What happened over the summer

What happened over the summer

The good news is that activity has held up in the face of sweeping US tariffs and the world has so far largely avoided a retaliatory cycle of tit for tat tariffs. Despite the average tariff on US imports of goods shooting up from 2.4% at the start of the year to 18.6%, the IMF nudged up its forecast for global growth in July to 3.0%, only marginally below last year’s 3.3% rate.

• This doesn’t mean that the world has shrugged off the effects of tariffs. The impact of tariffs on growth and inflation takes many months to feed through the system. Five months on from Donald Trump’s ‘liberation day’ announcement, we still don’t have a full picture of US tariff rates by country and product. The next key date is 10 November when a pause in the application of the highest US tariffs on China ends. The jury is still out on how America’s tilt towards protectionism will affect the global economy in coming years. 

• What is clear is that tariffs have hit prospects for US growth harder than for most other countries. Economists slashed their forecasts for US growth since January and expect the economy to grow by 1.6% this year, just over half last year’s rate and the slowest pace of growth since the pandemic.

• Hopes about the transformative effects of the AI have ridden to the rescue, buoying sentiment and boosting US equities. That has fed through into a surge in investment in AI and data centres which has buoyed US growth. Were it not for tech - and a strong performance from the healthcare and real estate sectors - US activity would be faltering.

• Two areas of concern are lacklustre levels of consumer confidence and a rapidly weakening jobs market. US inflation is drifting higher, partly as a result of the imposition of tariffs, adding to the squeeze. Barring a sharp pickup in the August inflation data on Thursday, we expect the Federal Reserve to cut interest rates when it meets next week.

• What of China? The world’s second-largest economy saw a boost to demand from stockpiling ahead of the application of US tariffs. While trade with the US has fallen sharply trade with other countries continues to grow. It is a measure of the resilience of China’s economy that the IMF has raised its forecast for GDP growth this year from 4.0% in April to 4.8% in July, similar to last year’s 5.0% rate.

• Momentum in the euro area is mildly positive. GDP forecasts for this year have been revised up since the spring, high-frequency data points to a gentle increase in activity and the ifo survey of German business confidence – one of Europe’s most important economic indicators – has risen steadily through this year.

• The most obvious sign of increased confidence in Europe can be seen in stock markets. Euro area equities are up 27% so far this year while the UK is up 14%, both stronger than the US (11%). Higher spending on infrastructure and defence in Germany and an increased focus on growth-boosting reforms across the continent have helped boost sentiment. Expectations for euro area corporate earnings, too, have risen 13% since the start of the year. European equities trade at lower earnings multiples than in the US, making them attractive to investors concerned about exposure to the US technology sector and broader volatility in the US economy and the dollar.

• The UK’s had a good year so far with the economy growing by 1.1% in the first half, making it the fastest-growing economy in the G7. One-off factors such as tariff-related stockpiling and the end of the stamp duty holiday have flattered the GDP numbers and we expect the pace of UK growth to slacken in the second half of the year.

• The UK is an outlier in another, less desirable area, with inflation rising to 3.8% in July, higher than any other G7 economy. This has created a headache for the Bank of England, which is weighing the risk of above-target inflation against a weakening jobs market. Unemployment, at 4.7%, is at the highest level in over four years while HMRC data show that the number of payrolled jobs has been on a downward trend since last autumn.

• The Bank has cut the UK base rate from a peak of 5.25% to 4.0%. Financial markets are pricing only one further rate cut in the spring of next year and an approximately even chance of one further final cut later in 2026.

• Higher inflation has contributed to an upward drift in the yield, or interest rates, on UK government bonds, a process that has exacerbated by weakened demand for long-dated gilts from defined benefit pension schemes. Last week the yield on the 30-year gilts reached a 27-year high. Ten-year borrowing costs are higher than elsewhere in the G7.

