Global Economic Update: Eurozone Wage Growth Slows, Fed Eyes June Rate Cut Amid Falling Consumer Confidence

This week, global markets are reacting to shifting economic signals as central banks weigh their next moves.

In the Eurozone, slowing wage growth is fueling speculation that the European Central Bank (ECB) may ease monetary policy sooner than expected.

Meanwhile, in the U.S., the Federal Reserve is increasingly seen as resuming rate cuts by June as consumer confidence weakens.

Investors are closely watching inflation data, labor market trends, and geopolitical developments that could shape monetary policy decisions and market sentiment in the months ahead.

This Week In Economics: Key Global Trends And Market Insights By Deloitte

The week of February 24, 2025, has been marked by significant economic developments, with tariff proposals continuing to dominate global headlines. As the U.S. Federal Reserve Board adopts a cautious stance due to economic uncertainty, Japan’s strong export-driven growth stands in contrast to a lagging U.S. equity market.

Tariff Uncertainty and Economic Impact

U.S. President Donald Trump has indicated that his administration is considering imposing a 25% tariff on imports of automobiles, pharmaceuticals, and semiconductors. He has also suggested that tariffs could rise even higher, in an effort to encourage businesses to relocate operations to the U.S. This follows the administration’s recent decision to impose a 25% tariff on steel and aluminum imports, set to take effect in March.

The potential tariffs on automobiles come at a time when the U.S. is still weighing a similar 25% tariff on imports from Canada and Mexico. This has the potential to disrupt North America's integrated automotive supply chains, which often involve multiple cross-border movements of components before a vehicle is assembled. Such tariffs could lead to rising production costs, higher vehicle prices, and decreased demand. While European and Asian manufacturers could initially gain a competitive advantage, a blanket tariff on all automotive imports would raise domestic assembly costs and suppress consumer demand.

Japanese automakers, many of which operate plants in the U.S., are already preparing for the impact of steel and aluminum tariffs. If broad-based automotive tariffs take effect, Japanese manufacturers with operations in Mexico and Canada could face additional disruptions. In response, some are accelerating efforts to shift production to the U.S. by the end of February.

Beyond the automotive industry, tariffs on pharmaceuticals would likely increase drug prices, adding to healthcare and insurance costs. The intended goal of reshoring pharmaceutical production may take years to materialize, leading to short-term supply chain disruptions and price volatility. Similarly, tariffs on semiconductors aim to accelerate the reshoring of chip fabrication—a process already underway due to the CHIPS Act subsidies. However, replacing foreign supply chains is a costly and time-consuming endeavor, meaning initial tariff-driven price increases are likely.

U.S. Federal Reserve Maintains Cautious Stance

The Federal Open Market Committee (FOMC) recently released the minutes of its January meeting, reaffirming its cautious approach to monetary policy. While the committee opted to keep interest rates unchanged, the minutes highlighted significant uncertainty regarding tariff policies and their economic impact.

The FOMC acknowledged that tariffs on intermediate goods would lead many businesses to pass rising costs on to consumers, contributing to inflationary pressures. However, tariffs could also suppress consumer purchasing power, potentially slowing demand and exerting a disinflationary effect.

Additionally, the minutes noted that labor productivity growth and a slowdown in labor demand could help mitigate inflationary pressures. As of late February, the futures market indicates a 66% probability of one or two rate cuts in 2025, with a 16% chance of no cuts at all. Investors remain cautious, anticipating that tariff uncertainty may limit the Fed’s ability to ease policy significantly.

U.S. Equities Lag Behind European Markets

Since the beginning of 2025, European equities have significantly outperformed U.S. markets. Several factors contribute to this divergence. First, European central banks are expected to ease monetary policy, whereas the Fed is likely to keep rates steady, leading to higher discount rates for U.S. equities.

