The GDP Showdown: EU vs. US

The world's largest economies are expected to have slowed down in the first quarter, but with tariffs on everyone's mind, whose GDP could emerge victorious?

Less to Lose

This week, the initial estimate of Q1 GDP for the Eurozone and the April inflation rate will be released. Given the Eurozone's modest economic growth, a smaller slowdown could have a more significant impact unless there is a swift resolution to the tariff issue. While there was some optimism late in the quarter about the European economy after the bloc pledged to increase defence spending and Germany amended its constitution to allow for increased spending, analysts suggest the effects of these measures will not be felt until next year.

Meanwhile, Germany's Q1 GDP is expected to have accelerated to 0.2% from 0.1% previously, but the annual growth rate is still anticipated to be -0.1%, up from -0.2% previously. Markets may take cues from this figure, as an hour later, the Q1 GDP reading for the entire Eurozone is released, with expectations of a repeat of the 0.2% growth seen in the previous quarter. But the annual growth rate is projected to decline to 0.9% from 1.2% previously.

On inflation, the hope is that consumer prices will continue to ease, allowing the ECB to maintain its accommodative stance. Currently, there is a growing consensus that the next rate cut will occur in June as the Eurozone grapples with slower growth than anticipated due to the tariff wars, declining business confidence, and expectations of slower wage increases.

How Bad Will It Be?

After an optimistic start to the year, the US economy across the Atlantic has sent a series of warning signals throughout the first quarter as investors worried about the potential impact of the trade war. The dollar has experienced volatility as traders attempt to price in risk. With uncertainty persisting amid tariff negotiations, this week could offer concrete data on how the economy is being affected by the tariffs. Initial concerns arose when the Fed's GDPNow tracker for Q1 fell substantially into negative territory; however, a significant portion of that decline was attributed to methodological issues amid market turmoil, specifically the large imports of gold in response to market uncertainty. Adjusting for that effect, the Fed's tracker shows -0.4% annualised growth in the quarter, but economists are not as pessimistic, with the average forecast expecting 0.4% annualised growth. However, that is still a substantial slowdown compared to the 2.4% growth recorded in the fourth quarter.

The US economy was expected to slow down in Q1 even before the tariff issue arose, for various reasons, including the Fed's still restrictive monetary policy. Exiting that position has been challenging for the US central bank as inflation remains high with a tight labour market, but the market is still expecting, although losing confidence, a June rate cut. Meanwhile, the Fed's preferred measure for inflation, the core PCE, is expected to fall to 2.5% from 2.8% on Wednesday.

The dollar decline, and in turn the gains seen in the EURUSD pair over the last couple of weeks, were largely attributed to faltering confidence in the US economy, stemming from the tariff issue. Still, with negotiations underway, the pair has seen a slight reversal to the downside, which could continue if tariffs are lifted.

EURUSD Braces for Breakout?

Fibre appears to be consolidating within a tightening range, resembling a triangle pattern or a pennant at this stage. If the pair breaks above 1.1430, it could lead to a move towards 1.1576 and the measured move projection of 1.17, with intermediate resistance at the 1.16 and 1.1650 levels. Conversely, if the pair breaks below 1.1305, it would expose the support levels at 1.1265 and 1.1150.

Source: SpreadEx / EURUSD

Key Takeaways

Both the Eurozone and US economies are expected to show a slowdown in the first quarter as the tariff wars have cast a shadow over economic growth prospects. While growth is anticipated to falter in the Eurozone unless there is a swift resolution to the tariff issue, the US economy is also grappling with the impact of the trade tensions and the Fed's stance on rate cuts.