Consumers Take Fright At US Policy Trajectory, And Other Key Economic News To Know

1. Uncertainty Takes Its Toll The rapid changes in U.S. policy announced since the new administration took office in January are beginning to affect consumers, according to preliminary survey results for March. The University of Michigan’s Index of Consumer Sentiment stood at 57.9 in the latest release, a decline of 22% from December 2024. The forward-looking component of the index, which measures consumer expectations, dropped even more sharply, falling 26% to 54.2. This decline follows weeks of dramatic developments, including the inconsistent imposition of extensive tariffs, a significant deterioration in the stability of the transatlantic alliance, and a narrowly averted government shutdown. Equity markets were initially expected to benefit from the administration's business-friendly stance, but volatility has ensued; on March 13, the S&P 500 index entered correction territory (defined as a drop of 10% or more from its most recent high) before recovering slightly after the government shutdown was avoided. Additionally, the dip in 10-year Treasury yields from 4.8% in mid-January to 4.3% in mid-March reflects rising investor nervousness. Typically, such a fall in yields would be accompanied by an increase in the value of the dollar as a safe-haven currency. However, a weakening of the dollar in the first half of March suggests there may be deeper concerns about the economic outlook. 2. Germany Prepares for a Major Fiscal Overhaul Recent developments in the U.S. have prompted European capitals to consider the need for greater self-sufficiency and corresponding shifts in fiscal policy. This is particularly evident in Germany, where on March 4, the incoming Chancellor, Friedrich Merz, announced a significant departure from the country’s decades-long commitment to fiscal prudence. Under the new plans, Germany’s debt brake, which prohibits structural deficits exceeding 0.35% of GDP, will not apply to defense spending above 1% of GDP. Additionally, a €500 billion infrastructure fund has been established, and the new government aims to loosen EU budgetary regulations. On the same day as Germany's overhaul announcement, the European Commission disclosed plans to create fiscal space of up to €800 billion for defense spending, with €150 billion coming from new Commission borrowing made available to member states, while €650 billion would be exempted from countries' increased defense expenditures to avoid “excessive deficit” penalties. On March 6, the European Central Bank (ECB) lowered its policy interest rates by 25 basis points. This action signals an intention to bolster economic activity across the eurozone, although the simultaneous loosening of both monetary and fiscal policy could risk fueling inflationary pressures. ECB President Christine Lagarde remarked, “The level of uncertainty we are facing is exceptionally high. We will always do whatever is necessary to deliver price stability.”

3. News in Brief: Other Recent Global Economic Updates The OECD has revised its global growth estimates, predicting growth will "moderate" to 3.1% GDP for this year, down from 3.3%, and 3% instead of 3.3% for 2026. A key concern highlighted by the OECD is the "further fragmentation of the global economy," along with persistent inflationary pressures in numerous countries. The latest global Purchasing Managers' Index (PMI) also indicates softening growth, standing at 51.5 in February, down from 51.8 in January. This corresponds to an estimated global growth rate of around 2.2%, compared to an estimated 3% for the last quarter of 2024. Moreover, the latest PMI data does not suggest an imminent uptick; new business growth in February eased to its slowest pace since September. Economic policy uncertainty is reaching record levels, as indicated by various indices primarily based on news coverage. A rolling 7-day average of the U.S. uncertainty index reached levels not seen even during the pandemic in March. The latest equivalent global data from January shows that the previous pandemic-era peak had already been surpassed. Despite these challenges, including an escalating trade war with the United States, China has set a growth target of 5% for 2025, unchanged from 2024. Projected deficit spending is expected to rise from 3% in 2024 to 4% this year, reflecting the anticipated need for increased government support. Concurrently, the inflation target has been lowered from 3% to 2%, indicating ongoing deflationary pressures. In Japan, long-standing deflationary pressures have recently shifted to a challenging period of rising prices. Data indicates an inflation rate of 4% in January, with core inflation at a 19-month high of 3.2%. On March 14, labor unions secured a wage agreement of 5.5%, the largest increase in 34 years. This agreement comes after government growth figures were revised downward, primarily due to slower private consumption. Additionally, reductions to India’s goods and services tax (GST) are forthcoming, according to the finance minister, following significant income tax cuts announced in the budget.