05/07/2025 by Tony Redondo
President Trump’s 2 April ‘Liberation Day’ tariff and subsequent announcements pushed tariffs to their highest levels in a century. It’s been calmer of late with the US and China coming to an agreement. It’s also a done deal with Vietnam. A deal with India looks imminent. Trump zeroed in on Canada, citing the country’s Digital Services Tax (DST) as a “direct and blatant attack” on American technology companies. Within 48 hours, Canadian Prime Minister Mark Carney announced his government would rescind the DST to resume trade negotiations with the US, aiming for a deal by 21 July. The EU is said to be prepared to accept Trump’s proposed 10% universal tariff on its exports but is pushing for reduced rates on strategic sectors such as pharmaceuticals and semiconductors. Should they fail to reach an agreement by the 9 July deadline, EU goods imported to the US could be hit by duties of up to 50%. Retaliatory measures from the EU targeting a wide range of US goods, which have been put on hold, could then follow shortly afterward. The US-EU trade relationship is one of the most important in the world, accounting for around 30% of global goods trading.
Trump announced that the US is sending formal letters to foreign governments outlining the specific tariff rates they will face on imports into the US. This marks a significant shift from the administration’s earlier strategy of negotiating numerous individual trade deals. The President pointed to the complexity of negotiating with more than 170 countries and said the US will instead favour a simple, reciprocal tariff structure. Letters will be sent in batches of ten countries at a time, with many expected to receive tariff rates between 20% and 30%.
The UK reached a deal in May to retain a 10% tariff rate and secured preferential terms for key sectors, including automotive and aircraft engines but not steel production.
The Chinese Ministry of Commerce said Friday it had concluded EU producers had engaged in “dumping” activity which had harmed the Chinese brandy industry and is imposing retaliatory duties of up to 34.9% for a five-year period this month.
Agustín Carstens, general manager of the BIS (Bank for International Settlements), the central bank for the world’s central banks, has warned that the global economy is at a “pivotal moment” as it enters a “new era of heightened uncertainty and unpredictability” and increasing protectionism and trade fragmentation is “particular concerning” as they were exacerbating a decline in economic and productivity growth, while also voicing concern over evidence that the world economy is becoming less resilient to shocks. Pointing to rising debt levels, Carstens said: “This trend cannot continue.”
Currency Exchange Rates Update
In the first half of 2025, the Pound Sterling fell by 3.5% against the Euro but gained 9.3% on the US Dollar, 3.3% on the Australian Dollar, 3.8% on the Canadian Dollar, 3% on the South African Rand and 1.2% on the New Zealand Dollar.
The Pound’s decline against the Euro in the first half of 2025 reflects a mix of domestic economic challenges in the UK, including weak manufacturing data, concerns over public finances, a dovish BoE (Bank of England) interest rate policy and political instability in the first year of the first Labour government since 2010. The Euro has found support by a relatively stronger European growth outlook, bolstered by German fiscal reforms, less aggressive ECB (European Central Bank) rate cuts and strong capital outflows from the US as global trade tensions increased following Trump’s tariffs.
https://www.examinerlive.co.uk/news/cost-of-living/households-warned-withdraw-cash-banks-31990307
BoE Governor Andrew Bailey said interest rates should come down gradually as inflationary pressures looked like they were cooling. Analysts widely expect the BoE to cut UK interest rates by 0.25% at their next meeting on 7 August, taking the base rate to 4%.
The USD index ended the first half of 2025 down 10.8%. This was the worst start to the year for the US dollar since 1973, in the aftermath of the end of the gold standard. Has the dollar bottomed? The global dominance of the US Dollar remains firmly in place with the US dollar involved in approximately 88% of the daily $7.5 trillion turnover of the global foreign exchange market, but its once-unshakable safe-haven status has come under fresh scrutiny with a growing chorus of foreign investors growing increasingly cautious, spooked by erratic policy decisions and shifting economic signals that are reshaping capital flows. These shifts are gently nudging capital toward new centres of gravity.
This week, the key economic data releases include:
Monday UK Halifax Housing Index
Tuesday Australia RBA Interest Rate Announcement
Wednesday China CPI & PPI Inflation
New Zealand (RBNZ Interest Rate Announcement
Thursday Germany CPI Inflation
Friday UK GDP & Industrial Production
Canada Employment
What’s in the news?
