Take Two: US economy shrinks in first quarter; Eurozone GDP expands
- 05 May 2025 (3 min read)
What do you need to know?
The US economy contracted for the first time since 2022, falling by an annualised 0.3% in the first quarter (Q1), down from 2.4% growth in Q4. The contraction was driven by a number of erratic moves in underlying components, including a net trade imbalance, which alone stripped 5.5 percentage points off the annualised growth rate as consumers and businesses rushed to get ahead of incoming tariff increases. While volatility around tariff reactions remains uncertain, a rebound in growth is likely in Q2, which should avoid the risk of a technical recession in the first half of 2025, although risks will remain over the coming quarters. AXA IM expects GDP growth will slow to 1.6% in 2025 and 0.6% in 2026.
Around the world
The Eurozone economy expanded more than expected in Q1, while inflation remained stable in April at 2.2%, flash estimates revealed. Eurozone GDP grew by 0.4% on a quarterly basis in Q1, double its pace in the previous quarter and marking the bloc’s fifth consecutive quarter of expansion. AXA IM expects GDP growth to average 0.7% and 0.5% for 2025 and 2026 respectively. Meanwhile, Eurozone headline annual inflation rose 2.2%, the same pace as in March, missing market expectations for an easing to 2.1%. Core inflation, excluding energy, food, alcohol and tobacco, rose to 2.7% in April from 2.4%, as services prices increased.
Figure in focus: 49.0
China’s factories felt the brunt of the US trade tariff standoff during April as activity slipped to its lowest level since December 2023. China’s official manufacturing Purchasing Managers’ Index (PMI) fell from March’s 12-month high of 50.5 to 49.0 in April – a reading below 50 indicates contraction. The US has added up to 145% on Chinese imports in President Donald Trump’s first 100 days, while China in turn increased its tariff on US imports to 125%. Elsewhere the Bank of Japan voted to keep its benchmark interest rate unchanged at 0.50% but lowered its 2025 economic growth expectations to 0.5% from 1.1% due to concerns over trade.
Words of wisdom
TIGER: Confidence in the global economic outlook has fallen sharply, according to the Tracking Indexes for the Global Economic Recovery (TIGER), a set of composite indices from research organisation Brookings, Cornell University and the Financial Times. The latest TIGER update revealed a mixed picture, with the financial markets and private sector confidence indices both falling after the US administration announced sweeping trade tariffs. It said that tariff uncertainty “is likely to take a toll on business investment and employment growth” in the US while China “now faces major challenges”.
What's coming up?
A spate of final composite PMIs are published this week, with data from the US and Canada issued on Monday, followed by China, the Eurozone, and the UK on Tuesday. Japan issues its PMIs on Wednesday, when the Fed meets to decide on monetary policy - policymakers decided to hold rates steady at 4.25%-4.50% at their March meeting. The Bank of England follows with its own interest rate setting meeting on Thursday. China's latest import and export numbers are reported on Friday.
Disclaimer
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