Additionally, the increasing reliance of the U.S. on tariffs as an economic policy tool has dampened investor sentiment. Investors fear that tariffs will raise costs, hurt competitiveness, and weaken consumer demand. As a result, U.S. equities have underperformed compared to their European counterparts.

One notable area of European stock market strength is the defense sector. With geopolitical tensions rising, European nations are expected to increase defense spending, especially as concerns grow over U.S. commitment to European security. This shift has driven up bond yields in Germany, France, Italy, Spain, and the U.K., while Poland—already investing heavily in defense—has seen stable yields.

Japan’s Strong Export Growth in Q4 2024

Amid global uncertainty, Japan’s economy delivered an impressive performance in the fourth quarter of 2024, growing at an annualized rate of 2.8%. This marked the third consecutive quarter of strong growth, driven primarily by exports.

Japanese exports surged in January 2025, rising 7.2% year-over-year, with shipments to the U.S. up 8.1%. This growth was likely fueled by businesses frontloading shipments ahead of anticipated U.S. tariffs. Exports to China declined 6.2%, but shipments to Hong Kong, Taiwan, South Korea, and Southeast Asia saw robust increases.

While Japan’s export growth has been a key driver of recent economic gains, domestic demand remains relatively weak. Business capital investment has grown steadily, but consumer spending has been tepid. With potential U.S. tariffs looming, Japan’s export sector faces headwinds, underscoring the need for stronger domestic demand to sustain economic momentum.

Looking Ahead

As tariff uncertainty continues to cloud the global economic outlook, businesses and policymakers must navigate a complex landscape. The U.S. faces the challenge of balancing trade policy with inflationary risks and economic growth concerns. Japan, despite its recent strength, must address domestic demand weaknesses to maintain long-term expansion. Meanwhile, Europe’s equity markets may benefit from increased defense spending, but broader geopolitical and economic risks remain.

The coming months will reveal whether the U.S. proceeds with its proposed tariffs and how global economies adjust to an evolving trade environment. For now, cautious optimism and strategic planning remain the order of the day.

https://www2.deloitte.com/us/en/insights/economy/global-economic-outlook/weekly-update.html

Eurozone Wages Slow, Opening Way For Rate Cut

Wages in the eurozone grew at a slower pace in the final quarter of 2024, reinforcing expectations that the European Central Bank (ECB) will continue cutting interest rates as inflationary pressures ease.

According to data released by the ECB on Tuesday, wages set through negotiations between employers and labor unions increased by 4.12% in the fourth quarter of 2024 compared to the previous year. This marks a deceleration from the 5.43% rise recorded in the third quarter, signaling a cooling labor market as economic growth remains weak.

Expectations of Further Wage Moderation

Economists anticipate further moderation in wage growth throughout 2025 as inflation continues to subside, leading to tempered wage demands. Capital Economics’ Andrew Kenningham highlighted this trend in a note to clients, stating, “There are good reasons to expect wage inflation to fall much further this year. The eurozone’s labor market is not as tight as it was previously.”

A number of forward-looking indicators compiled by the ECB support this view, with many suggesting that the eurozone labor market is loosening. The unemployment rate in the region rose to 6.3% in December from 6.2% in November, adding to concerns about weakening job prospects.

ECB Poised for Further Rate Cuts

The ECB has already responded to these dynamics by reducing its key interest rate five times since June 2024. With another policy meeting scheduled for next week, investors widely anticipate further cuts to borrowing costs in an effort to support economic activity.

Despite a broader decline in inflation—particularly in energy, food, and manufactured goods—service sector prices have remained elevated due to persistent labor cost pressures. However, the slowdown in wage growth suggests that service price inflation may soon follow suit, aligning with the ECB’s forecast that overall inflation will return to its 2% target later in the year.

