Global Economic Overview – July 2025

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• Global

  The 9 July reciprocal tariff (RT) date came and went without much ado, President Trump extending their imposition until 1 Aug. He also sent 24 letters to US trading partners outlining what their new tariff rates will be. Three have subsequently reached agreements, Japan being the latest and biggest. It saw its threatened 25% RT and auto tariff cut to 15%. What can be learnt from these so far? In terms of levels the majority of RTs have seen levies reduced from their Liberation Day rates, implying that Trump is willing to dial back from the most punitive levels. Brazil is the big exception with a big jump to 50%, on a rationale entirely separate from trade. However even with the reductions, tariffs are higher than the 10% baseline, even for those having agreed trade deals*.

  Chart 1: US tariff rates (%): changes since 2 April ‘Liberation Day’ rates^#

  

  # Canada and Mexico were not included in the 2 April RTs, with USMCA compliant goods still receiving a 0% tariff. The letters do not clarify the position of USMCA goods, * some exceptions   
  Source: Investec Economics, Macrobond

  For those hoping to negotiate duties down to 10%, such as the EU, this presents a challenging picture.  A possible implication is that tariffs do not settle at the very lower end of the range that markets may be hoping for. This prompts a question as to whether markets are a little too complacent over tariffs and the potential macro effects, with equities having recovered all their Liberation Day losses and some reaching new all-time highs this month. Implied volatility, both in equities and Treasuries have also fallen to levels last seen in February. True, risks of a global trade war have eased, but they are still arguably higher than they were earlier in the year.

  Chart 2: Equities have fully recovered their ‘Liberation Day’ tariff announcement losses

  

  Source: Investec Economics, Macrobond

  The US dollar is however telling a slightly different story having endured its worst H1 start to the year since 1973. Against major currencies such as the pound and euro, it has fallen 8% and 13% respectively.  In recent years relative differentials in interest rates have been an important factor influencing currencies. However, that relationship has weakened this year (see Chart 12), implying other factors are now playing a prominent role. Principal among these are growing concerns over US credibility given White House policies, including the fiscal outlook, factors which seem to be prompting some diversification away from the dollar. The President’s attacks on Fed Chair Powell and talk of his possible removal do not help matters.

  Chart 3: Dollar endures its weakest H1 start to a year since 1973*

  

  * 1973 is when the Federal Reserve began publishing its USD index
  Source: Investec Economics, Macrobond

  The effect of tariffs on activity thus far has predominantly been seen in distorted patterns on GDP rather than a drag. The UK and EU20 are prime examples having enjoyed a strong Q1 performance thanks to a frontloading of orders ahead of tariffs. Consequently, Q2 is set to see some payback and a weaker quarter for growth. More broadly, despite the tariff noise and uncertainty we have made few changes to our global outlook, our growth forecasts unchanged at 3.1%, for both this year and next. However, the risks remain skewed to the downside, although with updated levies on average coming in lower than the original RTs, the risk of the most punitive tariff scenario has receded.

  Chart 4: Global growth outlook little changed despite the tariff noise

  

  Source: Investec Economics, Macrobond

  We have however upgraded our 2025 Chinese GDP growth forecast to 4.8% from 4.5%. 2026 is forecast at 4.3%. This is set against a resilient H1 performance, with Q2 GDP exceeding our estimates at 5.2% y/y, leaving it on track to meet the government’s target. Notably export growth has remained buoyant despite US tariffs, which, whilst being dialled back from 145% to 30% remain higher than previously. This resilience has been aided by a re-routing of China’s exports to other nations: US exports may have fallen 24% y/y in Q2, but they have risen 12% to Asia. That said China still faces domestic issues including weakness in consumer spending and property, with the door ajar to further stimulus in the former.

  Chart 5: Chinese exports by destination: y/y changes in Q2 ($bn)

  

  Source: Investec Economics, Macrobond

  Globally, pressures have been building on long-dated bonds, with sovereign curves in the UK and US their steepest in three years. But it is in Japan where the situation may be most acute The curve is its steepest in history, with the 30y yield hitting a record high 3.17%. Upper House elections, where the LDP-Komeito coalition lost its majority, is an unhelpful development. However in Japan, as elsewhere, there has been a growing aversion to long maturity bonds. There are multiple factors at play here, ranging from mounting nervousness over long-term fiscal dynamics, to idiosyncratic issues such as the end of defined benefit pensions in the UK. Adding to pressure is the fact that waning investor appetite is occurring at a time when central banks are withdrawing from the market thanks to QT.

