Despite levies, the economy continues to limp along

While daily attention regarding the economy is focused on the whims of the American president, his import tariffs, and their consequences, the economy is humming along smoothly. This week, there was some positive economic news from all regions.

The ZEW index, which measures analysts' and economists' confidence in the German economy, improved again this month. Both the sub-index for expectations and the assessment of the current state of the economy improved.

While daily attention regarding the economy is focused on the whims of the American president, his import tariffs, and their consequences, the economy is humming along smoothly. This week, there was some positive economic news from all regions.

The ZEW index, which measures analysts' and economists' confidence in the German economy, improved again this month. Both the sub-index for expectations and the assessment of the current state of the economy improved.

The index measuring confidence among homebuilders also improved slightly in June. Perhaps more importantly, retail sales rose more than expected in June after two months of disappointing figures. You should never underestimate the American consumer.

Economists and market participants are currently particularly focused on signs that Trump's tariffs are likely to boost US inflation. So far, that hasn't been too bad. The price level rose by 0,3% month-on-month and 2,7% year-on-year in June. This was in line with expectations. Core inflation also met expectations: 0,2% month-on-month and 2,9% year-on-year. This means inflation is still slightly above the Fed's target, but not by much.

Naturally, all sorts of analyses were published on the details. I saw a comment on Bloomberg suggesting that inflation is indeed accelerating for specific products that are largely imported. Prices are said to be higher, especially after February. I've listed the indices mentioned in that article. I find them rather reasonable, but judge for yourself. The overall inflation figure is said to be temporarily depressed by a few specific factors, such as falling used car prices. In my experience, you can sometimes have successive "temporary" factors.

The debate about potential interest rate cuts in the US continues. But they're coming, those interest rate cuts. Probably not for another week and a half, although that's quite possible. If a rate cut doesn't happen in July, then there will definitely be one in September. Whether that's due to the pressure Trump is putting on the Fed or not is difficult to assess. Of course, there's a lot of uncertainty. That argues for a wait-and-see approach. On the other hand, the interest rate level is still quite high. The gap between the ECB's interest rate and that of the Fed is considerable. It suggests that the US interest rate is restrictive, while one might question whether that degree of restrictiveness is desirable. We'll see.

Closing
Across the board, macroeconomic data in various regions this week paint a positive picture. The German ZEW index rose again, and growth in several Chinese variables was also positive. The same applies to data from the US. The destructive impact of Trump's import tariffs and the resulting uncertainty has so far been limited.

US inflation did rise slightly in July, but it was in line with expectations. Some nerds digging into the details believe they're seeing some signs of the tariffs driving inflation. I won't deny that, but you have to look closely to see it. It's still early days, though. Who knows what's yet to come.

A remarkable number of Fed officials have argued in recent speeches that it's time to lower interest rates again. That's why I think they're coming. Maybe not this month, but definitely in September. Mark my words.

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

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