Executive summary
This week we look at three critical issues:
- ECB: Moving closer to cuts but not there yet. At the 11 April meeting, we expect the ECB to keep the deposit rate unchanged at 4.0% for the fifth consecutive time. In the meantime, quantitative tightening remains on autopilot, and the complete expiration of the TLTRO funding by year-end should not affect overall liquidity provisioning. Policymakers will reiterate that initial rate cuts could start from June onwards, contingent on continued disinflation. Given the recent strong US economic data, the Fed is in a different boat and a transatlantic monetary policy divergence cannot be ruled out. However, this should not derail the Eurozone economy. A cumulative 1pp rate delta over the next two years could lead to a 4% depreciation of the euro, which should only marginally increase inflation while benefiting the economy’s struggling export industry.
- China and Germany: The trade tide is turning. Ahead of the German Chancellor’s trip to China next week, we find that the historic trade relationship could be on the rocks. China's global export shares in key sectors like machinery, chemicals, and electrical equipment have surpassed Germany, while the latter's critical dependence on Chinese imports has increased significantly from 6% in 2004 to 22% in 2022. Despite a fivefold increase in German direct investments in China from 2010 to 2022, firms have experienced lower turnover of -EUR6.2bn and lower returns on investments of -EUR24.8bn in 2022. To address these challenges, companies are reinvesting profits in China but also facing domestic economic difficulties, resulting in job cuts in Germany.
- UK: New border controls to be largely offset by aggressive tariff-suspension measures. Over four years after Brexit, border controls on agricultural imports from the EU will finally be implemented on 30 April, costing GBP2bn to British importers and potentially pushing up inflation by +0.15pp. At the same time, and as of today, the UK decided on a massive two-year tariff suspension on almost half of its imports. This smart counter attack could cut total import costs by GBP7bn, and subsequently decrease inflation by -0.6pp. All in all, our inflation forecast for the UK is expected ex ante at 2.6% in 2024 and 2.2% in 2025, from 6.9% in 2023. Taking into account both measures, UK inflation could land at 2.4% in 2024, and 2.0% in 2025, all other things equal.