  Chart 6: Sovereign curves are steepening: 30y-2y yield spread (YTD chg. %pts)

  

  Source: Investec Economics, Macrobond

• United States

  US tariff policy remains 'fluid'. The 9 Jul deadline to re-establish Reciprocal Tariffs (RTs) was replaced by 1 Aug, with Mr Trump sending letters to 24 countries and economic blocs informing them of their (in some cases updated) RTs. We estimate that if these plans are realised (plus the recent deal with Japan superseding them) they would raise the US effective tariff to 20.4%, its highest level for 115 years. We suspect that many, including a prospective EU RT of 30%, will either be reduced or the can kicked further down the road to allow further talks. Indeed with the S&P500 and the NASDAQ hitting all-time highs recently, markets remain adherents of the TACO trade, if with interrupting bouts of volatility.

  Chart 7: On 1 August, average US tariffs could climb to highest level since 1910 – or not

  

  Source: Investec Economics, Macrobond

  June's CPI data showed indications that the tariff increases since April are starting to filter through to 'main street'. In aggregate the figures were relatively benign - headline CPI rose by +0.3% on the month and ‘core’ by 0.2%. But a breakdown by product line showed evidence of stronger price rises for goods that are largely imported. This is summarised by a measure of ‘core’ goods prices (Chart 8). How much of a delay to expect between higher tariffs and price rises at the consumer level is not clear. But in 2018, President Trump's tariff hikes on washing machines took 2-3 months to filter through. Based on this, we expect the CPI impact to build in July and August's data.

  Chart 8: The price of a basket of ‘core’ goods rose noticeably steeply in June

  

  Source: Investec Economics, BLS, Macrobond

  These dynamics underpin the Fed's wait-and-see strategy in terms of – i) whether there will be a price impact; ii) its scale if there is one (and any slowdown in spending in real terms); and iii) whether pay rates jump, risking entrenching higher inflation. Our 'top down' view of the way monetary policy unfolds is unchanged. We still foresee a slowdown in GDP growth in H2. This would discourage a material rise in wages as inflation creeps up, facilitating the FOMC to resume easing late in Q4 as its key focus tilts away from price stability towards its full employment goal. But for now (to use the Fed's mantra), policy is in a ‘good place’ and despite the best efforts of Fed Governors Waller and Bowman (and pressure from President Trump to cut rates to 1%), immediate calls for easier policy look set to be rebuffed.

  Chart 9: The forward curve has risen, but it still sees a 60% chance of a September cut

  

  Source: Bloomberg, Investec Economics, Macrobond

  Talk of the President firing Jerome Powell as Fed Chair has persisted, though Trump admitted this was unlikely. Indeed if there were a contentious dismissal - i) the Senate could reject the new candidate (the GOP majority is just six); ii) a new Chair could be easily outvoted on rates by the rest of the FOMC; and iii) markets would probably sell off aggressively with longer-term rates higher. NEC Chair Kevin Hassett is the favourite to take over, but at Powell's scheduled departure date in May next year. One idea floated is that Scott Bessent takes a dual role as Treasury Secretary and Fed Chair. Such a case of ‘fiscal dominance’ replacing Fed independence would certainly rile markets. Indeed various people have served as both head of a major central bank and finance minister (e.g. Janet Yellen), but not concurrently.

  Chart 10: Examples of those performing multiple key policy roles, but rarely at the same time*

  

  *Of these quoted, Jean-Claude Juncker was Luxembourg PM and Finance Minister concurrently
  ** Includes German Chancellor
  Source: Investec Economics, Macrobond

  With wafer-thin majorities in the Senate and the House, President Trump's 'One Big Beautiful Bill' was passed by Congress and then signed into law. Overall the package is highly expansionary in fiscal terms. The CBO¹ calculates it will add $3.4trn to public debt in 10 years' time, while the CFRB² suggests that $4.1trn is more realistic. Mounting interest costs partly explain the President's eagerness for the Fed to bring rates down. But although policy rate cuts would help lower shorter-term and variable financing costs, signs that these moves are politically motivated could well have the opposite effect on longer rates.  We still see jitters in Treasuries pushing 10y yields to 4.75% by end year, from 4.37% now.

  Chart 11: CBO’s estimate of the One Big Beautiful Bill on the annual deficit

  

  ¹Congressional Budget Office; ²Committee for a Responsible Federal Budget
  Source: Investec Economics, Macrobond

  While stocks have rallied and bonds have gyrated, USD's direction has been firmly downwards this year. As argued previously, prospective short-term rates are often the key driver of major currency pairs, including EUR:USD. This was the case for a few years, but the greenback has weakened autonomously since Trump’s major policy shifts began (Chart 12). Weaker credibility of US policymaking and concerns over the fiscal position are taking their toll on the currency and while we judge it is overdramatic to call the end to the USD’s reserve currency status, we have tweaked our Euro:dollar forecasts down, such that our end-2025 target is $1.20 (previously $1.17) and $1.25 for end-2026 (was $1.20).

