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Daily Economic Update
01.06.2025US: Trump doubles steel and aluminum tariffs to 50%, while a federal court reinstates reciprocal duties. The US Court of Appeals for the Federal Circuit paused the order issued by the US Court of International Trade of blocking tariffs (imposed through an emergency power act) during the litigation process. The appeals court has now allowed the administration to temporarily keep such tariffs in place until it reviews the appeal filed by the latter. The US authorities also highlighted other ways to implement Trump’s tariff agenda in case of a setback from these courts’ proceedings. Re-igniting his tariff escalation, President Trump announced increasing tariffs on steel and aluminum products to 50% from the current 25% effective June 4, with the EU quickly announcing that they are “prepared to impose counter measures”. Trump also criticized alleged violations by China of the trade framework agreed earlier in May, in which both countries had substantially lowered their import duties on each other, with US Trade Representative Greer accusing China of continuing to restrict exports of rare earth minerals. Nonetheless, Trump expressed hope that a call with China’s President Xi, which is not yet scheduled, could help diffuse tension. Amid all these developments, the volatility in US stock markets remained elevated, with the S&P 500 closing flat d/d on Friday after having fallen by more than 1% intraday. In terms of data releases, the US economy in Q1 performed mildly better than the initial estimate, contracting by 0.2% q/q (annualized) versus -0.3% as per the preliminary data, on imports front-running tariff rollouts. Meanwhile, PCE inflation in April remained relatively soft but broadly in line with forecasts, at 2.1% y/y (0.1% m/m) from March’s 2.3% y/y, with the core rate at 2.5% y/y (0.1% m/m), underscoring that steep tariffs would take more time before being reflected in consumer price rises. Finally, the US merchandise trade deficit abruptly shrank in April, to $88 billion from March’s record high of $162 billion, as businesses had front-loaded their purchases ahead of the tariff rollout. However, this may reverse again as importers could resume inventory buildups to take advantage of the current pause in ‘reciprocal’ duties.
China: Manufacturing activity in May improves but US threatens to revive trade war. China’s official NBS General PMI rose to 50.4 in May from 50.2 in April on the back of lessening contraction in manufacturing activity (to 49.5 from 49) and non-manufacturing activity that was still expanding despite a second consecutive month of moderating gains (to 50.3 from 50.4 in April). The uptick possibly resulted from the stimulus packages unveiled by the authorities and the current trade pact with the US, though President Trump’s latest swipe at China (mentioned above) could derail the early progress in trade talks between the world’s two biggest economies and add another layer of uncertainty to China’s economic outlook.
Japan: Tokyo core inflation continued to climb in May for the third month. Headline consumer inflation for Tokyo remained stable, though elevated, in May at 3.4% y/y, while core inflation (excl. fresh food) rose to its highest level since January 2023 at 3.6% (up from 3.4% in the previous month). This increase came mainly due to higher non-fresh food prices (6.9% y/y versus 6.4% in April), particularly rice, which has soared 93% over the past year. The persistent inflation has bolstered the case for the Bank of Japan (BoJ) to raise rates and accelerate the timeline for monetary tightening, with the market already anticipating a rate hike in October. However, the upper house elections next July and the uncertainties related to trade talks with the US may still drive some caution. Meanwhile, retail sales in April accelerated for the third straight month to 3.3% y/y, up from March’s reading of 3.1% y/y, as higher wages supported consumption.
Saudi Arabia: Credit growth accelerates to near-4-year high in April, LD ratio widens to series-high. Credit growth accelerated to 16.5% y/y in April from 16.3% y/y the previous month, the fastest pace since June 2021. In the first four months of the year, credit grew by 5.8% compared to 3.9% in the same period of 2024. Credit to the private sector continued to dominate total lending (93% of total), growing by a robust 15.1% y/y (5.7% ytd), helped in part by strong personal loan growth (including mortgages) of 10.4% y/y. Meanwhile, deposit growth continued to lag behind, increasing by 9.5% y/y (4.3% ytd). This has pushed the loan-to-deposit ratio to a series-high (since 2010) of 111%. This is an extension of a multi-year trend of credit growth outpacing deposit growth amid a surge in investment-driven credit demand. We also note the accelerated growth in public sector deposits held at commercial banks in the first four months of this year versus last year (8.1% versus 3.3%), reflecting active government measures to improve liquidity in the KSA banking system. This coincides with the continued drop in net foreign assets as banks resort to more external debt amid tighter domestic liquidity.