FLASH PMIs

Eurozone output growth at 11-month high as new orders stabilise

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index rose to 51.0 in July from 50.6 in June. The latest reading signalled a seventh consecutive monthly increase in business activity across the euro area. Although modest, the pace of growth quickened for the second month running and was the sharpest since August last year.

Output increased across both the manufacturing and services sectors, but for the first time in four months the services category posted the stronger pace of growth as the rate of expansion quickened to the fastest since January. Meanwhile, manufacturing production rose marginally, and at a fractionally slower pace than in June.

Differing trends were recorded across the various areas of the Eurozone covered by the flash PMI release. Germany posted a marginal increase in output for the second month running. In France, activity decreased again but at the slowest pace in the current 11-month sequence of decline. Meanwhile, the rest of the euro area registered a solid expansion in output that was the most marked since February.

July data pointed to a stabilisation of new orders, thereby ending a 13-month sequence of contraction. Services new business increased for the first time in six months, but this was cancelled out by a renewed fall in manufacturing new orders. While total new business stabilised, new export orders (which include intra-Eurozone trade) decreased again. The latest fall was modest, but quicker than that seen in the previous survey period. New business from abroad has declined continuously on a monthly basis since March 2022.

Higher activity requirements and a stabilisation of new orders encouraged companies in the Eurozone to raise their staffing levels again in July, extending the current period of job creation to five months. The pace of job creation was marginal and unchanged from June. Employment increased in the services sector but continued to fall in manufacturing, although the latest reduction was the least pronounced since June 2023. The overall increase in workforce numbers was reflective of job creation outside the largest two euro area economies as Germany and France continued to post declining staffing levels. In fact, outside the ‘big-2’ the pace of job creation was the strongest in just over a year.

Backlogs of work decreased again in July, but the pace of depletion was only slight, having eased for the second month running to the weakest since April 2023

Although input costs continued to increase in July, the pace of inflation eased to a nine-month low and was weaker than the series average. Services input prices rose at a slower pace, while costs in the manufacturing sector continued to decrease. That said, the latest fall was only fractional and the softest in four months.

Manufacturing output prices were unchanged in July, ending a two-month sequence of decreases. Meanwhile, the pace of services charge inflation softened. Overall, companies in the euro area raised their output prices modestly, and at the same pace as in June.

The pace of selling price inflation in Germany eased over the month, but faster increases were seen in France and the rest of the Eurozone.

After business sentiment hit an 11-month high in June, confidence dipped slightly in July. As such, optimism remained weaker than the series average. Sentiment was lower across both monitored sectors. Business confidence declined in France during the month, after having jumped in June. Elsewhere, however, optimism strengthened. In Germany, sentiment hit a 14-month high, while the rest of the euro area signalled the strongest confidence in the year-ahead outlook since February. (…)

There is good news for the ECB, as the disinflation trend has continued in the closely watched service sector. Prices for goods did not fall further in July, but the stronger euro and US tariffs are likely to exert downward rather than upward pressure on inflation in the coming months.

In the UK:

Overall export sales decreased for the ninth consecutive month, albeit to the least marked extent since January. Goods producers widely reported a negative impact on global demand for manufacturing items in the wake of US tariff announcements, with shipments delayed and investment decisions postponed. Manufacturers also noted that rising competition in international markets had constrained export order intakes.

Service providers also recorded a decline in new work from abroad in July, but the rate of contraction was only marginal. While survey respondents mostly noted subdued overseas demand, some firms commented on successful efforts to diversify into new export markets in response to weak domestic sales.

Japan: Stronger service sector growth offsets fresh decline in manufacturing output

At 51.5 in July, the headline seasonally adjusted S&P Global Flash Japan PMI Composite Output Index was unchanged from June and signalled a further modest increase in overall private sector output. Business activity has now risen in each of the past four months, with the rate of expansion slightly quicker than seen on average over the first half of 2025.

A solid and accelerated rise in service sector activity contrasted with a renewed drop in factory production during July. Improved activity levels were generally linked by survey respondents to firmer demand conditions and increased client numbers. However, lingering uncertainty over future US trade policy and general market malaise were cited as key factors that had dampened the performance of the manufacturing industry.

New business across Japan’s private sector as a whole rose at a pace that, though marginal, was the strongest in three months. As was the case for output, this reflected a sustained rise in new work placed with services companies, as factory orders continued to decline.

At the same time, there was a broad-based reduction in new orders from abroad, with manufacturing firms registering a steeper decline than service providers. Overall, new export business fell at a modest pace that was the most pronounced in nine months.

Overall business confidence regarding the year-ahead weakened during July, hitting the second-lowest level since August 2020 (after April 2025). Lower levels of optimism were seen across both the manufacturing and service sectors, with companies often expressing concerns over US trade tariffs and the potential impact on demand. A shrinking population, labour shortages and high costs were also cited as headwinds to growth.

Subsequently, Japanese private sector firms adopted a more cautious stance regarding staff hiring, with overall employment rising at a marginal rate that was the weakest in a year-and-a-half.

Although the rate of input cost inflation across the private sector as a whole eased to its weakest in just over four years, it remained sharp overall. Firms often mentioned that higher labour, fuel and raw material costs had pushed up expenses in the latest survey period. As a result, companies increased their selling prices again in July. At the composite level, the rate of output charge inflation slowed from June but was nevertheless solid overall.

Trump’s Japan Trade Deal Raises Fears He Gave Away Too Much

US industries and protectionists are raising alarms with President Donald Trump’s pact with Japan, saying it risks undercutting his stated goals of rebalancing America’s trading relationships and reviving domestic manufacturing. (…)

The president’s decision to grant Japan relief on automobiles, however, provoked criticism that the agreement wouldn’t address the main source of the US’s trade deficit with Japan even as it disadvantages Detroit’s Big Three. Around 80% of the US-Japan trade gap is in cars and car parts.

Tuesday’s announcement marked the latest signal that Trump is willing to negotiate on industry-specific duties on products including chips and pharmaceuticals, potentially undermining the most durable pillar of his tariff strategy.

