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It’s March 11th, and the global economy is shifting faster than ever. From trade wars to defence spending to financial uncertainty, this past week has been packed with big moves that could shape the months ahead. China is slipping into deflation, Germany is rewriting its economic rules, and Trump’s tariffs are starting to bite while tensions between the U.S. and Ukraine hit a new level.

With policies shifting and markets reacting, we’re here to break it all down in the clearest way possible. Let’s get into it.

China’s Economic Climate: Navigating Deflationary Pressures

For decades, China has been known for its rapid economic growth, booming industries, and increasing consumer demand. This means that the value of goods and services produced in the economy keeps rising each year, while everyday people continue to buy and use more  Now, the world’s second-largest economy is facing a very different challenge: deflation.

Understanding Deflation: Why Falling Prices Can Be a Problem

Deflation occurs when the general price level of goods and services declines over time. At first glance, this might seem like a positive development, after all, lower prices mean greater affordability for consumers. However, persistent deflation can create a dangerous economic spiral:

1. Consumers and businesses delay spending – If prices are expected to continue falling, people hold off on major purchases, and businesses postpone investments, further reducing demand.

2. Lower demand leads to declining revenues – Companies sell fewer goods, leading to lower profits and potential layoffs, reducing consumer spending even further.

3. Debt becomes more expensive – Since loan repayments remain fixed, falling prices increase the real burden of debt, making it harder for businesses and individuals to borrow and invest.

4. Economic slowdown intensifies – As consumption, investment, and credit growth slow, GDP contracts, worsening the economic downturn.

How Consumer Behavior is Changing in China

Retailers across China are already adjusting to falling prices, with aggressive discounting becoming the norm. For instance, in Beijing, stores like Wankelai have begun holding multiple flash sales per day to entice cautious shoppers.

• A cotton jacket originally priced at 239 yuan ($33) was slashed to just 20 yuan ($3).

• Undershirts priced at 39 yuan ($5.50) were even given away for free.

While such deep discounts help clear excess inventory, they reinforce deflationary pressures, as consumers become accustomed to waiting for further price drops instead of buying at full price.

Why are retailers being forced to cut prices so dramatically? The key driver is falling consumer demand. With economic uncertainty rising, Chinese consumers are spending more cautiously, leading to a self-reinforcing cycle of price declines.

Economic Indicators: How Bad is the Situation?

Recent economic data underscores the scale of the challenge:

• China’s Consumer Price Index (CPI), a measure of inflation as an average across a basket of household goods/services, fell by 0.7% year-on-year in February, prompting the government to lower its 2025 inflation target to just 2% - far below historical levels.

• Premier Li Qiang announced a modest 5% GDP growth target, signalling a shift from investment-led expansion to a more balanced, consumption-driven economy. This approach focuses on boosting growth through increased consumer spending rather than relying on large infrastructure projects and industrial output.

• Youth unemployment remains a major concern, with job prospects dimming and wages stagnating, further weighing on spending.

Government Response: Can China Reverse the Trend?

To combat deflation and stimulate economic activity, policymakers are considering several key measures:

1. Boosting disposable income – Proposals include tax cuts for low-income workers and direct subsidies to encourage spending.

2. Shortening the workweek – Discussions are underway to reduce the standard workweek to 4.5 days, aiming to reduce unemployment and give workers more time to spend money.

3. Increasing fiscal stimulus – The government is considering higher public investment in infrastructure and green energy projects to support job creation and demand.

External Pressures: The Role of U.S. Tariffs

China’s economic struggles are compounded by ongoing trade tensions with the United States. As detailed in our U.S. tariff report, Trump’s protectionist policies remain in place, limiting China’s export market and reducing the country’s ability to drive growth through trade. Higher tariffs mean reduced demand for Chinese goods, hitting the country’s output and limiting its ability to drive growth through trade.

While China has responded with targeted stimulus programs, the combination of weaker global demand and internal deflationary pressures has made recovery more challenging.

What This Means for the Global Economy

China plays a critical role in global trade and investment, and its economic slowdown has far-reaching implications:

• Weaker demand for imports – Countries that export to China, such as Germany, Japan, and Australia, may see reduced growth in their key industries.

