Economy: Untimely trade war

The mood among Swiss industrial and service companies deteriorated sharply in March. Swiss consumer spending, as measured by retail sales, also rose far less than in previous months. However, with strong momentum in the export sector, first quarter economic growth is expected to be solid, partly because many companies brought forward deliveries before the announced US tariffs took effect. If significant tariffs come into effect, the Swiss economy would be disproportionately affected. As a small, open economy, Switzerland is heavily dependent on the export sector, not to mention that the USA is our most important trading partner.

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Economic growth in the USA slowed appreciably at the beginning of the year, mainly due to the weakening of private consumption, which has been a key pillar of growth in recent years. This slowdown comes as little surprise as many households are currently facing pressure on two fronts: on the one hand, income growth has been lagging behind the increase in consumer spending for some time now, while, on the other, reserves built up during the pandemic have now been largely spent. There is also a palpable sense of uncertainty caused by the trade conflict that is clearly weighing on consumer confidence. On top of that, high tariffs on imported goods, which lead to rising prices, are likely to put additional pressure on budgets. It means the US Federal Reserve (Fed) finds itself in an extremely difficult position, with an economy showing weakness as price pressure rises.

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The eurozone economy continues to trend sideways, as shown, in particular, by sentiment among both companies and consumers, which has seen little change in recent months. The huge fiscal policy measures put in place by the German government, and to some extent by the European Union have as yet failed to restore optimism. However, inflation has at least slowed somewhat against the backdrop of a weak economy. In March, core inflation, which excludes volatile price components beyond the influence of the central bank, fell from 2.6 to 2.4 percent, bringing inflation trends gradually closer to the targets set by the European Central Bank (ECB).

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Among the major emerging markets, the strongest growth momentum continues to come from India. Here again, however, growing uncertainty about possible US tariffs has made itself felt recently, weighing on business sentiment. By contrast, economic performance in China is still well below average. Private demand in the form of consumer spending and construction investment remains weak. In response, the Chinese government has announced targeted fiscal policy measures in an effort to take the pressure off private households in particular. However, the negative effects of the trade war, with a spiral of tariffs and counter-tariffs that now includes US tariffs of 145 percent on Chinese imports and retaliatory Chinese tariffs of 84 percent on US imports, are likely to outweigh these measures and continue to slow growth.

Growth, sentiment and trend

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