The reaction underscores the risks of the president’s transactional negotiating style. Industries that have championed much of Trump’s trade strategy and stand to benefit from robust levies on foreign rivals could be left in the lurch as his plans shift.

“Any deal that charges a lower tariff for Japanese imports with virtually no US content than it does North American built vehicles with high US content is a bad deal for the US industry and US auto workers,” said Matt Blunt, president of the American Automotive Policy Council that represents Ford Motor Co., General Motors Co. and Stellantis NV.

Trump defended his approach, which resulted in a deal to reduce Japan’s country-specific rate to 15% and put US levies on cars and parts at the same level — lower than the 25% global charge on vehicles.

“I WILL ONLY LOWER TARIFFS IF A COUNTRY AGREES TO OPEN ITS MARKET. IF NOT, MUCH HIGHER TARIFFS! Japan’s Markets are now OPEN (for first time ever!). USA BUSINESSES WILL BOOM!” Trump posted.

His Commerce Secretary, Howard Lutnick, argued in a Bloomberg Television interview on Wednesday that it was also ratcheting up pressure on South Korea and Europe to make additional concessions or risk their automakers being left at a significant disadvantage. And White House Press Secretary Karoline Leavitt said Trump’s approach was breaking down barriers for US products abroad. (…)

Even so, automakers and other industry stakeholders were crying foul Wednesday. They warned that giving Japan an unlimited reduction on auto tariffs undermines the use of those levies not just for cars, but also metals, semiconductors and other goods.

“Unlimited imports at tariff rates below existing Section 232 rates critically undermine” the intention of the law and could actually encourage offshoring, said Jon Toomey, executive director of the Coalition for a Prosperous America, an advocacy group representing import-threatened industries that supports tighter trade controls.

The provision on Japanese autos is far more expansive than the steel and aluminum tariff reduction Trump gave the UK, which allows a limited quota of imports to enter the US at a reduced rate. (…)

Other countries already are clamoring for sectoral tariff relief, and the US-Japan trade deal sends a signal that they are up for negotiation, people familiar with the matter said. Two of those individuals predicted the agreement will also add leverage to the auto and oil industries’ pleas for relief from steel duties.

“It doesn’t make sense to allow for unlimited vehicle imports at 15%, while charging rates of 25% on auto parts and 50% on steel,” Toomey added. (…)

The US-Japan deal’s emphasis on investment suggests the promise of more revenues has taken priority over the push to protect domestic industries, one person familiar with the matter said.

While direct foreign investment in the US could help expand domestic manufacturing and artificial intelligence capacity, it won’t necessarily make the country’s exports more competitive on its own.

And some analysts raised doubts about whether Japan’s promises to open its markets to US products would prove meaningful. (…)

Even so, a major impediment to US auto sales in Japan is the American designs themselves — not just trade barriers. Put simply, Japanese consumers are less interested in driving Fords and GMs than Americans are in Toyotas and Hondas. Japan sells the US about 84 cars for every one the US sells there.

“American cars that are big just don’t comport well with the needs, desires and demands of the Japanese public” said Colin Grabow, an associate director at the Cato Institute’s trade policy center. “It’s unclear what the payoff here is.”

The WSJ Editorial Board:

(…) The new tariff rate is good news only as relief from 25%. This is still a 15% tax increase on imports from Japan. (…)

By the way, more investment inflows by definition mean a larger trade deficit in the U.S. balance of payments. Has someone told the President about this? (…)

One positive development is the apparent reduction in U.S. auto tariffs from 25%. Perhaps the Administration is noticing that forcing Americans to pay higher prices for the cars they want to buy isn’t a political winner. Yet the 15% rate still marks a substantial increase over the 2.5% tariff that applied to passenger cars before Mr. Trump took office. The U.S. already applies a 25% tariff on imported trucks.

This highlights the economic bramble into which Mr. Trump has stumbled with his tariffs-first-negotiate-later approach to trade. U.S. auto makers are worried that Japanese companies will enjoy preferential tariff rates while Detroit could be stuck paying 25% on imports of cars and parts that U.S. companies ship from Mexico and Canada. (…)

By the time this trade war ends, if it ever does, the average U.S. tariff rate may settle close to 15% from 2.4% in January. That’s an anti-growth tax increase. The question for Trumponomics now, as in the first term, is whether the pro-growth elements of his tax and deregulatory agenda overwhelm the tariff damage. (…)

Tourists Tame Their Shopaholic Ways, If They Even Come to the US

(…) President Donald Trump’s global trade war and border policies — combined with broader economic uncertainty — are threatening billions of tourism dollars. Bloomberg Intelligence estimates almost $20 billion in retail spending is at risk this year.

Some travelers are avoiding the US altogether, and of those who are coming, many are rethinking their budgets. Although some major currencies have recently gained against the dollar, international visitors are still confronting years of US inflation that has driven up the price of hotel stays and restaurant meals, leaving less money in their pockets for shopping.

Travel-related spending, which typically grows each year, has been virtually flat this year through May when compared to the same period in 2024, data from the US International Trade Administration show. Meanwhile, foreign arrivals to the US by air were down 6.6% in June compared to last year, according to the ITA. (…)

“Compared with Europe, it’s unbelievable,” said van der Meer, 64, who’d just visited the Macy’s store near the Empire State Building. “Food is very expensive, alcohol is very expensive — I think in Europe we pay two times less than here.” (…)

Tariff Risk Drives Another Round of Asia Forecast Downgrades Southeast Asia will be hit hardest by worsening trade conditions and persistent uncertainty, the ADB warned

The Asian Development Bank and multilateral organization Asean+3 Macroeconomic Research Office, or Amro, both lowered growth projections for major Asian economies, citing the impact of U.S. trade policy.

Asia-Pacific has weathered a tough external environment this year, “but the economic outlook has weakened amid intensifying risks and global uncertainty,” said ADB chief economist Albert Park.

Strong domestic demand and export front-loading supported regional economies in the first half of the year, but that momentum is expected to weaken, the Philippines-based multilateral bank said in a report Wednesday.

