Weekly Update - Economic situation: the first effects of trade tensions

Economic situation: the first effects of trade tensions
 
The first surveys carried out after Liberation Day are starting to be published. They report a decline in household and business confidence in April, which is consistent with the International Monetary Fund's (IMF) new forecast of a sharp decline in activity. They also show an accentuation of fears of a rise in inflation in the United States. These indicators also support our strategic positioning of reduced risk-taking, particularly on US financial assets.
 
TIn the euro area, signs of moderation in activity and prices. The S&P PMI Purchasing Managers' Survey showed a slowdown in April to 50.1, very close to the 50-threshold signaling a contraction. While the decline is visible in all sectors and countries, it is particularly noticeable in services. Manufacturing activity is showing some resilience, surprisingly given its greater sensitivity to ongoing trade tensions. By country, Germany fell sharply, tipping into contraction territory, while in France the contraction accelerated. While the employment component remains stable, inflationary pressures continue to moderate, in view of the slowdown in price components
 
In the United States, a slowdown in activity with price pressures. The S&P PMI survey fell sharply in April, to 51.2, from a higher level than in the eurozone. While the manufacturing sector is also showing some stability around the 50 threshold, it is mainly services that show a clear decline. Households also showed a decline in their assessment of the current and future economic situation in April. On the inflation side, surveys show fears of a return to price pressures, both on the part of households and companies.
 
These signals are consistent with the sharp decline in activity forecast by the IMF. The institution has just updated its forecasts and now shows a sharp decline in global growth in 2025, to 2.8% from 3.3% in 2024. This decline is mainly due to a marked revision of the United States' forecast (to 1.8% compared to 2.7% anticipated at the beginning of the year), but all regions are concerned. According to the IMF, the global economy would avoid a recession, but the probability of a recession in the United States has increased to 40% from 25% previously, due to the risk of a further escalation in trade tensions or financial turbulence. These forecasts were made on the basis of the tariff increase announcements of 2 April (the date of Liberation Day) but remain robust to the alternative scenario of a certain moderation. At the same time, the institution forecasts higher inflation in 2025 – mainly revised upwards in the United States, where it would be 1 point higher at 3% on average – without calling into question the downward trend in the longer term.
 
This news reinforces our strategic positioning. The first surveys in April as well as the IMF's analyses are in line with our scenario of a "slowdown" on economic growth, explained by trade tensions as well as by the uncertainties generated by the direction of US policy. We expect a slowdown in activity in the United States with a rise in inflation in the coming months, which would encourage the Federal Reserve to delay the continuation of its monetary easing. In the euro zone, growth is also expected to be slowed down, but more moderately, as it is less directly affected. The easing of inflation would allow the European Central Bank to accentuate its easing. A sharper slowdown in activity combined with less monetary easing reinforces our choice to "reduce the sails", particularly against the US markets.
 
Other highlights of the week
 
In the highlights of the week, we chose to talk about France public finances and financial markets.

• Public finances: France in a bad position according to the IMF

IOn 23rd April the International Monetary Fund published its forecasts for the States' budgetary policy. For 2025, the institution believes that France will respect its deficit reduction schedule, with a public deficit of 5.5% of GDP (against a government target of 5.4%). But from 2026, the IMF anticipates a deficit of 5.9%, well above the target set by the government at 4.6%, and forecasts a continued deterioration in the following years. In the same vein, the IMF anticipates a worsening of public debt, which would reach 128% of GDP in 2030, compared to 113% in 2024. Prime Minister François Bayrou has announced that he will present his plan to reduce public spending by 14 July, with the aim of saving 50 billion euros

• China: Solid growth and trade surplus in Q1

In the United States, the S&P 500 has recovered slightly after the sharp decline observed following the "liberation day“, but remains down sharply compared to its January level (-8%). In Europe, the STOXX 600 returned to a higher level than at the beginning of the year (+1.5%), thus making up for its losses. By country, the CAC 40 has not yet returned to its January level, while the German DAX continues to perform well, and the Spanish IBEX has regained its pre-liberation day level. In Japan, the Nikkei remains below its level at the beginning of the year (- 12%).
The Treasury yield fell slightly to around 4.3%. In the eurozone, the yields on the BUND and OATs also fell slightly, to 2.4% and 3.1% respectively. Finally, the yield on 10-year UK bonds stood at 4.5%.

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