Global Economic Overview – August 2025

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Although various sector tariffs, such as on pharmaceuticals, are still being threatened by US President Trump, it appears that country specific tariff rates at least have reached a settling point. The 1 Aug deadline for ‘reciprocal tariffs’ passed, this time with no delay, and the new levies came into effect 7 Aug; on our estimates the average effective US tariff rate now stands at 17.9%. For now POTUS’s focus appears to have shifted to ending the war in Ukraine, but that is not to say tariff threats and unpredictability is over with Trump recently announcing an extra 25% levy on India due to its purchases of Russian oil. But yet the TACO trade still lingers; both China and Russia, for example, have escaped recent tariff threats.

Chart 1: ‘Reciprocal’ tariff rates may have settled but uncertainty still lingers



Source: Investec Economics, Macrobond

Thus far it seems as if trading partners are accepting higher US tariffs without retaliation, reducing the risk of a full-blown trade war. As such, the economic impact is mostly viewed through the lens of the US. In the States, the tariffs look set to be borne by consumers and retailers – exporters in comparison do not seem to be swallowing much, if any, of the higher costs for now (Chart 2). But there could be a price impact in other countries, although there is a debate over the direction of this. Some global companies, such as Birkenstock and Pandora are raising prices across markets to spread out the higher costs faced in the US. But this price rise could be offset by imported disinflation from China as it seeks alternative markets for its goods.

Chart 2: US import prices (ex-tariffs) are not falling - exporters to the US are not footing the bill



Source: Investec Economics, Macrobond, BLS

The current data points to goods price inflation rising in many economies. That though is not necessarily a tariff effect – some of the increase can be attributed to rising wholesale food prices, such as cocoa. Shipping costs are also a factor, with vessels still largely avoiding the Red Sea – the latest UK PMI report noted the longer shipping times for items sourced from Asia. The consequence of this is that many central banks can no longer rely on low goods inflation to offset higher services inflation. The extent to which this is a problem of course depends on the extent of the potential rise in goods prices (a concern in the US), but also the stickiness of services inflation (a concern in the UK).

Chart 3: Central banks can no longer rely on goods disinflation to drag overall inflation lower



Source: Investec Economics, Macrobond, BLS, ONS, Eurostat

For economic growth, we judge the impact of tariffs on the rest of the world (ex-US) so far to have been fairly limited. Global trade, for example, is estimated to have grown on average by 2.6% a quarter in H1, as per UNCTAD data, despite the higher tariff environment. Indeed our global growth forecast is broadly similar to last month – if anything it is a touch higher at 3.2% this year (prior: 3.1%) and stable at 3.1% next, despite tariffs proving to be more severe than we initially assumed (we had a 10% universal tariff embedded in our forecasts). The upgrade this year largely stems from underestimating Q2 economic growth, meaning H1 performance as a whole was slightly more robust than we imagined.

Chart 4: Tariff related distortions in Q1/Q2 make it more appropriate to look at H1 performance



Source: Investec Economics, Macrobond

China is one example where the hit to growth from tariffs has been constrained, in its case due to its success in redirecting exports to alternative markets. The latest data for July showed exports (in USD terms) to ASEAN countries up by 17% on the year, while US exports were 22% lower. This relative resilience of overall exports will be welcomed by authorities considering the still troublesome domestic economy. Although consumption has been supported over the past year by the launch of China’s large-scale trade-in scheme, the boost from this has now started to fade. Confidence also remains low, not helped by persistent property sector weakness. House prices in China continue to fall (Chart 5), while the recent delisting of former property giant Evergrande, although largely symbolic, is unlikely to have helped sentiment either.

Chart 5: Weakness in the Chinese property market persists



Source: Investec Economics, Macrobond, NBS

From a financial market point of view however one of the key themes continues to be the rise in longer-dated sovereign bond yields. Alongside a decline in shorter-dated yields in economies where rates have been cut this year, this has caused a considerable steepening in yield curves (Chart 6). Just why longer dated bonds have sold off so aggressively is an open question. There are some country specific factors, such as in the UK where there are more sellers (due to QT) plus reduced DB pension funding, but the broader theme is that investors are becoming more nervous of longer-term fiscal dynamics and therefore demanding higher term premia.

Chart 6: Rising risk premia have contributed to a widening in 30y-2y government bond spreads



Source: Investec Economics, Macrobond

United States

The main point in July’s jobs report was not the 73k increase in non-farm payrolls, but the 258k net downward revisions to May and June, leaving job growth close to zero in each month. Notably recent payroll revisions have been firmly downwards (Chart 7), placing July's rise under threat. Unemployment rose to 4.2% in July, the average over the past 6 months. Although this is the series by which one should gauge the Fed's full employment goal (the FOMC's central view of the equilibrium jobless rate, or NAIRU, is 4.2%), we would not place too much weight on it, bearing in mind the low response rates to the household survey. Also the critical metric is not what the unemployment rate is now, but what it is likely to be in 12-18 months' time.