• This is adding to the difficulties facing UK chancellor Rachel Reeves, who is widely predicted to face a shortfall in tax revenues if she wishes to meet both her current spending plans and fiscal rules. One estimate from National Institute of Economic and Social Research put the shortfall at £50bn if the chancellor wants to maintain the current level of fiscal headroom. The Autumn Budget will take place on 26 November and it seems inevitable that speculation over tax rises will continue until then, with potentially harmful effects on consumer and business sentiment.

• The UK is far from alone in facing difficulties over its budget. French prime minister Francois Bayrou looks at risk of losing a confidence vote today as he seeks to find €44bn in spending cuts, including, among things, scrapping two public holidays.

• In a warning shot to the public and his coalition partners Germany’s chancellor Friedrich Merz said last month that “the welfare state that we have today can no longer be financed with what we produce in the economy.”

• Japan, Italy and Canada have also seen their borrowing costs rise this year. A notable exception is the world’s largest and most liquid debt market, that of US Treasuries where ten-year bond yields have slightly declined since the start of the year.

• As well as tariffs the other big US policy announcement this year has been the passage of Mr Trump’s budget bill. It includes $4.1tn in tax cuts over the next ten years but, with only limited spending cuts, is set to add $3.3tn to federal deficits.

• Mr Trump has continued to criticise Fed chairman Jerome Powell and last month attempted to fire Fed policymaker Lisa Cook. This has raised concerns that the independence of the US central bank, seen as a key safeguard against political interference and inflation, may be at risk.

• Against a backdrop of growing worries about government debt and higher inflation investors have sought out supposed safe-haven assets. The dollar price of gold hit a fresh high just last week and has risen by 35% this year. Bitcoin also hit a record high last month and is up 20% since the start of the year. The US dollar has been a casualty of recent developments and has fallen by about 9% this year.

• The world economy has managed to avoid some of the negative outcomes that seemed quite likely earlier in the year. But we are out of the woods. The full impact of tariffs is still to be felt and US growth, like the US stock market, is heavily dependent on tech.  Concerns around government indebtedness and geopolitical risk are here to stay. The tectonic plates of public opinion are shifting in Europe, with Reform UK 11 points ahead in polls in the UK, Rassemblement National 6 points ahead in France and Alternative für Deutschland 1 point behind the CDU in Germany.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.2% at 9,208.  

Economics

• The US added fewer than expected 22,000 jobs in August, down from 79,000 in July, increasing concerns over a cooling US labour market
• Gold prices reached a record high last week, of $3,526 per troy oz, due to elevated uncertainty, market expectations of US interest rate cuts and a weak US dollar
• The US Department of Justice launched an investigation into Federal Reserve governor Lisa Cook following US president Donald Trump’s attempts to remove her from the board of the central bank
• UK chancellor Rachel Reeves announced that the UK government’s Autumn Budget will take place on 26 November 
• The Office for National Statistics revised down UK retail sales estimates in the first half of 2025, from growth of 1.7% to 1.1%, due to errors identified in their previous estimates, the latest issue in a series of problems with official statistics
• The number of UK mergers and acquisitions increased to 501 in the second quarter this year, up from 412 in the previous quarter, according to official statistics, driven by a rise in domestic transactions while overseas takeovers declined
• The EU is offering legal guarantees to its farming industry in attempts to alleviate concerns about imports from South America, as it starts the approval process for a trade deal with Mercosur group of South American economies
• Euro area inflation increased to 2.1% in the year to August, up from 2.0% in July. Unemployment remained stable at 6.2% in July
• Russia and China agreed to build a new gas pipeline, providing Russia with new export routes amid European attempts to reduce reliance on Russian energy
• Developing countries are swapping US dollar-denominated debt to currencies with much lower interest rates compared to the US, such as the Chinese renminbi and Swiss franc, to avoid higher debt servicing costs
• OPEC+ agreed to further increase output later this year, a decision that is expected to weigh on oil prices despite already weak global demand
• UK cement production fell to its lowest level since 1950 last year, according to the Mineral Products Association. The Association said high energy, regulatory and labour costs increasingly threatened the industry

