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Daily Economic Update
18.05.2025US: Moody’s cuts US credit rating to Aa1, Republicans spar over tax bill. Rating agency Moody’s cut US’s sovereign rating by one notch to ‘Aa1’ from the highest ‘Aaa’ rating but upgraded the outlook to stable from negative, citing a significant worsening in fiscal and debt metrics over the coming decade relative to other similar-rated sovereigns. The agency estimates the US fiscal deficit widening to around 9% of GDP by 2035 from 6.4% last year, with public debt to GDP rising to 134% from 98% currently. Other rating houses had previously removed their top rating for the US, with S&P doing so in 2011 and Fitch in 2023. Meanwhile, some Republicans pushed for greater spending cuts and blocked a comprehensive bill about tax cuts and other budgetary matters (touted as a “big, beautiful bill” by Trump) in the House Budget Committee that would extend soon-expiring tax cuts and provide newer exemptions and add an additional deficit of $4 trillion over the next decade as well as raise the federal debt ceiling. According to the Treasury Secretary, the treasury will exhaust its current maneuvers and hence, the debt limit will be hit sometime in August.
US: Tariff-induced inflation worries soothe as wholesale prices fall but consumer spending cautious. PPI inflation in April unexpectedly fell to -0.5% m/m from no change in March, with core PPI inflation (excluding food and energy) also dropping to -0.4% m/m from March’s 0.4% increase. On an annual basis, overall producer price growth softened to 2.4% from 3.4% in March. A monthly fall in wholesale prices along with previously reported relatively benign consumer price inflation prints suggests that the initial impact of higher trade tariffs may have been partially absorbed by importers and local businesses. However, it should reverse somewhat once the dust on actual tariff rates settles over the coming months as companies may gradually start to pass on higher prices to consumers. On the other hand, households became more cautious as retail sales in April grew at a modest 0.1% m/m rate (still above consensus forecast of no change) following March’s huge and upwardly revised increase of 1.7%. A narrow measure of sales linked to goods spending in GDP (excluding food services, auto, gasoline and building supplies sales) fell to -0.2% m/m from March’s rise of 0.5% as consumers pulled back spending after front-running tariffs in prior months. Lately, several US companies have indicated a cautious/downbeat outlook ahead amid an unclear tariff environment and uncertainties about the government’s broader policies.
UK: GDP growth beats estimate in Q1 before US tariffs and higher insurance contributions hit prospects. The UK economy grew by 0.7% q/q (1.3% y/y) in Q1 25, accelerating from a 0.1% (1.5% y/y) rise in Q4 24 and versus the market and the Bank of England (BoE) forecast of 0.6% growth. Growth in Q1 was boosted by manufacturing front-running US tariffs and greater services spending during March. However, the outlook ahead appears more downbeat given that the US-UK trade deal saw limited concessions and retained the baseline 10% duty, and the implementation of a previously announced higher insurance burden on employers in April along with dampened government spending. The BoE, in its latest economic projections, estimated a meagre 0.1% q/q GDP growth in Q2, with full year 2025 growth of around 1% from 1.1% in 2024.
Japan: The economy shrunk in Q1 2025 for the first time in a year. Initial estimates showed that GDP declined by 0.2% q/q (-0.7% annualized) in Q1 25, coming below market consensus (-0.1% q/q) and the revised 0.6% q/q (2.4% annualized) growth recorded in Q4 24. Private consumption, which accounts for more than half of GDP, was flat in Q1, pointing to the impact of persistent inflation and lower consumer confidence. Moreover, exports declined by 0.6% q/q for the first time in a year while imports saw their highest growth in more than a year (Q4 23) at 2.9% q/q. The outlook for Japan's economy remains cautious as ongoing trade tensions, particularly with the US, and subdued domestic demand pose challenges; a further contraction in Q2 25 would push Japan into a technical recession and delay future Bank of Japan interest rate hikes.
UAE: The UAE signs a $200 billion worth of commercial deals with the US. The US and the UAE agreed on $200 billion worth of commercial deals during the visit of US President at the end of last week. The deal came in line with the landmark commitment to a 10-year, $1.4 trillion investment framework that was previously announced. The agreements include a $14.5 billion worth of Boeing aircraft (28), the building of a new Aluminum smelter in the US ($4 billion), and the new partnership between ADNOC and ExxonMobil, Occidental Petroleum, and EOG Resources to expand oil and natural gas production valued at $60 billion. Moreover, deals within the healthcare sector included the leveraging of AI to deliver more effective, scalable, and affordable healthcare. There were also other agreements for upgrading the UAE’s digital infrastructure including the Amazon’s sovereign cloud launchpad, which will accelerate the adoption of public cloud services in the UAE, and the establishment of the largest AI campus outside the US.
Saudi Arabia: Inflation steady at 2.3% in April. Consumer price inflation came in at 2.3% y/y in April, matching March for the highest inflation rate since July 2023. Housing inflation eased for the sixth consecutive month but remained elevated at 6.8% y/y with rents inflation declining gradually to 8.1% from double-digit levels in the majority of last year. Price pressure in the housing category could see some further easing in coming months as the government rolls out measures to boost supply via tax revisions and an effort to accelerate key housing projects. Price movements in the other categories were mixed with higher inflation in food and beverage (2.2% vs 2.0%), education (1.3% from 1.1%), and restaurants and hotels (2.0% from 1.3%), while lower inflation or faster deflation was logged in other categories including misc. goods and services (3.5% from 3.8%), recreation and culture (-0.7% from 0.3%), and transport (-1.0% from 0.8%). On a monthly basis, inflation rose by a relatively strong 0.3%, likely affected by seasonal factors.