Chart 7: Two-month payroll revisions have been downwards by an avg. of 74k over the past 6m



Source: Investec Economics, Macrobond

The forestalling of President Trump's tariffs, which began to take effect in April, led to misgivings over the accuracy of the data on (net) trade and inventories over Q1 and Q2, extending to the GDP numbers themselves. While we doubt that the economy shrank by 0.5% (annualised or ‘saar’) in Q1 or indeed surged by 3.0% in Q2, it is reasonable to conclude that the average of 1.2% (saar) over H1 is broadly correct, marking a significant loss of momentum from the 2.8% recorded in 2024. We have pencilled in a rate of 1.6% for Q3, contributing towards a 2025 GDP forecast of 1.7% for 2025 (was 1.5%). But with the labour market seemingly weakening, the risk is of a sharper slowdown over H2 and beyond, which the Fed needs to consider seriously.

Chart 8: US GDP growth has clearly lost momentum over 2025



Source: Investec Economics, Macrobond

Last month we noted evidence of tariffs impacting prices, with June’s CPI data showing the cost of a basket of ‘core’ goods up by 0.5% on the month. July’s release pointed to a 0.3% rise, slightly lower but still signalling higher price pressures. In terms of the PCE, we note that if the monthly increase of +0.26% in June’s core index were replicated through to December, core PCE inflation in Q4 would rise to 3.1% (from 2.8% in June), in line with the FOMC’s June forecasts (it also pencilled in two 25bp cuts in rates this year). How far inflation rises of course matters, but the more important point is whether the labour market is strong enough to result in stronger pay increases leading to second round inflation effects.

Chart 9: Core PCE – illustrative effect on annual rate of monthly increases at June’s pace



Source: Investec Economics, Macrobond

Our view had been that inflation would rise, with a weak economy limiting second round effects, allowing the FOMC to resume cutting again in Dec. Now, the Fed’s full employment mandate is under greater threat and a looser labour market may limit longer-term inflation pressures, allowing the Fed to restart easing earlier. Indeed in his Jackson Hole address, Chair Powell stated that 'the shifting balance of risks may warrant adjusting our policy stance'. With a full month of key data to go until the 17 Sep FOMC meeting, a bumper payroll outturn or a surge in the CPI could blow this scenario out of the water. But a 25bp Sep cut in the Fed funds target to 4.00%-4.25% and a 25bp move in Dec is now our base case. Our end-‘26 forecast is still 3.25%-3.50%.

Chart 10: We now see the Fed cutting rates in September and December



Source: Investec Economics, Bloomberg, Macrobond

Pres Trump’s assault on Fed independence has intensified with an attempt to establish a ‘friendly’ majority on the 7-member board. Governors Waller and Bowman are already aligned with the President. Gov Adriana Kugler suddenly resigned earlier this month with the vacancy due to be filled temporarily by Trumpite CEA Chair Stephen Miran. Recently Trump stated that he is firing Gov Lisa Cook on the grounds of mortgage fraud. Cook intends to launch a legal process to fight the dismissal, but how long she can remain in her post in the meantime is unclear. And of course the succession process for Chair Powell continues. If a pro-Trump faction were in the majority by February, the Governors could block the renewals of the terms of the 12 regional Fed presidents.

Chart 11: President Trump to get a majority on the Fed Board of Governors? By when??



Note: Vice President Jefferson and Governor Barr are expected to remain in place
Source: Investec Economics, Federal Reserve

The arithmetic is tight but may not work as Powell’s term as Chair does not end until May. Also the Republicans are attempting to protect their majority of 7 in the House (4 seats are vacant) in the 2026 midterm elections. In Texas the GoP majority legislature has redrawn US Congressional boundaries, hoping to gain 5 of the state’s 38 districts. Such ‘gerrymandering’ is commonplace, but rare outside the 10-yearly US census cycle. In response, California state lawmakers launched a similar exercise to offset this, possibly sparking a race across many other red and blue states. We expect some Treasury market volatility as these events play out, but we have lowered our 10y forecast to 4.50% for end-2025.