The ADB now projects gross domestic product growth for developing Asia at 4.7%, down from April’s forecast of 4.9% and the 5.1% expansion recorded in 2024.

Next year, growth in developing Asia, which comprises 46 ADB members including China, South Korea and India, is forecast to slow further to 4.6%.

Southeast Asia will be hit hardest by worsening trade conditions and persistent uncertainty, the ADB warned.

Although several Southeast Asian nations have negotiated for lower tariffs, analysts say that won’t offset the blow of high trade barriers, economic fragmentation and policy shocks.

Growth in Vietnam, the first to get a deal, is still expected to slow through 2025 and 2026 as U.S. tariffs dampen export demand. The ADB cut Vietnam’s GDP growth projections to 6.3% in 2025 and 6.0% in 2026, from 6.6% and 6.5%, respectively.

Those who have yet to reach a compromise, such as South Korea or Taiwan, face significant “reciprocal” tariffs on U.S.-bound exports if no agreement is reached by Aug. 1. The temporary trade truce between the U.S. and China is also set to expire in August.

“A renewed imposition of the U.S. reciprocal tariffs or a re-escalation in US-PRC [People’s Republic of China] trade tensions could reduce regional growth by 0.5 to 1.4 percentage points,” the ADB said.

A faster deterioration in China’s property market also poses a risk to regional growth, it added. (…)

For now, it maintains its growth forecasts for China at 4.7% this year and 4.3% in 2026. Beijing has a target of 5% for this year.

Tariff pressures also led ADB to trim growth views for India to 6.5% and 6.7% in 2025 and 2026, respectively. South Korea’s forecast was lowered to 0.8% this year and 1.6% the next year. (…)

The resulting global slowdown will further impact ASEAN+3, which includes the 10 Association of Southeast Asian Nations members, plus China, Japan, and South Korea. Amro expects regional growth to slow to 3.8% this year and 3.6% next year.

Under a scenario where U.S. tariffs on China revert to April 2 levels, BRICS-aligned economies face an additional 10% duty, and previously exempt goods incur a 25% levy, growth could drop below 3% next year, Amro estimates.

Non-tariff protectionist measures, such as stricter investment regulations, could magnify the impact, it added.

European Firms Becoming More Reliant on China, Chamber Head Says

(…) “In order to have the best product at the most attractive price, you obviously need to source the components where you get the best components at the most attractive price. And in many, many cases that is here in China,” said Jens Eskelund, president of the European Union Chamber of Commerce in China.

“So we see actually in many ways that European business is becoming not less dependent, but perhaps more dependent on China,” he said in an interview with Bloomberg TV on Thursday. More than a quarter of the group’s members are increasingly onshoring in the Asian country, he added. (…)

• Von der Leyen Says EU-China Ties Are at ‘Inflection Point’

European Commission President Ursula von der Leyen told Chinese leader Xi Jinping that the bloc’s ties with his country “have reached an inflection point,” illustrating what’s at stake in their summit shadowed by tensions spanning trade to the war in Ukraine.

“As our cooperation has deepened, so have the imbalances,” von der Leyen said on Thursday, according to her prepared remarks. The head of the European Council, Antonio Costa, called on China “to use its influence on Russia to respect the United Nations Charter and to bring an end of its war of aggression against Ukraine.”

“Rebalancing our bilateral relation is essential,” von der Leyen said. “To achieve this, it is vital for China and Europe to acknowledge our respective concerns and come forward with real solutions.”

The first in-person EU-China summit since 2023 is exposing a divide between the bloc and Beijing just months after earlier signs of a possible detente. In his opening remarks, Xi said their ties are “at a historical juncture,” urging stronger trust and communication amid global uncertainty, state broadcaster CCTV reported.

Xi said he was hopeful the EU will keep its trade and investment markets open while refraining from using restrictive economic tools, according to the official Xinhua News Agency. (…)

“China and the EU have extensive common interests and no fundamental conflicts. No matter how the international landscape evolves, cooperation should be the keynote and partnership the correct definition of China-EU relations.” (…)

The strains flared into view in April with Beijing’s decision to impose export controls on rare earth magnets, which shook European car companies and other sectors. In its statement after Thursday’s talks, the EU took aim at a range of Chinese trade policies, demanding it end investigations into pork, brandy and dairy that it called “unjustified and retaliatory” and asked China to lift the export restrictions imposed on rare earth magnets.

The EU inflamed trade tensions when it imposed tariffs on Chinese electric vehicles last year in a bid to ward off a flood of cheap imports. In response, China launched anti-dumping probes into European brandy, dairy and pork.

Brussels also takes issue with what it considers as Beijing’s support for Moscow. The EU on Friday sanctioned two Chinese banks and five China-based companies as part of its latest measures against Russia.

EU and China Pledge Climate Leadership Role as US Retreats A symbolic show of unity as the US steps back under President Donald Trump.

Trump Strikes Deal With Ally Japan Setting Tariff Rate at 15%

President Donald Trump reached a trade deal with Japan that will impose 15% tariffs on imports including automobiles from the key American ally, while creating a $550 billion fund to make investments in the US. (…)

Under the deal, automobiles and parts would be subjected to the same 15% rate as Japan’s other exports (…)

In return, Japan will accept cars and trucks built to US motor vehicle safety standards, without subjecting them to additional requirements — a potentially major step to selling more American-built vehicles in the country. The auto sector tariff had been one of the main sticking points in the negotiations. (…)

A centerpiece of the pact with Japan is the $550 billion investment pledge. A senior US administration official, speaking on condition of anonymity to outline the agreement, said the pledge was akin to a sovereign wealth fund under which Trump himself could steer investments inside the US.

Final terms of the agreement still need to be enshrined in a formal proclamation. Legal particulars and other details surrounding the pledge are still being hammered out, according to the official.

The investment timeline is not certain, and it’s not clear whether Trump would be able to allocate the full sum during his term. (…)

The source of the Japanese funding was also not immediately available. Ishiba said the investment sum would reach as much as $550 billion and would partly come in the form of loan guarantees. (…)

Japan agreed to provide $550 billion to invest in projects in America through vehicles returning 90% of the profits to the US. (…)

The official pointed to one hypothetical scenario of how the investments might work. The president could, for instance, select a semiconductor manufacturing project that could be built with Japanese funds, leased to operating companies and the resulting leasing profit divided 90-10 between the US and Japan.

