Global industrial activity remains mediocre

Find the market analysis for April    02, 2025, signed by Sebastian PARIS HORVITZ.

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While we await D. Trump's announcement today of the list of countries to be affected by new bilateral tariffs, and above all the levels, the effects of the US protectionist policy are weighing on activity. 

Thus, with the publication of S&P's monthly manufacturing PMI indicators, we can see that activity slowed in March. This trend is largely due to the downturn once again experienced by industry in the United States. In the other major regions and countries, however, business trends were slightly more favorable than in the previous month. 

In China, activity rebounded again in March, but this seems to have been driven once again by external demand. Tariff hikes seem to have prompted Chinese companies to step up production in order to satisfy the rise in demand that has emerged, and to avoid, at least in the short term, some of the negative impact of the sharp increase in import taxes. Nevertheless, in the medium term, these protectionist policies are likely to weigh on Chinese industry, especially if domestic demand does not take off more rapidly. 

All in all, the global industrial cycle has remained depressed for several years. US protectionism is likely to weigh further on the industry, where companies are having to adjust to a highly uncertain environment, particularly in view of trade policies that could prompt some countries to adapt their production strategies. In any case, the wait-and-see attitude is likely to persist.

Global industrial activity: S&P manufacturing PMI surveys show a slowdown in activity in March, particularly in the US 

The ISM survey for the US industrial sector also showed a deterioration in activity in March. In fact, the overall index is back in contraction territory. In particular, it's clear that most manufacturers seem to have pulled on the handbrake, with pronounced declines in both the employment and new orders sub-indices.  The disarray created by the Trump administration's economic policy initiatives clearly seems to be preventing companies from committing to the future.

United States: March ISM survey shows industrial activity back in contraction zone

In fact, what's most worrying is that demand could weaken more sharply than expected, pushing activity even lower and triggering a process of sharp contraction, or even recession. 

Although somewhat biased by companies' stockpiling behavior prior to the announcement of the tariff hikes, one indicator that has often been fairly reliable for tracking the industrial cycle is the gap between the new orders index and the inventory index. Over the last two months, but especially in March, there has been a very pronounced drop. An ominous message for the future. 

United States: the cyclical indicator, the difference between the new orders index and the inventory index, points to a pronounced deterioration in activity

In the eurozone, industrial activity remains depressed, as corroborated by S&P's March PMIs. Nevertheless, in both France and Germany, activity is continuing to pick up, even if we're still a long way from returning to growth. Clearly, in the current climate, with the winds of uncertainty blowing in from the United States, it is difficult to envisage a rapid upturn.

Unfortunately, the lesser contraction in activity in the major countries in March contrasts with the continuing slump in activity in Italy and Spain. For the latter, the last few months have been particularly unfavorable. Indeed, for two months now, industrial activity has been contracting, after a year of continuous growth. 

Eurozone: the situation in industry remains depressed, despite a slight improvement in March, with the periphery unfortunately struggling at the start of the year

The budget spending measures announced by Germany in particular should support growth over the course of the year, but their impact will only be felt very gradually in 2025. Other countries should also benefit from spending on defense activities. 

Nevertheless, a key factor in Europe's recovery will remain the ECB's continued monetary easing. In this respect, inflation figures for March were very reassuring. Total inflation, as expected, decelerated to 2.2% year-on-year. Above all, core inflation fared slightly better than expected, decelerating to 2.4%, the lowest level since January 2022. 

One of the most striking features of this deceleration in inflation is the downward trend in service prices. For the first time since June 2022, the index has fallen below 3.5%!

Euro zone: inflation on a favorable trend in March

This is good news for the ECB. Nevertheless, it still seems to us that the ECB should skip April and wait until June to continue its monetary easing. On the one hand, there is still a great deal of uncertainty surrounding the US tariffs, and it would be reasonable to have at least a month to see what impact they might have. 
On the other hand, Mrs. Lagarde has always tried to maintain the cohesion of the Board of Governors, and she will surely seek to allay the concerns of the more conservative members, a number of whom believe that even more caution is needed in the trajectory of key rate cuts.

In particular, with substantial fiscal spending ahead, the more conservative members are likely to insist on the need to be more patient in monetary adjustment, as her policies could push the ECB's “neutral” rate higher than previously anticipated.  In addition, while ECB economists still expect wage deceleration to continue, as we do, the fact that the region's unemployment rate remains historically low possibly remains a pressure factor that could make wage deceleration slower.

Euro zone: unemployment at an all-time low

Sebastian PARIS HORVITZ

Head of Research