Global Economic Overview – May 2025

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• Global

  US tariff news has remained central over the past month. The US administration has agreed its first trade deals within the 90-day window President Trump had set to do so whilst ‘reciprocal’ tariffs were paused. Judging by these, it looks like the US’s aim is to keep the 10% extra ‘baseline’ tariff largely intact and to lend a helping hand to certain US industries perceived as strategic (such as autos), but that it is prepared to negotiate in return for better conditions for US exporters. Whereas the UK was first off the blocks in agreeing a US deal, details on its implementation, including the timing, are yet to be negotiated. The main win for the UK is a reduced tariff rate for its car exports – key in bilateral goods trade (Chart 1) – but only up to a certain quota, leaving no scope for growth in sales to the US at that lower rate in future. So its deal looks quite narrow.

  Chart 1: Cars, the largest commodity exported from the UK to the US, were key to the trade deal

  

  Source: ONS, Investec Economics, Macrobond

  China’s agreement, though, makes a material difference to tariff rates. For now it is only temporary while trade talks continue. But if it sticks, this turns a de facto trade embargo into a situation where some trade will likely continue, albeit at clearly higher prices for consumers. Indeed, with that, the average US tariff rate on Chinese exports is ’just’ 51% as opposed to 135% at the post-Liberation Day peak (Jan ’25: 21%; Chart 2). This makes a clear difference to China’s economic outlook, as do the extra stimulus measures (reserve requirement ratio and rate cuts) announced by Chinese policymakers this month. As a result, we have lifted our Chinese GDP growth forecast, now predicting expansion of 4.5% in ’25 and 4.4% in ’26, 0.4%pts and 0.3%pts higher than last month, respectively.

  Chart 2: Tariff rates by the US and China on each other’s exports have fallen but are very high

  

  Source: Peterson Institute, Investec Economics, Macrobond

  Elsewhere though our GDP forecast changes are fairly modest this month. Our 2025 global GDP growth forecast is now 0.1%pt higher than last month, at 3.1%, but our 2026 forecast remains at 3.1% (Chart 3). We see little reason to alter our broader tariff assumptions at this stage, with so much still up in the air. In fact, we doubt tariff rates and wider trade arrangements between the US and the rest of the world will be settled by 9 July, the supposed end date of the 90-day US moratorium on ‘reciprocal’ tariffs for negotiations to conclude. This timeframe could easily be extended. Unfortunately, this would also prolong the uncertainty for firms.

  Chart 3: Upgrades to Chinese growth prospects have lifted our 2025 global GDP growth forecast

  

  Source: Investec Economics, Macrobond

  Recession fears though, rife in markets last month, are not corroborated so far by ‘hard’ monthly economic data on industrial production and retail sales volumes. These point to momentum in activity (Chart 4). That said, the surge in industrial output in the Eurozone in March does appear linked to front-running of exports to the US (for details, see the Eurozone section). Moreover, little of this evidence relates to the period post ‘Liberation Day’ as yet, given the time lag with which ‘hard’ data is published. Timelier ‘soft’ (survey) figures show a less benign trend: composite PMIs for instance have fallen visibly between Mar and May – cumulatively by 1.4pts in the US and the Eurozone and by 2.1pts in the UK.

  Chart 4: “Hard” data are holding up

  

  * Ex water and waste services to match US and Euro Area definition
  Source: Investec Economics, Macrobond

  Policymakers are therefore not letting down their guard, wary that, amid ongoing uncertainty, investment plans might be put on hold. Regardless, risk assets have staged a clear recovery, with notable gains in the major stock markets this month. Bond markets though have sold off, most so at long maturities. The US, where debt sustainability worries have mounted (see the US section), may be one driver, but the trend is wider than that: Japan for instance has seen 30yr yields surge, even relative to 10yr yields (Chart 5). As 9 July approaches though without linear progress in trade deals, we worry that even equity markets may yet balk again at some point too.

  Chart 5: A bear steepening has taken hold in Japanese bond markets

  

  Source: Bloomberg, Investec Economics, Macrobond

  The shadow of Liberation Day lingers elsewhere too with the ‘Trump effect’ influencing foreign elections. Outweighing domestic issues, many voters are becoming increasingly concerned over Trump’s policies and turning to candidates of a different political hue. Incumbents Carney in Canda and Albanese in Australia both rode this ‘anti-Trump’ wave to turn their parties’ fortunes around and clinch victories in federal elections. But that is not to say the far-right is in retreat. The first round of voting for a new Polish president saw a surge in support for the far right, whilst in Portugal the far-right Chega party tied in second place, breaking the usual duopoly. The Japanese upper house vote will likely be another test of the Trump effect, with trade negotiations a key issue.