Japan has also agreed to buy 100 Boeing Co. aircraft, boost rice purchases by 75% and buy $8 billion in agricultural and other products while hiking defense spending with American firms to $17 billion annually, from $14 billion, the senior official said.

Japan will also participate in an LNG pipeline project in Alaska, the official said, an apparent reference to a long-stalled $44 billion venture designed to export the state’s gas around the globe. Trump told lawmakers at the White House Tuesday evening that Japan is “forming a joint venture” on a proposed Alaskan LNG project. “They’re all set to make that deal now,” Trump said.

Akazawa didn’t mention those details when he outlined the deal in Washington. He said defense spending wasn’t part of the deal, an indication that some of the specifics may still be under discussion or getting characterized in different ways.

Trump also pledged to give Japan a safety clause on forthcoming sectoral tariffs, including levies expected on semiconductors and pharmaceuticals — effectively agreeing to not treat the country worse than any other nation when it comes to those goods, the official said.

In effect, that means Japan will be guaranteed whatever the lowest global rate is on those tariffs. (…)

So, Japan would guarantee loans up to $550B and get 10% of the returns on the loans for its guarantees.

ING:

Japanese Prime Minister Ishiba offered more details about the deal. He confirmed that Japan will face 15% tariffs, including on autos, and won’t be disadvantaged from any tariffs on chips. However, the 50% tariff on steel and aluminum will remain for the time being. Ishiba denied that Japan agreed to lowering import tariffs, which he claimed weren’t included in the agreement. The agreed-upon $550 billion US investment will be backed by loans from government-related organisations.

Although the specifics remain unclear, both parties called the pact deal a success. Trump appears to view it as a massive deal, while Ishiba characterised it in less grandiose terms.

Ishiba pointed out that among countries with a trade surplus with the United States, Japan negotiated the lowest tariff rate. Furthermore, for automobile exports, Japan secured a 15% tariff without any volume restrictions, in contrast to the UK’s arrangement. Regarding the politically sensitive matter of agricultural products, Ishiba stated that, while Japan will increase US rice imports within the existing quota, it won’t compromise the domestic agricultural market.

It’s expected that Japan will increase direct investment in the US, such as LNG projects in Alaska, and boost imports of US goods, including agricultural products. But, the implementation of a 15% tax on cars without a limit is a surprise. Ongoing uncertainty regarding Japanese politics — including reports Ishiba will stepping down soon — and the exclusion of defence spending from the agreement may introduce complexities to the negotiation process.

We think that the US aims to finalise the deal before August and encourage other trading partners to participate in negotiations. Including defence spending in the discussions could potentially extend the timeline for reaching an agreement. The US-Japan deal will put more pressure on other major Asia exporters to secure better deal.  We’ve already seen trade deals with the Philippines and Indonesia. Before 1 August, there should be more deal struck with Asian exporters. (…)

Meanwhile, the deputy Bank of Japan governor, Shinichi Uchida, indicated that the BoJ isn’t in a hurry to resume raising interest rates. He reaffirmed the BoJ’s stance that if the economic outlook is realized, the BoJ will continue to adjust the policy rate accordingly.  He noted downside risks to the economy and prices, but also that upward wage growth is likely to continue given businesses’ changing price-setting behaviour.

We believe that the BoJ will need more time to understand the details of the trade deal and how it affects the economy. It’s a close call, but an October rate hike remains likely in our view as US trade uncertainty eases and inflationary pressures grow. But it’s possible the BoJ to push back its rate hike towards the end of the year.

A dovish BoJ and the large investments in the US will probably weigh on the JPY. We still believe that once the Fed begins to cut its rates and the BoJ hikes, conditions will turn to favourable for the USDJPY. In the short term, though, JPY should experience depreciation pressures.

GM vs TARIFFS

By Wolf Richter for WOLF STREET.

GM, which reported earnings today, imports vehicles from Mexico, South Korea, China, and Canada, and those that it produces in the US have many imported components. So GM is more exposed to tariffs than most other major automakers.

The top foreign brands all have huge factories in the US. Most Honda/Acura models in the US are right behind Tesla models in the lineup of vehicles with the most US content – most of them of 65% and higher. These automakers are least impacted by tariffs. There are also models from Volkswagen, Kia, Jeep, and Toyota in that top group.

The US-assembled Chevy Colorado is further down, and that’s the top GM entry. So GM has to compete with automakers that are getting barely dented by the tariffs.

Today, in its quarterly earnings report and conference call, it shed some additional light on the tariff situation.

GM ate $1.1 billion in tariff-related costs in Q2, and CFO Paul Jacobson added in the conference call that Q3 “net tariff costs” will likely be higher.

The company stuck to its projection, announced on May 1, that for the whole year, net tariff costs would total $4-5 billion, of which about $2 billion is related to imports from South Korea. Or it might be a little less if tariff rates are reduced, CEO Mary Barra said.

“Over time, we remain confident that our total tariff expense will come down as bilateral trade deals emerge, and our sourcing and production adjustments are implemented,” Jacobson said.

GM’s tariff “mitigation efforts” are largely focused on upgrading existing US factories to bring more production of vehicles, batteries, and components to the US.

Adjusted automotive free cash flow plunged by nearly in half, by $2.5 billion year-over-year, to $2.8 billion, “primarily driven by tariff payments as well as headwinds from working capital and lower dealer inventory levels,” Jacobson explained during the conference call (transcript via Seeking Alpha).

For GM North America (GMNA), earnings before interest and taxes (EBIT) plunged by 45% year-over-year in Q2, or by $2.0 billion, to $2.41 billion. And compared to Q2 2023, North America EBIT plunged by 24%.