Chart 12: Boundaries matter – three scenarios with 5 seats containing 5 voters each



A square represents a state with 5 Congressional districts.
Source: Investec Economics, Macrobond

Eurozone

The EU has agreed a 15% tariff on its exports to the US, replacing existing tariffs. But this came at the price of buying $750bn of US LNG by 2028, purchasing US military equipment and investing $600bn in the US. This is not a particularly good deal for the EU, but it is significantly better than the threatened 50% tariff levy and provides some clarity for EU businesses. The auto sector gets a carve out from the 25% global levy but will only see tariffs reduced to 15% once the EU sets out legislation to cut its tariffs on US goods. Meanwhile exemptions for the wine and spirits industry have not been achieved. Indeed, despite relief at avoiding an all-out trade war, the response from member states has been downbeat.

Chart 13: Some member states are more impacted by US tariffs than others



Source: Investec Economics, Macrobond

Still, this reduces downside risks to the growth outlook and whilst the 15% tariff is higher than our original baseline assumption, it is not materially so as to warrant any major changes to our forecasts. We have in fact lifted 2025 GDP to 1.3% (from 1.0%), due to a stronger than expected reading for Q2 at 0.1% q/q. That said this could be revised lower given that the latest EU20 GDP figures do not yet take into account the revision to German Q2 GDP to -0.3% from -0.1%. The Euro area’s performance over H1 has, however, been distorted by several factors. As elsewhere, US tariffs and a frontloading of orders ahead of their imposition have been one. So has the 71% q/q rise in Irish investment in Q1, which boosted the EU20 aggregate.

Chart 14: EU20 GDP and expenditure component contributions (q/q)



Source: Investec Economics, Macrobond

We do not foresee these distortions persisting and whilst we do not envisage H2 being as firm as H1, indicators do point to signs of underlying momentum in the economy. This can be seen in a variety of metrics. Manufacturing for one is showing some signs of life having been mired in a two-year downturn. August’s PMI rose back into expansionary territory at 50.5, its highest reading since Jun ’22. The ramp up in EU defence equipment spending should breathe further life into the sector going forward. Meanwhile looser monetary policy has supported a strengthening in credit growth to households and businesses (Chart 15), a factor that should further support activity going forward. We forecast 2026 GDP growth at 1.4%.

Chart 15: Easier monetary policy is supporting a strengthening in bank lending



Source: Investec Economics, Macrobond

ECB easing now looks to have run its course, our view being for the Deposit rate to remain at its current 2.00% level. There are several reasons for this. Firstly, the ECB is likely to believe that it has achieved victory over inflation with HICP at the 2% target and its forecasts also envisage price stability being maintained. Secondly, the ECB will likely view the latest trade developments as having reduced what it previously described as ‘exceptional uncertainty’, easing its potential drag on the economy. Indeed, we suspect that the economy may be performing better than its baseline view, with its June forecast of a Q3 contraction now looking a little pessimistic. We would not totally discount one more cut, but it would likely need a run of negative data to swing the Governing Council.

Chart 16: Inflation is back at target overall, with core inflation close to it as well



Source: Investec Economics, Macrobond

France is once again finding itself at the centre of unwanted market attention, with 10y OAT yields rising to 3.50% and spreads versus Bunds now exceeding those of Greece. Political problems lie at the centre of its woes with PM Bayrou calling an 8-Sep confidence vote. This risky move is seen as an attempt to gain support for the government’s highly contentious 2026 Budget, which includes €44bn of fiscal tightening to address France’s deficit and rising debt. This however looks to have backfired with the three main opposition parties set to vote against the PM. If Bayrou fails to gain enough support, which looks highly likely, President Macron is faced with nominating a new PM, asking Bayrou to remain as a caretaker or calling for new legislative elections.

Chart 17: Political jitters push French 10y yield spreads to Germany above those of Greece (%)



Source: Investec Economics, Macrobond

All are unpalatable options. Even with a new PM or even a new legislature the overriding issue remains France’s very high deficit, which is forecast to remain around 5.6% over 2025-26, and its high debt, due to rise to 118% of GDP in 2026*. Such political risks represent a downside risk to our EUR forecasts. But we still believe that the more prominent driver of €:$ will be a broadly weaker US dollar. A more dovish Fed further supports such a view, as would greater fears over an encroachment on the Fed’s independence. As such we continue to expect a strengthening in €:$ to $1.20 in Q4 ’25 and $1.25 in Q4 ’26.

Chart 18: French bond markets have reacted, but recent issues have had limited effects on €:$



* European Commission Spring forecasts
Source: Investec Economics, Macrobond

United Kingdom

The last meeting by the Bank of England’s Monetary Policy Committee (MPC) had an unprecedented element: it took two rounds of voting for the MPC to reach its decision. That the MPC was not unanimous, though, very much fits the recent norm (Chart 19). Nor was the decision itself a surprise: the MPC sanctioned its fifth 25bp rate cut in the current cycle, to 4.0%. But whether the one-a-quarter pace will be maintained going ahead is less certain: the MPC is clearly troubled by inflation running persistently above its target and worried that household inflation expectations may be sustained despite the gradually weakening labour market. The burden of proof to maintain the rate cutting pace has shifted: inflation will have to come in below the MPC’s forecasts.