• Supply chain disruptions – Deflation could pressure Chinese manufacturers, leading to lower production and potential supply shortages for global businesses.

• Financial market instability – Investors who rely on China’s steady growth may start reallocating capital, leading to market volatility.

Final Thoughts

China is at a critical economic turning point. If deflationary pressures persist, it could trigger a prolonged period of sluggish growth, reshaping global trade dynamics. The effectiveness of China’s policy response in the coming months will be crucial - not just for its own recovery, but for the broader world economy.

While short-term measures like tax cuts and workweek adjustments may provide temporary relief, the real challenge lies in restoring consumer confidence and ensuring long-term economic stability. Whether Beijing’s efforts will be enough remains to be seen.

Germany Adjusts Debt Rules to Boost Defence Spending Amid Growing Security Concerns

Germany is making a significant shift in its financial policies to allow for increased defence spending, marking a major departure from its traditionally cautious fiscal approach. On February 23rd, Friedrich Merz was appointed Chancellor of Germany, stepping into leadership during a period of heightened geopolitical tensions and strained transatlantic relations.

As covered in previous editions, the fallout between U.S. President Trump and Ukrainian President Zelensky has led to growing uncertainty about Europe’s reliance on U.S. military support. In response to these concerns, European nations are reassessing their defence strategies, with Germany taking a key step by modifying its "debt brake"—a constitutional rule designed to limit government borrowing and maintain fiscal discipline.

Understanding the Debt Brake: Why This Change Matters

The debt brake (Schuldenbremse) is a fiscal policy rule introduced by Angela Merkel in 2009 to control public debt and limit excessive government borrowing. It restricts the German government’s structural deficit to 0.35% of GDP, preventing excessive reliance on debt-driven spending.

What’s Changing?

• Under the new rules, any defence spending exceeding 1% of GDP will be exempt from debt restrictions.

• This allows Germany to increase its military budget without cutting spending elsewhere or raising taxes to stay within debt limits.

• In practical terms, this move unlocks billions in additional defence funding and positions Germany to play a stronger role in European security.

Why Is This Important?

Germany has long underfunded its military relative to its economic size, relying heavily on U.S. security guarantees through NATO. However, as U.S. commitment to European defence becomes more uncertain, Germany is under pressure to rearm at a level proportional to its geopolitical influence.

The Context: NATO Pressures and Rising Defence Expectations

• Germany currently spends 2% of its GDP on defence, just meeting NATO's minimum target.

• NATO (North Atlantic Treaty Organization) is a military alliance of 31 countries, formed after World War II to provide collective defence against security threats.

• Recent geopolitical instability has fueled speculation that NATO may raise its minimum defence spending target to 3.5% of GDP or higher, forcing members to dramatically increase military investments.

By changing its debt rules, Germany is signalling that it is prepared to take a stronger role in European security and reduce its dependence on U.S. military support.

Domestic Debate: Balancing Defence with Economic Stability

Not everyone in Germany is in favour of these changes. Germany's Bundesbank President Joachim Nagel has warned that increasing defence spending alone will not solve deeper economic issues. He argues that Germany must also:

• Increase its labour supply to sustain long-term economic growth.

• Restructure its energy sector to reduce dependence on foreign resources.

• Cut bureaucracy and lower corporate taxes to make the economy more competitive.

Political Challenges:

• The proposed debt brake modification requires a two-thirds parliamentary majority, meaning Chancellor Merz must secure support from opposition parties.

• The Greens have opposed the move, arguing that the funds should be used for productive investments rather than military expansion.

Impact on Germany’s Defence Industry

The German defence sector shrank significantly after the Cold War, with employment in the industry falling from 290,000 to just 100,000 jobs after German reunification. With new investment, the military-industrial sector could experience a revival, creating:

• New jobs in defence manufacturing and technology.

• Higher military procurement and production capabilities.

• Potential challenges in balancing military expansion with public concerns over militarisation.

However, critics warn that expanding the defence sector may lead to public opposition, particularly regarding the construction of new military facilities and increased defence exports.