Tariff a tax on gross profits: GMNA’s EBIT margin was 6.1%, but “excluding the impact of tariffs, our margin would have been approximately 9%,” CFO Paul Jacobson explained during the conference call. (…)

CEO Barra outlined one of the projects for bringing production to already existing plants in the US as part of the tariff mitigation efforts:

“For example, the $4 billion of new investment in our U.S. assembly plants will add 300,000 units of U.S. capacity for high-margin light-duty pickups, full-size SUVs, and crossovers to help us greatly reduce our tariff exposure, satisfy unmet customer demand, and capture upside opportunities as we launch new models.

“The capacity begins coming online in just 18 months after which we project building more than 2 million vehicles in the U.S. each year as we scale.” (…)

The company is “still tracking to offset at least 30% of the $4-5 billion full year 2025 tariff impact through strategic actions such as manufacturing adjustments, targeted cost initiatives, and consistent pricing,” he said.

“As far as the other aspects of the tariffs, we talked about the $4 billion, which will bring us, when all that is implemented, to producing over 2 million vehicles here in the U.S. That will take care of a large part of the other remaining tariffs that are out there,” he said.

For refence, GM sold 2.7 million vehicles in the US in 2024:

“We’re still working through supply chain and other indirect tariffs, but we’re not speculating on what it will be. But I expect that it is likely lower than the current run rate of what you would see just as things shake out. Remember, we’re only 90 days into this,” he said. (…)

On the news that GM and suppliers are eating the tariffs, rather than consumers, and that GM is investing in the US to cut the costs of those tariffs – all good news for the US economy and for the precarious US fiscal situation, but not for shareholders – GM’s shares tanked 8.1% to close at $48.89.

Goldman Sachs Sees Trump’s Baseline Tariff Rate Rising to 15%

Economists at Goldman Sachs Group Inc. expect the US baseline “reciprocal” tariff rate will rise from 10% to 15%, with a 50% levy on copper and critical minerals — an outcome that threatens to fuel inflation and weigh on economic growth.

The investment bank also revised forecasts for US inflation and gross domestic product growth to reflect the new tariff assumption and to factor in “early lessons” about the impact of the import levies, Chief US Economist David Mericle wrote in a weekly update.

“The main lesson about tariffs so far is that passthrough to consumer prices is tracking somewhat lower than in 2019,” Mericle wrote. “While it is still very early to estimate passthrough, surveys that ask businesses how much they intend to raise prices eventually also indicate lower passthrough than last time.”

As a result, Goldman now forecasts core inflation of 3.3% in 2025 from a year ago, compared to a previous estimate of 3.4%. The rate will slow to 2.7% next year and then 2.4% in 2027 — both higher than previous estimates of 2.6% and 2.0%. Cumulatively, tariffs are seen boosting core prices by 1.7% over 2-3 years, Mericle said.

Tariffs will weigh on GDP growth by 1 percentage point this year, 0.4 point in 2026 and 0.3 point in 2027, he added. As a result, Goldman now forecasts 1% GDP growth in 2025.

Goldman expects sectoral tariffs on heavy trucks and aircraft in 2026 as well as a delayed increase in tariffs on pharmaceuticals after the 2026 midterm elections.

On a weighted-average basis, the US effective tariff rate is now assumed to rise by 16 percentage points this year, Mericle said.

“This implies that the tariff risks to inflation are tilted slightly to the upside and the risks to growth are tilted slightly to the downside,” he wrote in the note to clients.

U.S. Mid-Atlantic Factory Activity Contracts at Fastest Rate This Year The Fifth District Survey of Manufacturing Activity’s index for July sank sharply to minus 20 from minus 8 in June

The Fifth District Survey of Manufacturing Activity’s index for July sank sharply to minus 20 from minus 8 in June, the Federal Reserve Bank of Richmond said Tuesday. A consensus of economists polled by The Wall Street Journal expected it instead to inch up to minus 6.5. (…)

All three component indexes for the survey—shipments, new orders and employment—declined compared with June, the Richmond Fed said. The index for new orders faced the most pronounced downturn.

However, future indexes for shipments and new orders ticked higher, though for future employment it decreased.

Average growth rates of prices paid and received also fell a little in July, pointing to lighter inflationary pressures this month.

Services are also weak with employment at a standstill:

Goldman Sachs’ Jan Hatzius agrees with my reading of the economy:

One reason why President Trump might raise tariffs further is that the costs of the trade war have been smaller than anticipated so far. At least as far as inflation is concerned, however, we think this mostly reflects lags related to large-scale inventory building before the tariffs hit.

For the earliest Trump tariffs, these lags have now run their course. Our estimates for June imply that 60% of the tariffs implemented in February have passed through, raising the core PCE price index by a cumulative 0.2%. With an estimated 1.2% price level increase yet to come, we expect the year-on-year core PCE inflation rate to rise back above 3% in H2, even assuming continued benign trends in rents, healthcare, and other services. We still think this is a one-time price level shift akin to a VAT hike.

Even a one-time price increase will eat into real income, at a time when consumer spending trends already look shaky. Although nominal core retail sales rebounded in June, we estimate that real personal consumption has now stagnated on net for six months, which rarely happens outside of recession.

Housing activity has also slowed sharply, with overall construction spending falling faster over the past year than at any time since the post-2008 housing bust. The weakness in consumption and housing has pushed down our tracking estimate for H1 real GDP growth to 1.1%, about a percentage point below potential. We expect a similar pace in H2, as the growing real income drag from tariff-related price increases offsets the boost from easier financial conditions.

The pace of hiring is likewise slowing. Private payrolls grew only 74k in June according to the Labor Department and contracted outright according to ADP. On a similar note, the payroll diffusion index has fallen to levels indicating that there are now just as many industries cutting as adding jobs.

So far, the consequences of slowing employment growth have been limited for most workers, as layoffs remain muted and the drop in net immigration has kept the unemployment rate at 4.1%. But if GDP growth remains sluggish, the labor market might soon hit “stall speed”—a pace of job creation weak enough to trigger a self-reinforcing rise in unemployment. Our 12-month recession risk estimate remains at 30%, double the unconditional historical average.