  Chart 6: Carney rode the ‘anti-Trump’ wave to bring victory for the Liberals

  

  Source: CBC, Investec Economics, Macrobond

• United States

  President Trump's 90-day moratorium on the Reciprocal Tariff regime in April and latterly on the (extra) 145% Chinese tariff (for now the new levy increase is 30%), have resulted in a period of market calm and a recovery in risk assets. But it is clear that businesses’ concerns remain. Notably work by equity data compilers Factset showed that 91% of 451 S&P500 constituents holding earnings calls since March made reference to the word 'tariffs' (Chart 7), including 100% of consumer staples companies. With perhaps two dozen separate trade discussions with the US taking place, we consider there to be a material risk that one or more of the talks goes awry in the intervening period, with a consequent reaction in financial markets.

  Chart 7: Nearly all S&P500 companies mentioned tariffs in their Q1 earnings calls

  

  Source: Factset, Investec Economics, Macrobond

  While we and more importantly the FOMC harbour concerns over the inflationary implications of tariffs (in particular any knock-on effects on wages), the recent run of inflation data has been benign. The past three CPI reports have all been below consensus with the core measure remaining at a (joint) 4-year low of 2.8%. This suggests that the core PCE measure in April will ease back to 2.5% (yoy) from 2.6%. But in a recent earnings call, Walmart warned that it would need to raise prices later this month and during the summer. This serves as a reminder that the current data predate any major price hikes from higher tariffs and also of the risk of higher inflation spreading to pay growth.

  Chart 8: Inflation trends have improved again, at least before tariff increases…

  

  Source: Investec Economics, Macrobond

  Q1 GDP data showed an ‘annualised/saar’ contraction of 0.3% (i.e. 0.1% q/q). This looks misleadingly weak, with a surge in imports subtracting 5.4% (saar) from GDP. In an accounting sense, imports do enter as a minus item, but the effect on GDP is only negative if they substitute for domestic output. Our take is that firms forestalled April’s tariffs, and the rush of imports should have been reflected in an equivalent rise in inventories (or a jump in consumption). The report did note higher stockbuilding, but the GDP contribution of 2.2% did not offset the rise in imports, hinting that inventories were under-recorded. Overall we do not view this is as the start of a period of falling GDP and expect either Q1 to be revised up or Q2 to show overestimated strength, or both. Our 2025 forecast is little changed at 1.6%.

  Chart 9: US imports of goods – forestalling tariffs, not substituting for domestic output

  

  Source: Census Bureau, Investec Economics, Macrobond

  The Fed seems to concur. It views 'real final sales to private domestic purchasers' (consumer spending + private investment) as a good guide to underlying GDP growth. In Q1, this rose by a robust 3.0% (saar). FOMC members are largely uncomfortable with the upside risks to inflation and while economic conditions remain solid, there seem to be few arguments to ease. Indeed applying the equivalent of the Hippocratic Oath of 'First, do no harm' would seem to be consistent with keeping the Fed funds target range at the modestly restrictive level of 4.25%-4.50%. Accordingly we maintain our base case of just one 25bp cut this year and it is notable that markets are now expecting two, having priced in up to four moves a few months ago (Chart 10).

  Chart 10: Markets no longer expect multiple cuts by the Fed this year

  

  Source: Bloomberg, Investec Economics, Macrobond

  Fiscal policy has re-emerged as an issue in US markets. President Trump's flagship fiscal package, the ‘One, Big, Beautiful Bill Act' got a thumbs down from Moody's when it downgraded the US's sovereign rating to Aa1 from Aaa, the first time in history that the USA has not had the top rating from at least one of the major ratings agencies. Meanwhile the Committee for a Responsible Federal Budget warned that by 2034, the measures would result in the budget deficit widening to 7.8% of GDP if made permanent and that debt to GDP could hit 129%. This seems set to weigh on Treasuries and we maintain our end-year 10y yield forecast of 4.75%. And if not resolved over the medium-term, it could threaten the degree to which US assets in general enjoy safe haven status.

  Chart 11: Fiscal concerns are reflected in moves at the longer end of the Treasury curve

  

  Source: Bloomberg, Investec Economics, Macrobond

  Following the market volatility after 'Liberation Day', the S&P 500 is now close to its end-2024 level. But the dollar, although having stabilised, is yet to rebound. It is still perhaps too early to tell if the dollar is losing its crown as the world's reserve currency, but investors do seem to be shying away from USD assets. Continued uncertainty over trade policy and increasing concerns over the fiscal situation are also weighing on Treasuries. Although the Treasury market is hard to decipher given the different forces at work, yields have moved up since April, especially at the longer end, a phenomenon also seen in Japan (see Global section), with the 30y yield hitting 5% for the first time since 2023.

