Economic Perspectives August 2025
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- Broadly in line with our base scenario, the US-led trade war intensified again on 1 August, as Donald Trump raised tariffs on multiple trading partners. Many countries saw notable tariff increases relative to the 10% temporary reciprocal tariff. Canada got hit with a 35% tariff on USMCA non-compliant goods, in response to its recognition of Palestine. Brazil got hit with a 50% tariff, in response to its prosecution of former president Bolsonaro. The tariff rates of other South-American countries were kept below 20%. In Africa, the elevated 30% tariffs for South-Africa, Libya and Algeria stand out. In southern Asia, many countries such as India (25%), Pakistan (19%), Bangladesh (20%), Indonesia (19%) and Thailand (19%), saw major tariff increases. Some important trading partners negotiated lower tariffs than announced before. Japan and the EU negotiated a 15% blanket tariff (including reduced tariff on automobiles), in return for higher investment in the US. Both economies also eased import restrictions on US goods. The EU eliminated all tariffs on industrial goods. Overall, the effective US tariff is now estimated at 18.3%, a level not seen since the Great Depression of last century. While reducing short-term uncertainty, the trade deals are far from finalised. New trade tensions could emerge in the medium term as conflicts regarding the exact terms of the “trade deals” reappear (e.g. the pledged EU investments or energy purchases).
- Oil prices increased by 3.9% last month to 71.7 USD per barrel. The increase is largely a result of increased US pressure on Russia and its trading partners. The US threatened secondary sanctions and penalties on nations that continue to buy Russian oil (Russia exports around 7 million barrels per day). In response, several Indian state-owned refiners halted Russian oil purchases. Other important buyers such as Brazil, South-Korea and Turkey could also limit their Russian oil purchases. However, China, the largest buyer of Russian oil, has indicated it will maintain buying patterns. Oil prices remain low by historical standards, however. OPEC+ has been ramping up supply in recent months. It recently announced another 547k barrels per day supply increase in September. European natural gas prices also increased slightly last month (+1.6%), reaching 34 EUR per MWh. Elevated temperatures (especially in the US) caused an increase in air conditioning usage, driving up demand for gas. Futures markets expect a slight increase in EU gas prices over the winter, as natural gas reserves are somewhat below historical average.
- Following the unexpectedly strong surge in real GDP growth in the euro area in the first quarter of 2025 (0.6% compared with the previous quarter), growth slowed to 0.1% in the second quarter, as expected. In Germany and Italy, where the economy had received a relatively strong additional boost in the first quarter in anticipation of import tariffs in the US, the correction even led to a slight contraction in real GDP (by 0.1% in both countries). In Ireland, the decline amounted to a full percentage point, which, given the exuberant growth of 7.4% in the first quarter, can also be described as modest. With growth of 0.2% in Belgium and 0.1% in the Netherlands, the slowdown in growth was limited to 0.2 percentage points. Against the backdrop of slowing growth in these countries, the strengthening of the French economy from 0.1% to 0.3% stands out. However, it should be added that this was mainly due to stockpiling and therefore does not indicate a qualitative improvement in growth. The same cannot be said of the Spanish economy, where investment and private consumption caused a growth acceleration from an already robust 0.6% in the first quarter to 0.7% in the second quarter, despite inventory drawdowns. Structural competitiveness challenges and uncertainty will continue to weigh on euro area growth in 2025, but a significant fiscal stimulus in Germany will boost economic momentum from 2026 onwards at the latest, at least in Germany. Spillover effects to other euro area countries will counterbalance the negative growth effects of fiscal consolidation in other countries.
- Inflation in the euro area stabilised at 2.0% in July. Core inflation also remained unchanged (2.5%). This was the result of a slightly stronger than expected slowdown in services inflation (from 3.3% in June to 3.1% in July) and an unexpected uptick in the rate of price increases for non-energy goods (from 0.5% to 0.8%). Food price inflation rose from 3.1% to 3.3%, while energy price inflation became slightly less negative (-2.5% in July compared to -2.6% in June). Food and, in particular, energy price fluctuations may continue to cause volatility in the coming months, but core inflation is likely to cool. The surge in goods inflation in July was probably due to random, temporary factors, while the cooling of services inflation is in line with expectations.
- The US economy avoided a technical recession. US GDP grew by 0.75% quarter-on-quarter in Q2, a big rebound versus the negative growth rate seen in Q1. The rebound was the result of the large positive contribution of imports. Imports, which are a subtraction in the calculation of GDP, had increased significantly in anticipation of higher tariffs in the first quarter of 2025. This import frontloading largely reversed in Q2, which resulted in a positive growth contribution of net exports. Under the waterline, signs of a decelerating US economy are appearing. Looking at internal demand components, the GDP release showed a weakening growth trend. Consumption only contributed 0.25 percentage points to quarter-on-quarter growth, far below historical averages. Government spending and private investment both notably made negligible contributions. Within the latter category, structures and residential investments notably made negative contributions. Looking ahead, higher tariffs and migration restrictions are likely to cause further growth weakening in the coming quarters. Confidence indicators remain weak. The labour market is also showing cracks. Last month, non-farm payrolls increased by only 73k. Furthermore, there were also major downward revisions over prior months. Over the last three months, non-farm payrolls only increased by 106k (more than three times lower than historical averages). The unemployment rate also increased from 4.1% to 4.2% in July, while the participation rate decreased. There was also an important increase in part time employment for economic reasons. Further labour market weakening can be expected as the economic environment deteriorates.