The slowdown has strengthened the case for earlier monetary policy easing, as noted by Fed Governor Waller in a speech last week. Both Waller and Vice Chair for Supervision Bowman are likely to dissent in favor of lower rates at the July 29-30 FOMC meeting, but other committee members will want to wait for confirmation that the tariff impact really is a one-time price level shock and/or evidence of more labor market softening.

Starting in September, however, we expect three consecutive 25bp cuts that take the funds rate down to 3½-3¾% at yearend 2025, followed by two more 25bp cuts in the first half of 2026. Our forecast remains modestly below market pricing. (…)

Market participants seem to agree that the risk to Fed independence is rising, as 5-year 5-year forward inflation swaps have recently decoupled higher from their prior close relationship with the 2-year note yield. A further increase could make Fed officials more reluctant to cut. (…)

The Impact of Immigration Restrictions and Deportations

If 3,000 people are deported every day, the labor supply will decline by about 1 million in total in 2025.

Combined with additional immigration restrictions, job growth is slowing down.

If legal immigration continues at current levels and illegal immigration declines to zero, the new level of monthly nonfarm payrolls will be 72,000.

Deportations and immigration restrictions are likely to increase wage growth in agriculture, construction, and leisure & hospitality.

Deportations and immigration restrictions lower demand for housing.

The bottom line is that immigration policy has implications for labor supply, nonfarm payrolls, wages, and housing demand. To better understand these effects, we have compiled a chart book, which is available here.

Meanwhile, job openings keep declining (Indeed Job Postings through July 17)

• “US net immigration decreased slightly from an annualized pace of 0.6mn in April to 0.5mn in June. This aligns with our forecast that immigration will stabilize at around 0.5mn annually, a rate moderately below the pre-pandemic trend of 1.0mn per year. (…) Looking ahead, we expect the gradual slowdown in immigration to bring the breakeven rate—the rate of payroll job growth needed to keep the unemployment rate stable—down to 70k per month by the end of 2025 from our 90k estimate of the current pace.” (GS)

How is China being impacted by tariffs so far? (ING)

(…) It remains too early to fully understand the longer-term implications, especially with another round of new tariff developments expected in August. But with a few months of post-tariff data now in the books, we can begin to assess how China has actually been impacted by tariffs so far. (…)

Despite tariff-driven headwinds through the first half of the year, China’s exports have held up well. They grew at 5.9% year-over-year, year to date, at the same pace we saw in 2024. China’s trade surplus reached $586 bn in 1H25, a new record high for any semi-annual period. Net exports contributed 1.7pp to GDP growth in the first half of the year, accelerating from the 1.5pp contribution seen in 2024.

As a result, we’ve seen that manufacturing activity continues to grow at a respectable pace. Industrial production grew by 6.4% YoY ytd, with manufacturing advancing 7.0% YoY in the first half of the year.

The main reason China’s growth beat forecasts in 1H25: surprisingly resilient external demand supporting industrial activity, which is also why China is on track to reach its “around 5%” growth target this year despite tariffs. (…)

In the first half of the year, exports to the US were down -10.7% YoY, or $25.9bn. However, China’s retaliation against the US resulted in a -9.2% YoY, or $7.5bn, slump in imports over the same period. As such, China’s net exports to the US of $141.7bn in 1H25 have fallen $18.4bn compared with 1H24, denting GDP by approximately 0.2%.

As a proportion of China’s total exports, the US has fallen from 14.6% in 2024 to 11.9% in 1H25. This is quite a sharp drop. Yet the trend itself has been in place since the first trade war in 2018, when the US’s share of China’s exports began falling after peaking at 19% in 2017.

Fortunately for Chinese exporters, external demand from other economies has helped offset much of the drag from the US. In 1H25, China’s exports saw the fastest growth in the EU, Africa, Vietnam, Hong Kong, Thailand, and India. Although exports to the United States declined by $25.7 billion, this was fully offset by increased exports to other countries. This resulted in a net year-over-year increase of $101.5 bn, or growth of 5.9%.

Comparing China’s 1H25 export growth to 2024 export growth:

• Exports to ASEAN accelerated to 13.0% YoY from 12.0% YoY.
  • The two main bright points were in Thailand and Vietnam, which grew by 22.1% YoY and 19.4% YoY, respectively.
• Exports to Asia ex-ASEAN accelerated to 7.6% YoY from 4.2% YoY.
  • Within the region, the acceleration was tied to an uptick in export growth to India (14.0%) and Japan (4.9%), though exports to Korea (-2.5%) continued to slump.
• Exports to the EU rose to 6.9% YoY from 3.0% YoY, despite the tariff hikes against Chinese EVs.
  • Strong exports to Germany (11.9%) and France (8.6%) helped offset slower growth to the Netherlands (3.2%) and Italy (4.5%).
• Exports to Africa rose to 21.4% YoY from 3.5% YoY.
  • Upticks of exports to Nigeria (34.5%) and Egypt (13.9%) helped offset continuingly sluggish exports to South Africa (2.0%).
• Exports to Latin America slowed to 7.3% YoY, down from 13.0% YoY but nonetheless continuing to outpace headline growth.
  • A slowdown of exports to Brazil (-2.1%) and Mexico (-2.1%) were the main culprits dragging Latin American exports.

Exports to other regions have helped offset the drop to the US

The importance of re-exports to China’s relative export resilience is worth exploring. Re-exports have played a role in helping businesses circumvent tariffs since 2018. Increasingly, these will be under more pressure as the Trump administration hikes tariffs on other regions and includes special clauses specifically targeting re-exports via transshipments.

There’s limited research on the scale of China’s re-exports. Other than notable port economies such as Hong Kong and Singapore, few countries publish such data. Generally speaking, higher margin categories may be more suitable for re-exports, as products with very thin margins may be unable to absorb the extra costs incurred.

However, looking at specific country data and drawing upon some assumptions, we can make some key inferences. We will primarily focus on Vietnam and Mexico as our case studies for this report.

Vietnam has been in focus as one of China’s main re-export channels and a notable destination for Chinese outward direct investment in manufacturing.