  Chart 12: Equity markets have recovered, but the dollar (and long bonds) remain on the backfoot

  

  Source: Investec Economics, Macrobond

• Eurozone

  Q1 GDP growth was stronger than expected at +0.3% q/q. But there are tariff related reasons to believe that growth will be more subdued in the coming quarters. Firstly, Q1 was buoyed by 3.2% growth in Ireland. In fact Ireland has contributed at least a third to EU20 growth in the last three quarters. Irish figures are typically volatile, however the frontloading of orders ahead of US tariffs was evident in Q1. For example, Irish exports to the US were up 395% y/y in March. Wider EU exports to the US are themselves up 44% over the first three months of 2025. This has breathed life into manufacturing which, having been in recession in 2024, saw output rise 2.0% q/q in Q1 in the EU20 and 11% in Ireland.

  Chart 13: Euro area GDP growth has been lifted by Ireland in Q1

  

  Source: Investec Economics, Macrobond

  This though is likely to be a temporary boost to activity given the prospective tariff impact on US demand for EU imports and wider global trade. Uncertainty over tariff policies is also likely to restrain investment representing another headwind to growth. That said developments have directionally moved in a favourable way. Recent reports have for example painted US talks in a fairly positive light, EU Chief negotiator Sefcovic describing them as good and constructive. However, we remain mindful that there remains a long way to go and that the end of the 90-day delay to reciprocal tariffs is inching closer. Retaliation remains on the table too, the EU having recently outlined its countermeasure package targeting an expanded €95bn of US goods, which could itself draw US retaliation.

  Chart 14: Frontloading ahead of US tariffs has buoyed exports and manufacturing

  

  Source: Investec Economics, Macrobond

  Given such uncertainty our 2025 GDP forecast is little changed at 1.0%. But tariffs aside we see longer-term growth lifted by domestic policies related to defence and investment. This month saw an uneasy start to Friedrich Merz’s term as Chancellor, becoming the first in German history to initially fail to secure enough votes for confirmation (he passed in a second vote). But with the new government now installed spending details will soon emerge. Comments thus far have reaffirmed the need to invest and spend, even entertaining the idea of defence spending rising to 5% GDP*. Indicatively that would be c.€275bn/yr by 2032. This will all take time, but we do see a stronger German economy supporting EU20 growth in 2026, our forecast being 1.5%.

  Chart 15: Illustrative German defence spending and infrastructure investment: a large ramp-up

  

  * Reported NATO proposal of 3.5% core defence spending + 1.5% wider definition inc investment by 2032
  Source: Investec Economics, Macrobond

  Euro area HICP inflation held steady at 2.2% in April. But other aspects of the release appeared less encouraging with the core rate rising to 2.7% and services to 4.0%, a 0.4%pt rise. However at a closer look, this may be a blip rather than an abrupt end to services’ disinflationary trend. The late timing of Easter this year was evidently a factor in the uplift in price pressures. For example, airfares rose by a record 24% m/m for April. Package holiday prices rose too, by 6.6% as opposed to 1.0% last April. As such we would expect services inflation to turn lower again in May and resume its path towards target: we forecast it to reach 2% in Q2 2026. This is, however, dependent on the labour market, but here signs remain encouraging.

  Chart 16: April inflation was little changed in most categories, but Easter distorts services (y/y)

  

  Source: Investec Economics, Macrobond

  At 6.2% the unemployment rate is now at a record low, which on the face of it may not shout lower wage growth. This has come despite a surge in participation to a record high of 65.6% and in particular a 5.1m rise in 55-69y olds in the workforce since Q4 ‘19. Despite lower unemployment though, there are signs of loosening conditions: the vacancy rate is at its lowest since ‘21. Moderating wage pressures are evident in a variety of indicators: negotiated wages is the latest example, falling to 2.4%, a 3yr low. Indeed, the ECB has been taking more comfort from recent wage data, which should support further easing. We continue to see the Deposit rate falling to 1.75% this year. But that outlook is very much subject to how tariffs play out.

  Chart 17: Despite a record low unemployment rate, conditions are loosening and wages easing

  

  Source: Investec Economics, Macrobond

  Whereas this month has seen some easing of the 'sell US' theme, European assets have not lost their shine. Indeed whilst €:$ volatility has fallen this month, sentiment continues to favour the Euro, where we see scope for €:$ to rise to $1.17 by end year. Driving this is partly our view for a weaker dollar, but there are supportive factors for EUR itself too. Fiscal loosening, including via more defence spending, will be a boon for the economy whilst the relative uncertainty over the US policies shifts sentiment in favour of the Euro. Fiscal expansion and infrastructure investment is also a factor behind European equities continuing to outperform both the UK and the US, particularly in Germany where the DAX has risen 20% YTD.

