US-China tariffs dilemma for Europe, one culprit for sticky US inflation and Central European central banks take a break

  • US auto tariffs: Can the EU follow suit? The bark of higher US tariffs on Chinese goods is worse than the bite: The latest move will lift the global effective US tariff rate by a meagre 0.2pp to 2.7%, and the effective tariff rate on Chinese goods by 1pp to 13.5%. However, it will bring topics such as increasing Chinese investment inflows into Mexico, trade diversion & mis-invoicing and exchange rate adjustments back into the spotlight, where they will remain as the US elections approach. The stakes are higher in Europe: It will not be easy to follow suit without hurting its own auto industry, which is much more reliant on China for profits and revenue, or jeopardizing its own green transition. China is the largest exporter of new cars to the EU both in terms of value and volume and sales of Chinese EVs have been surging. Imposing additional tariffs on Chinese EVs would mean even higher prices for European consumers, which could potentially backfire on the EU's climate ambitions.
  • Who’s to blame for sticky US inflation? Inflation remains elevated in the US, even as it drops in Europe. In April, inflation was running at +3.4% year-on-year (only -0.1pp from March), driven by still strong increases in core services and shelter prices. While fiscal policy, increasing immigration and the Fed – the latter blaming persistent supply constraints – are often listed as key reasons behind remanent inflation, we find that looser financial conditions are the number one cause, accounting for more than half of higher price pressures in 2024, even as US interest rates have been at 5.5% since July 2023. Looking ahead, the continuation of quantitative tightening should start to drain liquidity before long but we expect inflation to start to normalize only in Q4 2024 at the earliest.  
  • CEE and Türkiye: Rebounding inflation will slow the monetary easing cycle. Rising food and energy prices have brought rapid disinflation to an end in Poland, Czechia and Hungary, and we expect inflation to rise above central banks’ target ranges again by the end of 2024. In Romania, on the other hand, inflation has remained stickier. As a result, we expect the pace of the current monetary easing cycles in Czechia and Hungary to slow down, while Romania and Poland with wait until later this year to cut policy rates. In Türkiye, meanwhile, inflation is set to rise to over 70% this month before starting to fall thereafter to around 40% by end-2024. The Turkish central bank is likely to keep its policy rate unchanged at 50% until inflation will have eventually fallen below this level towards the end of this year. A first policy rate cut is then possible in Q4 2024.
Ludovic Subran
Allianz SE
Yao Lu
Allianz Trade
Manfred Stamer
Allianz Trade
Maxime Darmet
Allianz Trade
Jasmin Gröschl
Allianz SE