- US inflationary pressures intensified in July as core inflation increased from 2.9% to 3.1%. On a monthly basis, core inflation strengthened to 0.3%. The increase was primarily driven by core services, in particular medical care services and transportation services. Core goods inflation also accelerated as car prices rose (in contrast to the declining car prices seen in prior months). Some import-sensitive categories, such as household furnishings and recreation commodities, also showed important increases, while apparel prices remained well under control. Tariffs have thus not yet fully filtered through to goods inflation. Shelter prices inflation was subdued, thanks in part to lower hotel prices and the decline in rental prices. Despite the increase in core inflation, headline inflation remained unchanged at 2.7%. Energy prices declined by 1.1% month-on-month, while food prices remained unchanged. For the coming months, we expect inflationary pressures to accelerate further as tariffs gradually filter through to consumer prices.
- Both the ECB and the Fed left their policy rates unchanged at 2% and 4.375% respectively in July. Both central banks are thus taking a wait-and-see approach with regard to additional data that can support the assessment of future growth, labour market developments and inflation. The important difference between the two central banks is that ECB policy rates have been in neutral territory for several months, while Fed chairman Powell described US policy rates as modestly restrictive, given still high inflation and low unemployment. While eurozone inflation was at ECB target of 2% in July, the Fed takes into account the risk of import tariffs trickling down into higher US consumer prices. However, Powell assumes that this will lead to a one-off increase in the price level, without necessarily translating into second-round effects and persistent inflation. Thus while the eurozone’s rating cutting cycle might be at (or nearing) its end, the Fed’s rate cutting cycle might resume in the second half of this year. US 10-year rates have recently come under slight downward pressure due to some increased growth pessimism and consequently a higher probability of an early resumption of rate cuts by the Fed. For 2026, we do see some upside potential for German 10-year rates. The additional fiscal stimulus will be particularly noticeable from 2026 onwards. The related higher German debt issuance volumes are likely to lead to a further decompression of the term premium on German government bonds.
- The Chinese economy grew 5.2% year-over-year in Q2 as total exports held up despite a strong drop in exports going to the US. Activity data such as industrial production and retail sales held up well early in the quarter too, but June data highlighted imbalances that continue to plague the economy with industrial production growing 0.5% month-over-month and retail sales declining 0.16% month-over-month. The divergence highlights China’s excess capacity problem relative to weak domestic demand, which is contributing to the economy’s growing deflationary concerns. Headline inflation was unchanged year-on-year in July, while producer prices continued their decline for the thirty-fourth month in a row (-3.6% year-over-year). The GDP deflator turned more negative in the second quarter (-1.2% year-over-year), meaning the nominal GDP figure was a relatively weak 3.94% year-over-year. Looking forward, higher trade barriers with the US, including efforts by the US to block transshipping from China through third countries, will weigh on export growth. Together with structural challenges still weighing on the economy, and a real estate sector still stuck in the doldrums, we expect growth to remain relatively muted in the second half of the year.
- In Belgium, quarter-on-quarter GDP growth came out at 0.2% in the second quarter of 2025 according to the flash estimate, down from 0.4% in the first quarter and slightly above what we had expected (0.1%). Although the number implies a deceleration, Belgian growth once again proved relatively resilient compared to the euro area and, especially, to Germany. Component details have not been published yet so a proper assessment remains difficult. The preliminary estimate suggest a broad-based deceleration of growth. Value added growth (in real terms) in Q2 decelerated in all three sectors. The construction and services sector both continued to record positive growth though (0.2% quarter-on-quarter), while growth in industry became negative again (-0.1% quarter-on-quarter) after the one-off positive figure in Q1. July’s data for both consumer and business surveys disappointed. After noticeable improvements in previous months, consumer confidence was unchanged while business confidence even slipped. Belgium’s inflation based on the HICP fell to 2.6% in July, from 2.9% in June, on the back of a small decrease in energy inflation (from 2.2% to 2.1%) and a more significant drop in food price inflation (from 5.0% to 4.4%). Core inflation (i.e. excluding energy and food) stagnated at 2.2%. At 2.6%, Belgian headline inflation is still well above euro area inflation, while core inflation now is slightly below the euro area figure.
- CEE markets (Bulgaria, Czechia, Hungary, Slovakia) exhibit modest GDP growth in Q2 driven by domestic demand and EU funds but face persistent inflation and external headwinds. Within the Eurostat GDP figure releases, there was notable divergence as Czech quarterly growth decelerated from 0.7% to 0.2%, while Hungarian growth accelerated from -0.1% to 0.4%. CPI inflation in the Czech Republic, which stood at 2.7% in July, remains stubbornly above the CNB's target. For the time being, the CNB is therefore keeping its policy rate unchanged at 3.5%. In Hungary, the MNB also kept the policy rate unchanged at 6.5%. Hungarian inflation reached 4.3% in July, well above the MNB's target. As for the impact of the tariff agreement negotiated between the EU and the US in July on the CEE region, the expected additional damage (compared to the pre-agreement situation) should be minimal, especially in countries with a large automotive segment. In fact, Slovakia and Hungary may even benefit slightly according to our calculations. Bulgaria is set to adopt the euro on January 1, 2026, confirmed by EU Parliament on July 8. The Bulgarian parliament approved amendments to the Euro Adoption Act on July 30, establishing strict consumer protection measures: prohibiting unjustified price increases, mandatory dual pricing, and large retailer data publication.
All historical prices, statistics, and charts are up to date as of July 29, 2025, unless otherwise stated. Positions and forecasts are those of July 29, 2025.