  Chart 18: EURUSD volatility has fallen, but a preference in markets for the Euro remains

  

  A call is the right to buy EUR and sell USD. A greater preference for EURUSD calls indicates a preference for EUR The x-axis is the strike price of the option, it sets the rate at which the option contract allows the holder to transact.
  Source: Bloomberg, Investec Economics.

• United Kingdom

  The UK economy started the year on a strong footing, at least as per official statistics: Q1 GDP expanded by 0.7% q/q. It is likely that this overstated the strength of underlying economic momentum however, with alternative evidence, such as the PMIs, pointing to more subdued conditions. Indeed, in its latest Monetary Policy Report, the BoE estimated underlying growth to have been zero on the quarter. Despite what the Q1 numbers make out, the backdrop remains fairly challenging for households and businesses and as such, we do not expect the Q1 pace of expansion to continue. We are forecasting economic growth of 1.3% this year and 1.6% next, with this year upgraded due to the overhang from the robust start to the year.

  Chart 19: UK GDP expanded by 0.7% in Q1, but underlying momentum was likely weaker

  

  Source: Investec Economics, ONS, Macrobond

  Given our forecasts, we think that Chancellor Reeves’s conclusion that the UK economy is ‘beginning to turn a corner’ may be premature. Part of our doubts relate to the suspiciously strong 5.9% gain in business investment in Q1. The large increase is at odds with weak business sentiment indicators and reports from companies globally that investments are being put on ice amid the vast uncertainty over US policy. We would also note that the series is notoriously revision prone (Chart 20). As such it is quite possible that the 5.9% increase will be revised down in subsequent releases, and that Chancellor Reeves will have to wait longer to see any fruits of her investment push.

  Chart 20: UK business investment data is notoriously volatile and revision prone

  

  Source: Investec Economics, ONS, Macrobond

  One opportunity for the UK economy though emerges from the trio of trade deals that the UK has signed this month (Chart 21). Although they do not necessarily represent a ‘game-changer’ for the UK economy as they stand, it is a positive step forward and could act as a stepping stone for more comprehensive deals in the future; certainly, there is scope to expand the deals with the EU and the US. But what will be key for the Chancellor in the short term is if this reduction in trade barriers lifts current economic sentiment, and further ahead whether the OBR judges that the trade deals increase longer-term growth potential. If so, it would ease fiscal pressures on the Chancellor as we approach the Autumn Budget.

  Chart 21: Good things come in threes…
   

  

  Source: Investec Economics, Gov.uk, with trade data from the ONS for 2024

  The US-UK trade deal came on the afternoon of the latest BoE decision, in which the MPC voted to reduce the Bank rate by 25bps to 4.25%. But the decision was far from unanimous. As Chart 22 shows, this is the most divided MPC since the GFC. However, most early indicators suggest that inflation will move lower from here, despite the big jump in inflation in April (caused by large one-off rises in administered prices and the timing of Easter): wholesale energy prices are falling, wage growth is easing and there is scope for imported disinflation from China. One uncertainty though is the impact of the recent hike in employers’ NICs and the extent to which businesses will recoup some of the added cost of labour through higher prices as they had signalled.

  Chart 22: The most divided MPC since the aftermath of the Global Financial Crisis

  

  Source: Investec Economics, Bank of England, Macrobond

  Uncertainty is also being reflected in financial market volatility. After trading sideways for much of 2024, since Trump 2.0 GBPUSD has traded in a wide range of $1.2157 to $1.3500. However, much of the rise in £:$ can be attributed to the global sell off in the dollar post 'Liberation Day'. Indeed, looking at the sterling trade weighted index ex USD, sterling has not gained any ground this year. That said, we do think Cable has further to run, in part due to our view of further downward pressure on the greenback but also benefiting from the spillover of the fiscal easing in the EU20 and an increasing appetite for the euro as an alternative to the dollar. As a result, we see £:$ rising to $1.35 end-25 and $1.38 end-26, but sterling weakening slightly against the euro to 87p by end-26.

  Chart 23: GBPUSD has risen, but much of that is a dollar move

  

  Source: Investec Economics, Macrobond

  This month has also seen the first concrete evidence of the sharp shift away from the two-party politics that the UK has become accustomed to. Indeed, the concurrent local elections and by-election in Runcorn and Helsby confirmed that Reform UK has been making considerable ground. In the by-election, for example, Reform UK managed to overturn a near-15,000 Labour majority to take the seat. To try and counter the swing to Reform the Labour party has announced stricter migration rules, which the Home Office estimates could result in a 100k drop in immigration per year by 2029. The consequences of this for sectors heavily reliant on migrant labour, such as the care sector, remains to be seen.

  Chart 24: A sharp fall in applications for UK health and care worker visas as rules tightened

  

  Source: Investec Economics, Gov.uk, Macrobond

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