Economy

“The inflation data for February deserves increased attention ahead of the upcoming ECB interest rate decision this week. Recently, controversies within the ECB Council regarding the pace and number of further rate cuts have intensified. The key interest rates are now approaching a level that, according to some Council members, no longer exerts a restrictive effect on the European economy. Therefore, it is more important than before that today the expectations of a further easing of price pressure have been confirmed. There should be nothing hindering continuing the monetary easing in March. However, it is less certain whether another cut will follow as early as April. Given the potential inflationary effects of looming trade conflicts, it may seem advisable for the ECB to consider a pause in interest rate changes.”

Stephanie Schoenwald

“The wait for a lasting decline in inflation is increasingly becoming a test of patience. The good news is that the prices for services are rising less sharply. The downward trend is expected to continue in the coming months, as the cost pressure from wages is easing. Although wage growth in Germany remained robust in the fourth quarter, it has decreased to its lowest level since summer 2024. This aligns with the recently declining price expectations of service companies. These data will encourage the ECB to maintain its accommodative monetary policy for now, and the likelihood of another interest rate cut in March is high.”

Stephanie Schoenwald

“Economic indicators in February are sending contradictory signals regarding the current development of economic activity in Germany. While the Purchasing Managers' Index still pointed to an acceleration on Friday, the situation assessments from today's ifo survey are pointing downwards again. At least the business expectations of companies have brightened somewhat. However, the chances of a radical economic turnaround are slim, as Donald Trump is likely to follow up his tariff threats with action. The economic conditions remain a tough challenge for the new German Government.”

Dr Philipp Scheuermeyer

“The banks are tightening their reins on corporate loans again. Following the relaxation tendencies in the previous quarter, banks indicated that they had tightened their requirements again in the fourth quarter of 2024, according to the Bank Lending Survey published today. Our analysis of the KfW-ifo credit constraint indicator presents a similar picture. During the same period, a record share of companies reported obstacles in obtaining credit. The high economic and trade policy uncertainty is therefore also affecting the strictness of the banks. Banks are becoming more cautious again, as the creditworthiness of companies is declining due to economic deterioration. More certainty about future economic prospects is likely to help improve the credit supply!”

Dr Jenny Körner

“The German economy is stuck between weak demand and long-delayed structural problems. After another slight contraction last year, our economic output is practically the same as in the pre-coronavirus year of 2019, unlike in the other major industrialised countries. The five-year stagnation phase is like mildew on the mood of households and companies, which prefer to keep their money together rather than invest or consume it. In order to finally get the economy back on track, besides containing the numerous global crises and uncertainties, what is needed above all are convincing answers from policymakers and companies to the huge transformative challenges, especially in industry, before the labour market suffers even more.”

Dr Klaus Borger

“The start of the interest rate turnaround is approaching in the eurozone. I expect the deposit rate to be lowered in July at the latest. Overall, consumer price inflation remained unchanged in April. However, the fact that services inflation has eased after a five-month standstill is likely to be more important for the ECB. At the same time, the growth environment in the eurozone suggests that inflation remains on target. Although gross domestic product surprised on the upside in the first quarter and sentiment has recently brightened somewhat, the European economy is likely to be slow to pick up speed. This suggests limited domestic price pressure. However, the development of energy prices remains a risk factor for inflation and the economy due to the ongoing geopolitical tensions.”

“The economic outlook for the German economy is better than the current mood. The data on wage developments reported today confirm the assessment that private consumption should sustain a moderate economic recovery. The gap between inflation and nominal wage growth is visibly closing. A more significant increase in real wages can be expected at the end of the year. Driven by high price increases and the shortage of skilled workers, employees will receive the highest nominal wage increases in 30 years in the current year. On average, collectively agreed wages are expected to rise by more than 5% in 2023. A smaller increase is expected for next year. However, at around 2.5% (HICP), inflation in 2024 is likely to be much lower than in the current year, for which I expect average inflation of 6.3%. Subdued aggregate demand limits the scope for further price increases, and prices for both energy and food have already stabilised since the winter. If this development continues, real wages will rise noticeably again next year. This also gives rise to cautious optimism for the economy. In 2024, German GDP should therefore grow again after a decline of 0.4% this year, albeit only moderately at 0.8%.”

"The US economy grew by 2.4% on an annualised basis in the second quarter. The US economy is proving resilient despite the Federal Reserve's aggressive turnaround on interest rates. Stable consumer spending and nonresidential fixed investment had a positive impact. However, I continue to expect rising interest costs to slow economic activity in the second half of the year. Sentiment in the manufacturing sector has already deteriorated noticeably and the labour market, which has been clearly overheated lately, seems to be slowly cooling down somewhat. Workers will feel the impact, which will weigh on consumer spending in the coming months. However, on Wednesday, in parallel with the expected interest rate hike of a further 25 basis points, the U.S. Federal Reserve changed its assessment of current U.S. growth from "modest" to "moderate". The Fed now probably assumes that it only needs an economic dip – and not a recession – to push inflation further toward the two-percent target. This means that the US economy could come out of this interest rate cycle with a black eye.”