  Chart 12: Prospective rate differentials looked to be the main driver of EUR:USD until April

  

  Source: Investec Economics, Macrobond

• Eurozone

  The Eurozone, like much of the rest of the world, remains on tenterhooks over the landing zone for US tariffs. The US administration’s letter on 11 July extended the deadline for negotiations to 1 August but also upped the pressure, indicating a 30% extra tariff rate would apply to the EU in the absence of an agreement. (The ‘Liberation Day’ level had been 20%.) Despite intense negotiations, at the time of writing, it is not certain a deal will be struck. Even though markets are much calmer than they were in early April, it is unclear whether businesses are looking through this uncertainty too, or whether they are holding back on investing and hiring for now. That would be a drag on activity on top of that of tariffs themselves reducing US imports.

  Chart 13: Economic policy uncertainty in Europe is off its peak but still very elevated

  

  Source: Economic Policy Uncertainty, Investec Economics, Macrobond

  As regards the current state of play in US-EU negotiations, the mood darkened last week. Should President Trump only accept a baseline tariff rate of well above 10%, the EU seems more minded to deploy not only higher tariffs on €21bn plus potentially on a further €72bn of imports from the US, but even countenance using its most stringent countermeasure, the ‘anti-coercion’ instrument, with which it could restrict imports of US services and limit US access to EU public tenders. This though risks triggering US counter-retaliation, resulting in a larger hit to GDP than in the already recessionary ‘severe’ scenario the ECB had indicatively outlined in its June Staff Projections, based on ‘only’ a 20% US tariff and EU retaliation.

  Chart 14: In a trade war, the hit to EU20 GDP could exceed the ECB’s ‘severe’ scenario

  

  *Severe scenario assumes Liberation Day tariffs and some retaliation. **Our baseline assumption is for a 10% universal tariff.
  Source: ECB, Eurostat, Investec Economics, Macrobond

  That said, Japan’s deal has given hope there is room for compromise after all. Our forecasts still assume that the EU will achieve maintaining ‘just’ the current 10% extra tariff, alongside the existing sectoral tariffs, with other sectors’ tariffs staying as they are. Nevertheless, we have slightly lowered our 2026 EU20 GDP growth forecast. This is to take into account some extra fiscal consolidation in France next year. Prime Minister Bayrou has proposed a 2026 Budget that would reduce the French deficit by €44bn (1.5% of GDP) next year, through a mix of spending freezes and tax rises and also by cutting two public holidays. How plausible it is that these particular measures will be implemented is unclear.

  Chart 15: French public finances stand out, with particularly a large deficit and high debt

  

  Note: Chart shows expected 2025 values
  Source: European Commission, Investec Economics, Macrobond

  Without a parliamentary majority to pass them, Bayrou is at risk of being ousted as PM. That though will not solve the issue. Pressure from rising bond yields (Chart 16) may ultimately leave little choice but to pursue some visible fiscal consolidation, for him or any successor of his in the job, no matter how unpopular that is. Our sense though is that what will ultimately be implemented may be less than Bayrou has put forward. We have for now downgraded our French 2026 GDP growth forecast by 0.4%pt, which pulls down our Eurozone GDP forecast by 0.1%pt, to 1.4%. Our 2025 EU20 forecast remains at 1.0%, as before. These predictions, though, are clearly provisional and also subject to what the post-1 Aug US tariff regime will be.

  Chart 16: French yields remain materially higher than their German counterparts

  

  Source: Investec Economics, Macrobond

  When it comes to the ECB, the upcoming policy decision this week looks to be a straightforward one. With the Deposit rate at the current 2.00%, around what we would estimate to be a neutral level, inflation back at target and, on the current growth outlook, expected to stay fairly close to this in the coming years (Chart 17), the ECB can afford to wait and see how events develop. This is an uncontentious view; indeed, markets price steady rates this week as a near-certainty. Our longer-term view differs slightly from that of the market, in that we expect no change in the Deposit rate by end-’25 or indeed end-‘26. Markets price in just over one 25bp rate cut. We certainly would not rule this out either.

  Chart 17: We expect HICP inflation to run close to target this year and next

  

  Source: ECB, Eurostat, Investec Economics, Macrobond

  One factor that could yet push the ECB to cut more concerns the euro. EUR has strengthened by 12.6% against the dollar since the start of the year and is up 6.2% in trade-weighted terms (though only 4.8% against the other main currencies – Chart 18). Some Governing Council members have signalled that an exchange rate above $1.20 could become an issue, by exerting too much disinflationary pressure. Despite some retracement in the currency pair over recent weeks, we forecast EUR:USD rising to $1.20 by end-25 and $1.25 by end-26. Aside from investors taking a more cautious approach to USD holdings, the planned ramping up of infrastructure investment in Germany and defence spending elsewhere should add to economic growth, favouring EUR in the medium term.