UK
Sir Keir Starmer suffered a hit to his authority last week and landed his Chancellor with a £5bn spending headache following the government’s latest U-Turn to avoid a catastrophic defeat of its welfare bill last week. Last Tuesday, a heavily watered-down bill passed with 335 votes in favour, yet nearly 50 Labour MPs still voted against the bill despite huge concessions offered by 10 Downing Street. Now, the government faces increasingly urgent questions over whether this money will come from spending cuts elsewhere or extra tax hikes. Rachel Reeves faces a “hell slide” in her ambition to balance economic growth with her “iron clad” fiscal rules following Labour’s latest U-Turn. The Labour government’s climb down on welfare follows a £1.5bn retreat on the winter fuel payment last month. The rising costs of Labour retreats have spiked concerns on a repeat of the 2024 Autumn Budget where Rachel Reeves raised taxes by an eye-watering £40bn. The UK economy shrank 0.3% in April after the Chancellor’s budget tax hikes came into effect.
City analysts are now openly speculating over which taxes could rise, with concern growing that the so-called bank levy could be raised from 3 to 8%. Mike Regnier, the UK boss of Santander, warned against such a move, saying “Santander lends £7,500 for every single person in the UK. That lending is what the economy needs to grow. And if you don’t have a strong banking sector, you won’t get that support.”
Starmer’s Labour party has had a strained relationship with business in its first 12 months in office. Just a year ago, Keir Starmer’s Labour party won an historic general election victory having promised to be “the most pro-business government this country has seen’.
Bond giant L&G (Legal & General) has warned investors can no longer trust Labour after its multiple about-turns. Sonja Laud, the chief investment officer at L&G, said “Markets can’t trust that what’s been put forward will be put in place. You will see the adverse reaction. The changes we have seen ever since the first announcements from the Labour Party and the intended changes they wanted to put forward have subsequently been either watered down or changed. That’s what the bond market does not like. The reaction in the gilt market shows that there clearly is an unwillingness to accept that lack of clarity. There’s heightened sensitivity in the UK because of what happened in 2022, where you had unfunded fiscal promises.”
Good news
The ONS (Office for National Statistics) reported that the UK economy grew by 0.7% in the first quarter of 2025, its fastest pace in over a year, largely driven by increased household spending. Growth was broad-based, with the services sector expanding by 0.7%, production rising by 1.3%, and construction growing by 0.3%. Consumers dipped into their savings to spend more, causing the savings ratio to fall to 10.9%, its first decline in over two years. Despite the strong start to the year, economists warn of a weaker outlook ahead. Economic data showed a 0.3% contraction in April, and experts point to rising costs, tightened fiscal policy, the lingering effects of past interest rate rises and global market volatility as challenges for the months ahead.
The closely watched S&P Global UK Services PMI survey rose between May and June at its fastest rate for 10 months as inflation eased and the “turnaround” with consumers and businesses spending supported the industry.
Tim Moore, economics director at S&P Global Market Intelligence, said “June data highlighted a modest rebound in UK service sector growth, fuelled by a turnaround in domestic business and consumer spending after a soft patch during the spring. Business activity expansion was slightly stronger than the earlier ‘flash’ estimate for June and the fastest seen since August 2024. Concerns about elevated payroll costs meant that service providers were reluctant to turn on the hiring taps. Employment numbers decreased for the ninth month running and at a faster pace than in May, with job shedding again often attributed to redundancies as well as the non-replacement of voluntary leavers.”
Not so good news
The CBI (Confederation of Business Industry) are warning that private sector businesses are braced for a sharp decline in activity in the next three months after a sharp 26% decrease in output in the three months to June. CBI researchers said business volumes in the services sector, which represents around 81% of GVA (gross value added) in the UK, would fall by 24%.
Tax advisory firm Ryan have warned that UK manufacturers will have to cough up £685m more in new property taxes next year, adding costs to businesses which are struggling to boost output and already cutting back on headcount.
Industry chiefs have sounded the alarm over the ‘horrific’ packaging tax. The EPR (Extended Producer Responsibility) aims to get the producers of waste to pay for recycling costs but poses a multibillion-pound threat to UK businesses and will encourage firms to relocate their production abroad. The BRC (British Retail Consortium) has been calling for the government to delay implementing the new tax, saying the fees will take a £2bn chunk out of retailers’ bottom lines, just months after the £5bn hit from the rise to the employer national insurance contributions.
