Daily Economic Update

US: GDP contracts as imports spike ahead of tariff effect, but the underlying economy was robust, and inflation mixed. The US economy in Q1 unexpectedly contracted for the first time in three years by 0.3% q/q (annualized) after a solid 2.4% growth in Q4 2024 as imports surged ahead of tariff implementation. Imports contributed a drop of 5% in Q1’s GDP, the largest negative impact on record (outside the pandemic) on overall growth in a quarter, while federal spending also fell 5.1%. However, the underlying economy was relatively robust, as the growth in final sales to private domestic purchasers, which excludes trade and government spending, rose to 3% from 2.9% in Q4. Personal spending growth in March also accelerated to a three-month high of 0.7% m/m from 0.5% in February. Given that overall Q1 GDP figures were heavily influenced by higher imports and some business and consumer spending running ahead of tariffs, it remains very difficult to ascertain the near-term growth trajectory. Steep tariffs will likely reverse the import surge in Q2 but offsetting this, higher prices and uncertainty about government policies could dampen household and business demand. The inflation data was more mixed, as PCE inflation in Q1 increased to 3.7% y/y from 2.3% in Q424, with the core price rise also accelerating to 3.5% from 2.6% on upward revisions to prior data. However, March’s print was much tamer, as both headline and core prices (PCE) were unchanged on a monthly basis and the annual rise moderated to 2.3% and 2.6% from upwardly revised 2.7% and 3%, respectively, in February. Still, as mentioned above, tariffs will likely push prices higher over the coming months but could be somewhat offset by likely moderating demand and businesses’ ability to absorb the tariff impact. Following mixed data, futures markets increased the chances of more Fed interest rate cuts, seeing four cuts of 25bps each this year. 

Eurozone: GDP rises above expectations in Q1, but US tariffs to cloud the trend. Preliminary flash estimates showed that the Eurozone’s first quarter GDP rose by 0.4% q/q (1.2% y/y), higher than the 0.2% q/q (1.2% y/y) rise in Q4 2024 and a similar growth seen by markets as the continent continued to benefit from lower interest rates (policy rate currently at 2.25%) amid decreasing inflation (2.2% in March), both of which are expected to fall further over the coming months. The Q1 GDP figure also marked the fifth consecutive quarter of growth. Despite the latest outperformance, the growth trajectory ahead appears more uncertain as steep US tariffs could pressure Eurozone’s factory output and exports. Previously reported data had shown that Eurozone’s exports to the US increased by 22% y/y in February and 18% in January.    

Chart 1: US GDP (% q/q) annualized Source: Haver

Chart 2: Eurozone GDP  (%) Source: Haver, ECB

Japan: BoJ holds short-term rate, downgrades growth forecasts. The Bank of Japan (BoJ) maintained its short-term interest rate at 0.5% in a unanimous vote as anticipated by the market. However, the central bank downgraded its growth forecasts for FY25 and FY26 to 0.5% and 0.7%, from January’s forecasts of 1.1% and 1.0%, respectively. Despite these adjustments, the bank expressed optimism that underlying inflation trends remain on track to meet its 2% target by H2 FY26, albeit later than previously expected. Governor Kazuo Ueda reaffirmed the BOJ's commitment to future rate hikes if inflation continues to approach the 2% target, but emphasized a cautious, data-dependent approach considering global economic uncertainties. Market reactions were subdued, with government bond yields falling slightly (10-year JGBs to around 1.27%), and the yen weakening approximately 0.5% against the US dollar (to JPY144/$) at the time of writing.   

UK: House prices decline as demand normalized following stamp duty changes. The Nationwide House Price Index in April fell by the most since August 2023, 0.6% m/m after no change in March and recording a first drop in eight months. On an annual basis, price rises slowed to a six-month low of 3.4% from March’s 3.9%. The previously announced changes in stamp duty structures came into effect in April, which had boosted the demand in prior months as some buyers brought forwarded purchases to benefit from reduced duties. Given that demand is now returning to more normalized levels, annual price growth may remain somewhat muted over the coming months compared to the trend in the last few months. But a further reduction in policy interest rates and a steady rise in real wages should help support housing activity.   

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