Between 2017 and 2024, China’s exports to Vietnam rose from $72.4bn to $162.3bn. In this timeframe, Vietnam’s share of China’s total exports rose from 3.2% to 4.5%.

Reports on Vietnam’s trade deal framework with the US drew attention in China, particularly the special clause adding a higher 40% tariff rate on transshipments. Given the grey area in identifying transshipments and no official data on this front, we can instead look at changes in China’s exports to Vietnam and Vietnam’s exports to the US between 2017 (prior to the first trade war) and 2024.

Digging through industry-level data, the most striking change was in machinery equipment and electrical products.

• In 2017, China’s exports of machinery and electrical equipment to Vietnam were $26.9bn and accounted for approximately 16.6% of China’s total exports to Vietnam. By 2024, this had almost tripled to $77.2bn and represented 47.6% of China’s total exports to Vietnam.
• In 2017, Vietnam’s exports of machinery and electrical equipment to the US were $5.9bn and accounted for approximately 5.3% of total exports to the US. By 2024, this had surged to $45.3bn, representing 40.9% of Vietnam’s total exports to the US.

In essence, China’s machinery and electrical equipment exports to Vietnam rose around $50bn while Vietnam’s similar exports to the US rose just under $40bn. While certainly some of this change could be attributed to Vietnam’s own domestic production and demand, it’s likely that the rapid surge reflects significant transshipment activity.

Machinery and electrical equipment have likely been a major re-export category through Vietnam

Between 2017 and 2024, China’s exports to Mexico rose from $35.9bn to $90.2bn. In the same timeframe, Mexico’s share of China’s total exports rose from 1.6% to 2.5%.

• Looking at the similar machinery and electrical equipment categories that we tracked for Vietnam, Mexico doesn’t feature the same trends. While exports from this category to Mexico rose 145% from 2017 to 2024, this was in line with broader trends, staying around 44-45% of total exports.
• We did, however, see a bit of a shift in autos and auto parts, which more than tripled from 2017 to reach $12.3bn by 2024, and rising from 7.7% of total exports to 13.6%.
  • With growth continuing at 9.3% YoY ytd in 1H25, this may be more tied to Mexico’s own domestic demand or auto parts used in Mexico’s supply chain rather than direct re-exports. In any case, China’s auto exports to Mexico are relatively minor compared to Mexico’s total auto exports ($194bn in 2024).
• Much has been made of China purportedly selling fentanyl precursor chemicals to Mexico, where fentanyl is then manufactured and smuggled across the border to the US. While further granular data is unavailable, China exported $1.7bn of chemicals to Mexico in 2024, or around 2% of its total exports to Mexico.

Unlike Vietnam, which has continued to be a source of rapid export growth for China, shipments to Mexico have slowed to -2.1% YoY year to date. It’s possible that some re-exports may have slowed after Mexico was hit with high tariffs. Mexico’s overall import growth was up around 4% YoY through the first five months of 2025, though sector-level trade data doesn’t let us draw any strong conclusions.

Fewer obvious signs of re-export concentration in Mexico

Unsurprisingly, China’s recent dominance of the electric vehicle market continued to translate in the related categories, with rapid growth in lithium-ion battery (25.1%) and electric vehicle (21.9%) exports for 1H25. Machine parts (17.7%) and semiconductors (18.0%) have also fared well, given the difficulty of sourcing replacement products.

On the flip side, we see some generally lower value-added sectors under heavier pressure so far this year. Footwear (-7.6%), furniture (-7.3%), and toys (-2.8%) are among the categories in negative YoY growth, likely due to the drag from the US. We saw export growth to the US of these respective categories at -18.9%, -13.8%, and -2.8%.

The tariff environment also has varying levels of influence on each category. While in certain cases it’s a major determinant, in other categories the impact is relatively negligible. We take a look at two case studies — furniture and autos — to illustrate this in greater depth.

Fast growing export products are relatively insulated from US tariffs

Furniture exports have been one of the underperformers year-to-date, with a year-on-year decline of -5.0% in 1H25. This can be attributed to a steep -13.8% YoY drop of exports to the US. The US is China’s largest export destination for furniture, representing around 25% of total mainland furniture exports in 2024.

While furniture products can vary significantly in terms of value added, China’s furniture exports tend to compete on the cheaper and lower-value-added side, and have proven to be vulnerable to tariff impacts.

We saw a similar -17.1% drop of China’s furniture exports to the US in 2019, when China’s furniture exports were hit with a 10-25% tariff. Yet China’s overall furniture exports still managed 3.8% YoY growth on the year. 

The key differences between the first trade war and the current environment lie in a falloff of demand to the EU and ASEAN, which could partially be explained by reduced re-exports and supply chain shift.

• During 2019, despite the sharp decline in direct exports to the US, China’s furniture exports to East Asia (Japan (3.7%), Korea (15.3%), ASEAN (42.2%), and the EU (9.0%) accelerated and offset the drag.
• Vietnam likely served as a major re-export hub for Chinese furniture companies in the first trade war. China’s furniture exports to Vietnam surged 51.4% YoY growth in 2019, coinciding with Vietnam’s own furniture exports to the US surging 41.3% YoY. In 2018, Vietnam accounted for only 7.6% of total US furniture imports. This figure rose to 19.8% by 2024. As far, as Chinese furnituremakers are concerned, the story in Vietnam could be shifting from re-exports to reshoring, as Vietnam’s domestic furniture manufacturing has grown in double digits in recent years.

However, this pattern did not repeat in 1H 2025. China’s furniture exports to non-US destinations have also been soft year-to-date, including notable contractions in ASEAN (-1.1%) and EU (-1.4%). With EU’s final anti-dumping ruling in July against multilayered wood flooring originating from China, the contraction in furniture exports could worsen in the coming months.

China’s automobile exports grew by 8.1% YoY in 1H25. This outperformed headline growth, but it’s nonetheless notably slower compared to the past few years, when growth was in double or even triple digits.

First, it should be noted that the scale of auto exports has increased over sevenfold from $15.7bn in 2020 to $117.4bn in 2024. As such, it now takes a lot more to maintain a rapid growth rate.