Chart 19: Dissent has been the norm, not the exception, in recent MPC decisions



Source: Bank of England, Investec Economics, Macrobond

On the surface, the July CPI inflation data provided no such reassurance: total inflation was as the MPC had predicted; services and food price inflation exceeded its forecasts, by 0.2%pts and 0.1%pts, respectively. Yet digging deeper we are somewhat less concerned. Air fares were affected by the timing of school holidays, different from last year, which added 0.1%pts to aggregate inflation and 0.2%pts to services inflation. And half of the food sub-categories in the CPI saw their inflation rate fall. Nor is it evident that the employer NICs rise is a material driver of UK food price inflation: between January and July, UK food price inflation rose by 1.5%pts, versus 1.4%pts in the EU20 (Chart 20).

Chart 20: It is not clear the employer NICs rise has been a main driver of UK food price inflation



Source: ONS, Eurostat, Investec Economics, Macrobond

Looking ahead, we see a good chance inflation will peak at a lower rate in Sep (3.8%) than the MPC expects (4.0%). With inflation, on our forecasts, likely to reach a 2%-handle (though not yet the 2.0% level) from January and maintain this through 2026 (Chart 21), we see the chances of a further 25bp rate cut this November to a Bank rate of 3.75% as still, just about, our base case. Beyond that, we anticipate more rate cuts in 2026, until the MPC reaches a Bank rate of 3.00% next summer, a level we would consider – roughly – ‘neutral’ for the UK. In making its assessment, the MPC will consider the outlook for key variables that stand to have a bearing on inflation. One key question concerns productivity.

Chart 21: Inflation could reach a 2%-handle, though not 2.0%, from the start of 2026



Source: ONS, Investec Economics, Macrobond

So far, the MPC has judged the underlying pace of GDP growth in the UK to be very subdued, at 0.0% in Q1, 0.1% in Q2 and a predicted 0.2% in Q3. That, though, contrasts with firmer actual GDP growth, of 0.7% and 0.3% (and our forecast of 0.4% in Q3). An alternative read of the data is that, rather than signalling excess demand, supply in the economy may be less constrained than the MPC judges as productivity growth in the economy is firmer (perhaps on AI deployment?). If so, current pay growth would be less of a concern and less restrictiveness in policy needed. The longer GDP growth stays resilient, the less compelling the case is for a supply constrained economy, to us. We forecast ’25 & ’26 GDP growth of +1.5% and +1.6%.

Chart 22: The Bank of England’s estimates of underlying GDP growth are below actual growth



Source: Bank of England, Investec Economics, Macrobond

Productivity growth though matters in other ways too, not just for the MPC. Fears of another fiscal ‘black hole’ have attracted a lot of attention recently. Some of the estimates, such as NIESR’s, are far larger (£50bn) than the c.£6bn figure that the U-turns on winter fuel payments and disability benefits plus c.£2bn of extra debt interest given higher gilt yields warrant. Recent fiscal outturns have, in fact, not been all that far from the OBR’s expectation in March (Chart 23). Some tax rises at this autumn’s Budget do seem likely, but to get to a large hole that would need radical action to plug, the OBR would need to cut its future productivity assumptions. This is possible to correct for past overoptimism; but it is not as much of a given as the UK’s recent bond market selloff suggests is now priced in.

Chart 23: So far in FY2025/26, public sector net borrowing has matched the OBR’s latest forecast



Source: ONS, OBR, Investec Economics, Macrobond

UK 30y yields hit their highest level since 1998 this week and, since the start of the month, yields in the UK have risen by more than their US and German counterparts across maturities. Yet in the FX market, there is no evidence of fiscal concern at this time. Month-to-date, GBP has appreciated by 2.0% against USD and 0.3% against EUR. This is in clear contrast to the period of the short-lived Liz Truss government, when UK spread widening had been accompanied by a plunge in sterling (Chart 24). Looking ahead, we predict GBPUSD to reach $1.37 by end-’25 and $1.40 by end-’26, as USD loses ground more widely, but GBP to slip slightly against EUR, to 88p and 89p, respectively, lacking fiscal stimulus.

Chart 24: UK spreads have recently widened, but GBP is up, unlike in the Liz Truss episode



Source: Investec Economics, Macrobond

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