMU still runs hot and does so somewhat broadly. Still, headline inflation in the euro area has run at a compounded annual rate of 2.1% since January 1999, very close to its original 2% commitment.

Current headline inflation rates among early reporting and early EMU members (11-countries) show year-on-year inflation at 2.4% or higher in six of them- highest at 3.5% in Austria.

Since currencies were bound together and blended into the euro in January 1999, price levels among these members have risen in differing magnitudes, ranging from 92% in Luxembourg to 63% in France. That leaves a lot of potential for competitiveness gaps between those countries depending on the industries that most responsible for the price-level rise differences.

Price levels have risen more slowly than for the EMU overall in France, Finland, Ireland, Germany, and Italy. When the EMU was first being implemented, there were massive and chronic inflation differences between hard money countries like Germany, the Netherlands, Finland and a few others. The Mediterranean countries including France, Spain, Portugal, Italy, and Greece had typically run much higher rates of inflation. However, after over a quarter century in the cauldron of monetary singularity, we find that Spain and Portugal have averaged inflation rates of 2.4% and 2.2% while the EMU has averaged a pace of 2.1% during the period. Italy has averaged 2.1%. These are tightly clustered results.

The Monetary Union has had its difficulties, its tensions, its debt crises, and has withstood an influx of migrate that created tensions in the area (an influx that cost former EU member the U.K. its membership). But in the end, current inflation rates are mostly in alignment and so do not seem to display much more variation that the sorts of inflation rate difference you see among various states within the United States. The worst start-to-date inflation performance is in Luxembourg at 2.5% -and that probably matters the least since it is a financial center and does not compete much in manufacturing.

The far-right hand column in the table ‘memorializes’ history by showing the largest divergence between German inflation and each member over this history back to 1999. The current largest one-year inflation rate gap with Germany is Austria at 1.5% but after that it is Spain at 0.6% and then Portugal, Luxembourg, and Belgium -all at 0.5%. These gaps bear no relationship to the historic annual discrepancies as large as 28%. Four countries have their largest discrepancy with Germany annual inflation at over 20%; the others are greater than 15% but less than 20%.

For reference, I include the United States and the United Kingdom at the bottom of the table. They are two peas-in-a-pod with aggregate price levels rising over 90% each over this period. We can see the impact of that on the dollar’s value as well as on the value of the pound sterling over this period. If exchange rates are locked (as in the EMU), domestic prices are forced to rationalize themselves in the domestic economy. If exchange rates are left to fluctuate, the pressure on the domestic price level to adjust is alleviated because the exchange rate can adjust instead. Forcing adjustments in prices through a domestic chain of events is usually more painful than undergoing exchange rate change and, the later, simply change all prices in unison at least those for tradeable goods.

This week, we look at key economic and trade developments across Asia amid persistent geopolitical tensions and shifting policies. US-India trade talks, once expected to produce a quick deal, have stalled. India now faces up to 50% additional US tariffs—half from revised reciprocal rates and half linked to its continued imports of Russian oil, which make up about 35% of its crude supply (chart 1). Around 20% of India’s exports go to the US, leaving its economy exposed to the impact of these measures. In China, a flurry of economic data releases for July will provide a comprehensive update. Despite resilient numbers of late, doubts persist about the sustainability of growth. Recent retail sales gains have been partly fuelled by a government subsidy program, which is likely a one-off, while the property market continues its multi-year decline. Export growth has endured (chart 2), but largely supported by importers’ front-loading ahead of tariffs,an effect that’s likely to be temporary. The US-China tariff pause may be extended, though talks remain ongoing, and risks of renewed tensions persist. Meanwhile, China’s trade surplus continues to expand as exports shift toward Africa, Southeast Asia, and Europe (chart 3).

On the region’s growth backdrop, Japan’s preliminary Q2 GDP reading and final Q2 figures from Taiwan, Hong Kong, and Malaysia are due. Taiwan’s preliminary Q2 GDP shined, boosted by AI-driven exports (chart 4), while Hong Kong and Malaysia have been treading water. Japan has faced export headwinds from US tariffs, particularly in autos, though recent US-Japan and US-Korea deals reducing auto tariffs may support future growth (chart 5). Monetary policy watchers will focus on the Reserve Bank of Australia, expected to cut rates but signal an end to easing, and the Bank of Thailand, likely to cut rates amid deflation risks (chart 6).

The US-India furore The trajectory of US-India trade talks has not unfolded as initially expected. At one point, these negotiations were considered among the most likely to yield an early deal. However, that has not materialized. In fact, India now appears to be in a potentially worse position than it was around its Liberation Day period, as it faces the prospect of up to 50% in additional US tariffs. Of that, 25% stems from the revised reciprocal tariff rate from the US, while the remaining 25% is linked to India’s continued purchases of Russian oil. India has thus found itself in a bind: on the one hand, it is under pressure to reduce imports of Russian oil—which have grown about 35% of its total crude oil imports, as shown in chart 1—while on the other, its exports to the US, which now make up roughly 20% of its total exports, could be seriously harmed by US tariff measures.