The latest IoD (Institute of Directors) Directors’ Economic Confidence Index fell in June as the impact of the Reeves tax rises filters down into bosses’ confidence levels with investment intentions taking one of the sharpest knocks. Another notable faller was headcount expectations.
For the British banks, 2024 was the steepest drop in headcount since 2018 amid an industry-wide digital push. Total employee numbers at British lenders slumped 5.25% falling to the lowest number in a decade. Standard Chartered and HSBC made the biggest culls. Not a single UK lender made it in the top ten of The Banker’s Top 1000 World Banks, which assess firms on their Tier 1 Capital, a core funding that indicates the financial health of a bank.
British business confidence has been hammered by Labour’s tax blows, but fears remain heightened the government will return for more according to a survey by the BCC (British Chambers of Commerce) which revealed that 56% of firms were particularly concerned about their tax burden. David Bharier, head of research at the BCC said “April’s rise in national insurance contributions has cemented tax as the dominant concern for firms. Businesses are entering a new employment landscape marked by structurally higher labour costs and administrative requirements, fuelling increased anxiety about redundancies.”
According to the latest High Street Sales Tracker from BDO, the High Street sales slump continued in June with in-store sales growth lagging behind inflation for the sixth consecutive month.
The S&P Construction sector PMI rose slightly despite it being the slowest contraction for six months, but activity remains below the 50.0 threshold suggesting the sector is continuing to struggle amid the Chancellor’s tax rises and inflation. The omission of construction from the Industrial Strategy’s eight priority sectors has also raised industry concerns. For a sector that underpins infrastructure, housing and industrial delivery and contributes around 7% of UK GDP the lack of formal recognition suggests a misalignment between policy ambition and practical implementation.
https://www.birminghammail.co.uk/news/uk-news/governments-38000-new-homes-year-31940669
A new report published by leading small business insurance provider, Simply Business revealed the government has created the perfect storm with nearly 1 million small businesses facing closure. The UK’s 5.5 million small businesses account for 60% of all private sector employment and £2.8 trillion in turnover per year. Yet, 18% fear they could be forced to close permanently if conditions don’t improve. That would mean almost one million fewer businesses in the UK whilst 25% say they will need to use their personal savings to prop up their business.
USA
US job growth proved better than expected in June, as the labor market continues to show resilience and likely taking a July interest rate cut by the Federal Reserve off the table. Nonfarm payrolls increased a seasonally adjusted 147,000 for the month, higher than the estimate for 110,000 and just above the upwardly revised 144,000 in May according to the Bureau of Labor Statistics. The unemployment rate fell to 4.1%, the lowest since February and against a forecast for a slight increase to 4.3%.
The EU
Philip Lane, the ECB’s chief economist has suggested that the ECB’s interest rate tightening cycle is ‘done’.
Eurozone inflation came in at 1.9% for May, below the central bank’s 2% target. The money markets are currently pricing in a further 0.25% interest rate cut to 1.75% by the end of 2025.
German inflation unexpectedly fell to 2% in June bringing Europe’s largest economy in line with the ECB target.
A vote of no-confidence against European Commission President Ursula von der Leyen is scheduled for 10 July during the European Parliament’s Strasbourg session. The motion, initiated by Romanian MEP Gheorghe Piperea, was approved with 79 signatures, surpassing the required 72. A debate is set for 7 July. The motion primarily stems from the “Pfizergate” scandal, involving allegations of non-transparency in von der Leyen’s 2021 text exchanges with Pfizer’s CEO during COVID-19 vaccine negotiations. However, the motion is unlikely to pass, as it requires a two-thirds majority, and major groups like the EPP, Socialists, and Renew have signalled opposition.
Others
Chinese automakers more than doubled their market share in Europe in May, rising from 2.9% to 5.9% year-on-year, despite new tariffs on electric vehicles, according to JATO Dynamics.
China’s manufacturing sector shrank for the third straight month in June.
China’s services sector lost momentum in June as the Caixin Services PMI to its weakest reading in nine months, weighed down by slower new business growth amid global headwinds. Export services took a hit, shrinking for the second straight month at the fastest pace since late 2022.
Australia’s trade surplus surprisingly shrank in May according to the Australian Bureau of Statistics. Exports weakened while imports picked up speed, pushing the balance lower. Markets see a 96% chance of a RBA (Reserve Bank of Australia) rate cut at the 8 July meeting.
Quote
Karl Marx, “History repeats itself, first as tragedy, second as farce”.
