Economy

“Despite the trade conflict, German companies are more confident about the future, while their assessment of the current situation has deteriorated marginally. The increased willingness of the USA to make compromises is presumably the reason behind the improvement in expectations in the ifo index. However, the rise also seems to signal an increase in companies' confidence in their own robustness. Nevertheless, the situation remains complex and tariffs in trade with the US are likely to be higher than at the beginning of the year. All in all, however, this suggests that Germany will soon begin to overcome its long-standing stagnation. But recovery will require more than the fiscal package for defence and infrastructure. Although this money is necessary, it is not sufficient for a turnaround for the better. Reducing bureaucracy, faster approval procedures and avoiding supply-side bottlenecks, for example due to a lack of skilled workers, are also essential for success.”

Dr Dirk Schumacher

“The Fed is facing an unusually complicated macro-economic picture at its upcoming meeting. The underlying reason for the current high degree of uncertainty with respect to the outlook is the seemingly constant back-and-forth of the Trump administration with regards to tariffs on foreign goods as well as the response of other countries to these. While there are some early signs that tariffs are already weighing on the US economy, it is very difficult to say how much more the economy will slow. Furthermore, it is conceivable that inflation, despite a weaker economy, will re-accelerate on the back of tariffs. In short, the US economy may face a significant adverse supply shock that could set growth and inflation on diverging trajectories. Given the low visibility on the outlook, we expect the Fed to stay on hold next week. It is noteworthy in this context that chairman Jerome Powell sounded rather sanguine about the sell-off in the USA Treasuries market, describing it as a normal adjustment to a changed environment. At the same time, we think the Fed to be more responsive to the coming slowdown of the economy than a potential rise in inflation, implying that we forecast rate cuts to resume in June.”

Dr Dirk Schumacher

"The U.S. economy contracted at an annualized rate of 0.3 % in the first quarter of 2025. This confirms the recession fears that have persisted in financial markets since February. However, the current figures provide only a limited insight into the actual state of the US economy. One-off effects such as inventory build-up still supported growth in the first quarter – but that is likely to change quickly. Leading indicators such as consumer confidence and investment willingness clearly point to a further slowdown. So far, these factors – along with Trump’s sweeping tariff measures in April – are only partially reflected in the data. However, the full braking effect of Trump’s economic policy is likely to become much more evident in the second half of the year.”

Dr Stephan Bales

"It is undoubtedly pleasing that the German economy grew again at the beginning of the year. All the more so as private consumption and investment have contributed to growth. At the same time, this should not be interpreted as the start of a sustained recovery. On the one hand, the increase in GDP barely compensates for the decline at the end of last year - the underlying growth trend remains weak. Secondly, the leading indicators paint a mixed picture and the existing uncertainty regarding US economic policy will once again dampen companies' propensity to invest.”

Dr Dirk Schumacher

„The fragile economic situation due to U.S. tariff policy is also leading banks to remain cautious in their lending practices. After already tightening their credit standards at the end of the year, banks have further tightened their requirements in the first quarter of 2025, according to the recently published Bank Lending Survey. The banks' assessment aligns with our analysis of the KfW-ifo Credit constraint indicator– a company survey on the access to credit. During the same period, a record share of medium-sized enterprises reported obstacles to obtaining credit. Additionally, an above-average number of large companies perceived restrictions from banks. The complex trade policy landscape and uncertain economic outlook are likely to further increase banks' risk assessments regarding companies. Furthermore, the recent severe turbulence in financial markets and the decline in market confidence may have reminded banks of liquidity risks, which continues to justify cautious lending practices.”

Dr Jenny Körner

“A strong tailwind from the energy markets kept inflation in check in March. Brent crude oil became considerably cheaper in a monthly comparison. At the same time, the euro benefited from the announcement of the massive fiscal package and gained in value against the US dollar. As a result, German consumers were able to enjoy falling fuel prices. In view of the volatile geopolitical situation, however, it is impossible to rely on permanently lower energy prices and the development of industrial goods prices is heavily dependent on the course of the customs conflict. It is therefore all the more pleasing that visible progress has finally been made with services inflation. However, part of this is probably due to the early timing of Easter last year. Only April will shed light on how sustainable the easing of price pressure in the services sector actually is.”

Stephanie Schoenwald

“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.”