• As tariffs affect economic sentiment in Europe negatively, Andrea Ferrero says global recession, partly triggered by Trump’s policies, may actually affect EU worse than US

ISTANBUL

US producer inflation in August, an important indicator of consumer inflation, unexpectedly declined 0.1% on a monthly basis, while reports and experts suggested that tariffs' effects on American inflation are yet to be seen.

After the data was released, US President Donald Trump said there is "No Inflation" and the Fed must lower interest rates "big."

"Just out: No Inflation!!! 'Too Late' must lower the RATE, BIG, right now," Trump wrote on his Truth Social, the platform he owns.

Fed Chair Jerome “Powell is a total disaster, who doesn’t have a clue!!!" he added.

The annual consumer inflation rose to 2.9% in August, matching estimates, while increasing 0.4% month-on-month, slightly higher than predictions.

Andrea Ferrero, an economics professor at Oxford University, emphasized that evidence from surveys run by the Federal Reserve banks of New York and Atlanta suggests businesses may take time before passing the full effect of tariffs on to their customers.

"Some businesses with large profit margins may also be willing to absorb part of the effect themselves. So, the effect of tariffs may not have fully appeared on prices," said Ferrero.

He touched on the situation in the labor market, saying that some weakness has been observed in the most recent labor report, noted by Fed Governor Michelle Bowman, so companies may have been careful in increasing prices substantially in fear of losing their customer bases.

"Whether or not the labor market weakness is related to tariffs or not is hard to say," he noted.

Bowman said in August that recent weak job data underscores her concerns about labor market fragility and strengthens her confidence in her forecast that three interest-rate cuts will likely be appropriate in 2025.

The weakness in the job market is coming forth, as annual revisions to the non-farm payroll data for the year before March 2025 revealed a decrease of 911,000 from initial estimates, according to a preliminary report from the Bureau of Labor Statistics (BLS).

In August, the US economy added just 22,000 jobs, well below expectations of 75,000. In addition, the June figure was revised downwards by 27,000 to a loss of 13,000, marking the first loss since December 2020.

Ferrero noted that the weakness may also be related to uncertainty at the global level, which is partly due to the tariff war but also to the war in Ukraine and in the Gaza Strip.

Weakness in economic sentiment in Germany, EU

Beyond the effect of US inflation, tariffs are also taking a toll on the global economy and trade. The German economic research institute ZEW's economic sentiment index in Germany dropped sharply by 18 points to 34.7 points month-on-month in August.

The institute said financial market experts are disappointed by the EU–US trade deal that was announced.

Ferrero said he would not be "surprised" if the drop in economic sentiment and the current situation would spread to the other EU countries, sparked by US trade policy.

"The headwinds that are threatening both the US and the EU are global in nature. If we are going to have a recession soon, it will most likely affect both regions. However, while the US administration may make crazy choices, its economy is fundamentally strong," he noted.

Conversely, Ferrero emphasized that the problem for the EU is that while policymakers are not necessarily making "huge" mistakes, the economy is "weak and stagnant."

"So, the irony is that a global recession, partly triggered by Trump’s policies, may actually affect the EU worse than the US," he added.

The US and the EU reached a trade deal on July 27 with 15% tariffs, ending months of uncertainty. The EU will invest $600 billion in the US and purchase $750 billion in American energy and military equipment.

Ferrero was cautious about the implementation of the EU's investment pledges to the US.

"Public investment programs sound good in theory but are difficult to implement with the high debt levels that pretty much every country in the EU have," he said. "Markets can turn very quickly, and then countries are in trouble. I think the appetite for more public investment is there, but I’m skeptical that we will see a lot of spending in the short term," added Ferrero.

And after the deal was reached, some EU member officials criticized it.

France and Hungary were the first countries to criticize the agreement, deeming negotiations a failure, while German officials said it was appropriate to continue trade.

“A bad deal is (just about) better than no deal at all,” said UK-based Capital Economics in a report, noting that it will reduce the EU’s gross domestic product (GDP) by 0.5%, above estimates.

Former EU foreign policy chief Josep Borrell also criticized the European Commission for the trade deal with Trump, saying it weakened the bloc's geopolitical position.

Borrell said the Commission had adopted a flawed strategy by trying to "appease and flatter" Trump, agreeing to purchase more US weapons and liquefied natural gas areas.

"Bad strategy leads to bad outcomes," he argued. "Europe emerges geopolitically weakened from a deal struck in just 1 hour on a golf course," he said.

Hungarian Prime Minister Viktor Orban ridiculed the deal, saying European Commission chief Ursula von der Leyen was outmatched in negotiations with Trump.

“This wasn’t a deal - President Trump ate President von der Leyen for breakfast,” he said. “Even at first glance, it is obvious to me that this is not an agreement.”