Job Market Pressures and Economic Outlook

While wage growth has remained above consumer price inflation, providing some relief to households, underlying labor market trends indicate potential economic headwinds. A recent survey of purchasing managers revealed that factories cut jobs in February at the fastest rate in over four years, excluding the Covid-19 pandemic. In fact, the survey recorded the steepest decline in manufacturing employment since 2012, when the eurozone was grappling with its sovereign debt crisis.

For now, real wages continue to recover, helping to restore some of the spending power lost during the inflation surge of the past two years. However, as labor market conditions soften and wage growth continues to slow, the ECB’s focus will likely remain on balancing economic support with its inflation targets.

As policymakers prepare for their upcoming meeting, the latest data supports the delicate economic environment in which they operate—where slowing wage growth and job market fragility may necessitate additional monetary easing to sustain recovery in the eurozone.

https://www.wsj.com/economy/global/eurozone-wages-slow-opening-way-for-rate-cut-cc513f9a?mod=global_news_article_pos1

Fed Seen Resuming Rate Cuts In June As consumer Confidence Takes A Dive

The Federal Reserve Board is poised to cut interest rates in June, with another reduction likely in September, as traders respond to fresh economic data indicating declining consumer confidence and rising inflation expectations.

A widely watched Conference Board survey revealed that U.S. consumer confidence plummeted in February at its sharpest pace in three and a half years. The data reflects growing economic concerns among Americans, exacerbated by President Donald Trump's policies, including tariffs, tax cuts, and workforce reductions. Inflation expectations have surged, with consumers forecasting a 6% rise in prices—the highest rate since May 2023.

Market Bets on Federal Reserve Rate Cuts

Interest-rate futures contracts now suggest a more than 70% probability that the Fed will lower its policy rate by a quarter of a percentage point in June, bringing it down to a range of 4.00%-4.25%. Another reduction could follow as soon as September. Market participants appear to believe that by midyear, the Fed’s concerns over labor market weakness will outweigh fears of persistent inflation, leading to monetary policy easing.

Federal Reserve officials have maintained that they need further evidence of inflation declining toward their 2% target before initiating rate cuts. Policymakers remain uncertain about how Trump's economic measures, including planned tariffs, tax adjustments, and an immigration crackdown, will impact inflation, economic growth, and employment trends.

Economic Indicators and Policy Outlook

A forthcoming report on the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, is expected to show modest progress in curbing inflation. Forecasts suggest that the year-over-year PCE inflation rate for January edged down to 2.5%, a slight improvement from December’s 2.6%.

Despite these signals of easing inflation, the labor market remains resilient, with the U.S. unemployment rate holding steady at 4% in February. However, business activity surveys indicate a slowdown, reinforcing traders’ expectations that the Fed will take action to support economic stability.

In this complex economic landscape, all eyes will be on forthcoming economic reports and Fed's statements in the lead-up to the June meeting. The central bank’s decision will be pivotal in shaping market sentiment and the broader economic trajectory for the remainder of the year.

https://www.reuters.com/markets/rates-bonds/fed-seen-resuming-rate-cuts-june-consumer-confidence-takes-dive-2025-02-25/

Central Banks And Investors Brace For Policy Shifts And Market Volatility

Global economic conditions remain highly fluid as central banks, businesses, and investors navigate shifting monetary policies, trade uncertainties, and evolving market conditions.

The European Central Bank appears set to continue easing interest rates amid slowing wage growth, while the U.S. Federal Reserve faces mounting pressure to cut rates as consumer confidence declines.

Meanwhile, Japan’s strong export-driven growth contrasts with the weaker performance of U.S. equities, reflecting differing economic trends across major markets.

Looking ahead, the trajectory of monetary policy will be shaped by inflation trends, labor market conditions, and geopolitical developments, particularly regarding tariff policies.

As central banks assess their next moves, investors will need to remain vigilant in managing risks and opportunities in an increasingly complex economic environment.

Sources: Deloitte.com Wsj.com Reuters.com

Federal Reserve Board European Central Bank Deloitte Capital Economics The Wall Street Journal Reuters

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