Business

• A US court ruled out breaking up Google in response to a previous court decision that Google had created an illegal online search monopoly
• The European Commission fined Google €2.95bn for its alleged practices of using its search engines for “self-preferencing” of its own services 
• JP Morgan is set to launch its digital consumer bank, Chase, in Germany next year as part of its European expansion plans
• US bank Goldman Sachs announced plans to invest up to $1bn in US asset manager T Rowe Price
• Energy company ConocoPhillips plans to cut 25% of its workforce as part of a cost-cutting drive amid low oil prices
• Food company Kraft Heinz announced plans to break up its business into two publicly listed entities in an attempt to improve performance
• The UK government announced a £10bn agreement with Norway to supply at least five British-made frigates. The UK is also in talks to build warships for Denmark and Sweden, the FT reports
• The World Gold Council plans to launch a digital form of gold in London that will allow traders to “pass gold digitally around the gold ecosystem as collateral”, as part of plans to modernise the industry 
• US film studio Plan B, co-founded by actor Brad Pitt, announced plans to launch a UK business, in a sign of growing strength for Europe’s TV and film production industry
• Spending by UK Premier League football clubs over the summer transfer window surged to a record €3.5bn, up from €2.4bn last year
• Fashion brand Topshop will return to the UK high street following its collapse in 2020, as part of a deal with John Lewis
• Royal Mail said it has returned to profit for the first time in three years, due to cost cutting, greater automation and increased locker deliveries
• Jaguar-Land Rover suffered a cyberattack that caused severe disruptions to its production activities
• Swiss pharmaceuticals company Novartis said it will buy the rights for potential cardiovascular drugs from a Chinese biotech company for up to $5.2bn, the latest in a trend of large pharmaceutical companies buying the rights to future potential medicines from Chinese companies
• The World Nuclear Association warned that falling uranium production over the coming decades may stifle the recent surge of planned nuclear energy developments  

Global and political developments

• Russian president Vladimir Putin said that any foreign troops sent to Ukraine while fighting is ongoing would be “legitimate targets to destroy”, as European leaders held discussions regarding future security guarantees for Ukraine 
• European Commission president Ursula von der Leyen said that European countries have “pretty precise plans” for possible military deployment to Ukraine as part of post-war security guarantees
• A plane carrying Ms von der Leyen was forced to use paper maps to land safely at a Bulgarian airport due to suspected Russian interference with GPS
• China hosted leaders from countries including Russia, North Korea, and India for a regional security forum. The forum ended in a military parade, with Chinese president Xi Jinping commenting that “the great rejuvenation of the Chinese nation is unstoppable”
• Israel’s military said Houthi rebels launched a drone attack that hit Israel’s Ramon airport, halting flights and closing airspace in the area
• The US government deployed its navy to the Caribbean to tackle drug trafficking in the region, as part of a campaign against Venezuelan drug cartels
• The UK government is considering a digital ID programme as part of plans to tackle illegal working by immigrants
• The UK government suspended family reunion applications from asylum seekers over concerns that criminal gangs were using the scheme to encourage people to take dangerous migration routes to the UK
• UK deputy prime minister Angela Rayner resigned from the government and her role as deputy leader of the Labour Party due to an underpayment of stamp duty on the purchase of a property
• Japanese prime minister Shigeru Ishiba announced his resignation less than a year into his tenure to avoid a “decisive split” within his Liberal Democratic Party
• The UK’s Green Party elected London Assembly member Zack Polanski as its new leader  

 And finally… more than 50 experts attending a cyber-security event in Singapore fell for a mock scam that offered the chance to queue-jump by scanning a QR code. The stunt, set up by the event organisers, was intended to highlight that everybody is at risk of being scammed –  giving in to QR-iosity