Conclusion: A New Era for German Defence?

Germany’s decision to modify its debt brake and unlock new military funding marks a major shift in its defence and fiscal policies.

• By exempting defence spending from borrowing limits, Germany can rapidly increase its military capabilities and play a larger role in European security.

• This move aligns with NATO’s growing defence expectations, as member states prepare for a future where U.S. security guarantees may not be as reliable.

• However, economic concerns remain, with policymakers debating how to balance military expansion with broader economic reforms.

As Germany navigates this transformation, its ability to fund defence expansion while maintaining economic stability will determine the success of this bold policy shift.

Trump’s Tariff Gamble: Boosting America or Hurting Its Economy?

Donald Trump’s "Make America Great Again" promise is once again dominating headlines as his administration pushes forward with a wave of tariffs aimed at boosting domestic production. But while tariffs are framed as a way to protect American jobs and industries, their economic impact is far more complex.

What Are Tariffs and How Do They Work?

A tariff is a tax on imported goods, making foreign products more expensive for domestic buyers. The goal is to:

1. Protect local industries by making imported goods less competitive, encouraging consumers to buy domestic alternatives.

2. Raise government revenue as businesses importing foreign goods pay the tariff tax to the U.S. government.

3. Reduce trade deficits by discouraging imports, ideally leading to more balanced trade flows.

However, tariffs don’t directly take money from foreign suppliers. Instead, they increase costs for U.S. businesses and consumers that rely on these imports. For example:

• A 25% tariff on Canadian cars means U.S. automakers pay more for imported vehicle parts, increasing their production costs.

• Higher costs lead to higher prices, making American-made cars more expensive for consumers.

• Foreign suppliers lose sales, but U.S. businesses and consumers ultimately bear much of the cost.

Trump’s Latest Tariff Moves

• March 4, 2025 – Last week the U.S. imposed 25% tariffs on Canadian and Mexican imports, affecting key industries like automobiles, steel, and agriculture.

• Tariffs on Chinese goods doubled from 10% to 20%, further escalating trade tensions.

• Upcoming Tariffs on Europe – Speculation is growing that the U.S. will target European imports, likely impacting luxury goods, machinery, and automobiles.

The Immediate Impact on U.S. Markets

Tariffs create economic winners and losers. While some domestic producers benefit from reduced foreign competition, the broader economy often absorbs the cost through higher prices and supply chain disruptions.

We’re already seeing these effects:

• Stock Markets Drop – The S&P 500 has fallen more than 7% in the past month, as investors worry that higher costs will shrink corporate profits.

• Bond Yields Decline – The yield on 10-year Treasury bonds has fallen, signalling that investors are shifting money away from stocks and into government bonds - a classic sign of reduced confidence in economic growth.

Explaining Treasury Bond Yields

Treasury bonds are government-issued debt securities. Investors lend money to the government by purchasing bonds and receive interest (yield) in return.

• Yields fall when demand for bonds rises, meaning investors are seeking safer investments because they fear economic instability.

• A drop in bond yields is often a warning sign of weaker future growth, as it indicates that markets expect slower economic expansion or higher risks ahead.

Do Tariffs Help Domestic Industries?

One of the key arguments for tariffs is that they protect and grow domestic industries by encouraging companies to manufacture goods at home instead of relying on imports.

However, there are two major challenges:

1. Time Lag in Domestic Growth – Expanding domestic production doesn’t happen overnight. Building new factories, hiring workers, and establishing supply chains takes years, while the negative effects like higher costs are felt immediately.

2. Global Specialisation – The U.S., like most modern economies, specialises in certain industries where it has a comparative advantage. This means it relies on imports for goods it doesn’t produce efficiently. Forcing businesses to use more expensive domestic alternatives can reduce competitiveness rather than enhance it.

Final Thoughts: A Risky Balancing Act

Trump’s tariffs may help some U.S. industries, but they risk slowing down economic growth, raising costs, and weakening market confidence.

• If businesses face higher production costs, prices rise, and consumer spending slows, economic expansion could stall.

• If global trade partners retaliate, U.S. exporters could face lower demand, hurting industries reliant on international sales.