  Chart 18: The weakening US dollar has contributed to the euro’s appreciation

  

  Source: ECB, Investec Economics, Macrobond

• United Kingdom

  There have been more signs of a loosening in labour market conditions. Private sector ‘regular’ pay growth eased back to 4.9% (3m yoy) in May, its slowest pace since February 2022. Meanwhile according to the ILO employment series, jobs growth was still positive in the three months to May. However HMRC data suggest that the number of payrolled employees has declined for five consecutive months to June (Chart 19), with this supported by survey evidence from KPMG/REC surveys and PMIs. A cooler jobs market has been in train for a while, but April’s hike in employers’ NICs and tariff uncertainty due to US trade policy have probably added to the chill.

  Chart 19: HMRC figures suggest that UK payrolls are falling

  

  Source: Investec Economics, HMRC/ONS, Macrobond

  This hints at waning ‘inflation persistence’ risks, leaving the door wide open to further interest rate cuts, despite inflation ticking higher to 3.6% in June, above the BoE’s 3.4% forecast made at the time of the May MPR. We expect the BoE to cut once again by 25bps at the next meeting in August and then again in November. This would continue the current pace of cutting every other meeting. Committee members are likely to stress though their willingness to deviate from that path if the data warrants. Our thinking on rates is broadly in line with market pricing this year, but it does start to diverge next year. Whereas we expect the BoE to continue cutting until it reaches ‘neutral’, which we estimate to be around 3.00%, markets think the BoE will stop loosening policy around 50bps higher.

  Chart 20: For 2026, we expect three further rate cuts - financial markets are not convinced (yet)

  

  Source: Investec Economics, Macrobond

  At September’s meeting the MPC will not only have to decide on interest rates, but also on the pace of Quantitative Tightening (QT) for the year ahead. As we outlined last month, keeping the current pace of £100bn per annum would require far more active sales of gilts, given the maturity profile of its existing portfolio (Chart 21). This is looking increasingly unrealistic given that the BoE will want to avoid any excess volatility in the gilt market from its actions, particularly at a time when fixed income markets are nervous, especially at the long end of the curve (see Global section). Indeed, since the start of the year, 30y gilt yields are up by over 25bps as there has been an increasing term premium.

  Chart 21: MPC seems likely to cut its QT target next year to avoid a big step up in active sales

  

  Note: 2025/26 figure illustrates sales needed if £100bn QT was to be maintained
  Source: Investec Economics, Bank of England, DMO

  Gilts’ sensitivity to fiscal matters was displayed clearly in the aftermath of a particularly fractious PMQs which followed the government’s watering down of the welfare bill after widespread backbench opposition. Speculation that Chancellor Reeves could be facing the axe led to market concern that she could be replaced with someone less wedded to the fiscal rules, resulting in a sharp selloff in gilts (Chart 22). This episode taught us firstly that PM Starmer’s mandate for change is maybe not as strong as one might think despite a (then) effective majority of 156, given the sensitivity of his backbenchers to welfare cuts. More importantly however, it reminded us that markets are willing to punish fiscally irresponsible acts in the UK. 

  Chart 22: Gilts did not take well to speculation that Reeves could carry the can for U-turns

  

  Source: Investec Economics, Bloomberg

  Cutting less from the welfare bill and reinstating winter fuel payments lowers the £9.9bn of fiscal headroom, setting up a difficult autumn Budget for the Chancellor, particularly if the OBR also cuts its medium-term growth forecasts as it has hinted. As such it is looking even more likely that tax rises will be on the cards. One option for the Chancellor is to extend the income tax band freeze until the end of the parliament, raising some £10bn. Should that not suffice though, options are less obvious if Ms Reeves wants to stick to Labour’s manifesto pledges. A wealth tax has been touted, but the fear is that this could lead to an exodus of the wealthy, leading to minimal revenues actually being raised and deterring much-needed investment.

  Chart 23: Debt to GDP outturns have consistently overshot OBR forecasts

  

  Source: Investec Economics, OBR

  After rising above $1.37 against the dollar at the beginning of this month, sterling has since pared gains to trade just above $1.35 as some dollar buying has resumed. Despite this though we have pushed up our GBPUSD forecasts to $1.37 by end-‘25 and to $1.40 end-‘26 (from $1.35 and $1.38 respectively) as we see scope for further dollar weakness ahead (see US section). However we expect sterling to lose ground against the euro as the single currency benefits more from the diversification of reserves away from US assets. The upcoming rise in defence spending may lend the euro more support against the pound too. As such we see EURGBP at 88p at end-‘25 and at 89p end-‘26.

  Chart 24: We see GBPUSD reaching $1.40 by end-‘26, but underperforming relative to the euro

  

  Source: Investec Economics, Macrobond

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