• While protectionist policies aim to make the U.S. more self-sufficient, history has shown that tariffs often cause more harm than good in the long run.

With market volatility rising and economic uncertainty growing, the next few months will reveal whether Trump’s trade strategy truly benefits the U.S., or ends up doing more damage than expected.

U.S. Halts Military Aid and Intelligence Sharing with Ukraine Amid Rising Tensions

The United States has taken significant steps to suspend all military aid and intelligence sharing with Ukraine, marking a pivotal shift in the ongoing conflict with Russia. These actions follow a series of diplomatic disputes and have profound implications for Ukraine's defence capabilities and the broader geopolitical landscape.​

Background: Diplomatic Tensions Escalate

On February 28, 2025, a high-stakes meeting between U.S. President Donald Trump and Ukrainian President Volodymyr Zelenskyy at the White House ended abruptly without agreement. The discussions, intended to finalise a minerals deal allocating 50% of Ukraine's natural resource revenues to a joint investment fund with the U.S., deteriorated into a contentious exchange. President Trump accused President Zelenskyy of "gambling with World War III" and exhibiting disrespect toward the United States, leading to the Ukrainian delegation's prompt departure.

Suspension of Military Aid

In the aftermath, on March 3, 2025, the Trump administration announced an indefinite pause on all U.S. military aid to Ukraine. This suspension affects over $1 billion in arms and ammunition previously designated for Ukrainian forces. The White House justified the decision by expressing concerns that continued assistance might prolong the conflict rather than contribute to a resolution.

Cessation of Intelligence Sharing

Further intensifying the situation, on March 5, 2025, the U.S. ceased all intelligence sharing with Ukraine. This includes critical geospatial imagery and electromagnetic battlefield data essential for Ukrainian military operations. The loss of such intelligence hampers Ukraine's ability to effectively monitor Russian troop movements and anticipate missile attacks, thereby compromising its defensive strategies.

Immediate Implications

The suspension of U.S. support presents immediate challenges for Ukraine:​

• Military Preparedness: The halt in aid disrupts the supply of vital weaponry and ammunition, potentially leading to shortages on the front lines. ​
  

• Operational Intelligence: Without U.S. intelligence, Ukraine's capacity to conduct precise military operations and protect civilian areas is significantly diminished.
  

• Civilian Safety: The reduction in defensive capabilities may result in increased casualties among both military personnel and civilians.

Potential Long-Term Consequences

The U.S. policy shift could have broader ramifications:

• Geopolitical Dynamics: The reduction in U.S. involvement may embolden Russian military strategies, altering the balance of power in the region.​
  

• European Security: European nations might face heightened pressure to enhance their defence contributions to support Ukraine and deter further Russian aggression.
  

• Diplomatic Relations: The strain between the U.S. and Ukraine could complicate future negotiations and international efforts to resolve the conflict.​

Responses and Outlook

In response to the escalating crisis, President Zelenskyy has expressed regret over the diplomatic fallout and signalled a willingness to engage in peace talks. He is currently in Saudi Arabia for discussions with Crown Prince Mohammed bin Salman and is preparing for high-level talks with U.S. officials led by Secretary of State Marco Rubio to explore potential ceasefire agreements.

European leaders have voiced concerns over the U.S. withdrawal of support, emphasising the need for a coordinated international response to uphold Ukraine's sovereignty and regional stability. The coming weeks are critical as diplomatic efforts intensify to address the escalating conflict and its far-reaching implications.

Looking Ahead

With China facing deflation, Germany reshaping its defence spending, and U.S. trade wars intensifying, this week has been a reminder of how quickly economic landscapes can shift. The coming months will be crucial in determining whether China can reverse its slowdown, how Europe adapts to new security demands, and if Trump’s tariff strategy delivers the results he’s promising or just raises costs for businesses and consumers.

As always, we’d love to hear your thoughts! Have you got feedback or a story you’d like us to cover? Hit reply and let us know.

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Thanks for reading, and as always we will see you next week!

Best wishes,
Harry & Reika
Co-Founders, Echonomics

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