Second, at this stage, the most significant auto tariffs are from the US and the EU, which impose 100% and 27.4-48.1%, respectively, on China EVs.

While a -32.3% YoY drop of auto exports to the US in 1H25 certainly suggests a shock, the US is not a major destination for China’s car exports, representing just 2.1% of total auto exports in 2024. For EVs in particular, a combination of exorbitant tariffs and security-related restrictions represents a de facto embargo on EV imports. We didn’t see a single BYD on the road in our trip across the country in June.

The EU, on the other hand, is a more sizeable market, with the EU 27 representing around 14.6% of China’s total auto exports in 2024. Auto exports to the EU 27 fell by -5.2% YoY in 1H25, led by a slowdown from major importers such as Belgium (-27.4%) and Germany (-19.5%) after tariffs on Chinese EVs rose last October. However, this was not an EU-wide trend. We did see auto exports to Italy (55.1%) and Spain (20.0%) accelerate in 1H25.

While the drop in exports to the EU certainly contributes to the slowdown, the bigger culprit is likely the sharp decline in auto exports to the Russian market. They fell a staggering -65.9% YoY, amounting to around $6bn.

This is likely tied to a broader slowdown in the Russian auto market, with the volume of sales down -23.2% YoY in 1H25. It’s likely that this is tied to a policy change from October 2024, when Russia raised its vehicle scrappage fee by 70%–85%. It’s a de facto tax on both imported and domestic vehicles collected to fund future disposal and recycling. As a result, Russian importers frontloaded imports before the policy took effect, leading to a reduction in imports this year.

Compared to 2024, the share of the Russian market in China’s motor vehicle exports has shrunk significantly—from 18.2% to just 5.2% in 1H25.

Conclusion: Tariff drag may intensify, but China’s export competitiveness should limit the downside

We’re already starting to see a clear impact of tariffs across various pockets of trade, as well as noticeable effects on new investment and sentiment. Numerous corporates and investors are taking a a “wait-and-see” stance this year amid continued uncertainty.

That said, the overall impact so far has fallen well short of doom-and-gloom forecasts that prevailed at the start of the year. Through the first half, the direct drag from US trade has been something in the area of -0.2pp on GDP. This has been more than offset by trade with other economies, with total net exports contributing 1.7pp to GDP growth in 1H25. As a result, we’ve seen the market generally revise China GDP forecasts higher in recent months.

The main question is whether or not China’s export resilience can last?

Barring further de-escalation, China’s exports will continue to be affected by tariffs. The drag from the US could worsen in 2H25, particularly as we’re not seeing another round of frontloading which helped boost exports in 1Q25. The current levels of 50-55% are already quite restrictive and have greatly hindered the price competitiveness of many exports.

We expect China’s total export growth to slow further in the second half, but full year export growth should remain in low-to-mid single-digit growth range barring additional shocks.

However, we do see some reasons not to fall into the trap of excessive pessimism.

• China’s fastest-growing exports are not reliant on the US.
  • China’s biggest export outperformers over the past year have been ships, semiconductors, and autos. Customs data shows that the exports of these products to the US represented only around 1-2% of China’s total in 2024.
  • Amid China’s Great Transition, China’s move up the value added ladder has resulted in many Chinese champions producing very competitive products, and even in the case of US tariffs or restrictions, these products will continue to do well in other economies.
• Exports to the US have proven to be stickier than expected. Despite the rapid escalation of tariffs to 145% in April, we saw a significant slowdown of exports but far from the “de facto embargo” that the tariffs purportedly represented.
  • The biggest monthly YoY decline of China’s exports to the US was in May, when growth cratered to -34.5% YoY, but this rebounded to -16.1% YoY in June.
  • By subcategory, copper products (135.8%), toys (-2.8%), and the optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments category (-1.6%) have all fared relatively well in 1H25 despite the major tariff shock.

A wildcard will no doubt be on how the August tariff developments play out. Obviously, the biggest and most direct catalyst will be what happens once the 12 August tariff ceasefire between China and the US is set to end.

Given the unpredictability we’ve seen so far this year, estimating tariff hikes is a bit of a dart throw. Our base case is that we won’t see tariffs reverting back to the April peaks. Following the test of endurance earlier this year, it was clear that such high tariffs are a lose-lose proposition for both parties.

That said, we also cannot rule out tariffs moving higher either, with a further 10% hike well within expectations. With tariffs already at 50-55%, the marginal impact of a further small-scale tariff hike could be relatively manageable. However, as the April episode proved, politics tends to trump economics. A more aggressive than expected re-escalation could lead to a bigger hit to the trade outlook.

Direct tariffs aside, another downside risk in recent months has been other countries signing explicit or implied “anti-China” clauses targeting China’s re-exports and foreign entities in their trade deals with the US. The impact will depend on how many economies agree to these clauses, and how strictly they are enforced. This trend certainly represents another downside risk moving forward.

At the same time, the direction of tariffs globally will play a big role in gauging the impact moving forward. The setup of the financial services industry often leads to economists looking at the tariff issue from the perspective of their country alone, with the rest of the world seen as a static variable.

In our view, this can lead to some overestimation of the tariff impact, as seen in the numerous estimates on China’s GDP at the start of the year. Arguably, the biggest element when considering the tariff impact is the risk of losing out on exports to competitors via substitution products. If tariffs rise significantly across the board, but not enough to make US-manufactured products viable, this could help mitigate part of the impact compared to if only China and a few other economies are hit. Given the currently speculated tariff rates of 15-20% on most of the key global economies, we could well be seeing this sort of scenario unfold.

An outsized external demand shock was seen as one of the main risk factors for China this year. The resilience of external demand so far is one of the key reasons for China’s outperformance in 1H25. We expect exports will likely moderate in the second half of the year, but nonetheless continue to be a growth contributor. This should help China stay on track to reach its growth target of “around 5%” this year.

WEALTH EFFECT PLOTTED

There’s a growing sentiment gap between rich and poor Americans

While overall unemployment still seems low, lower-earning adults are increasingly reporting a loss of pay or income in Morning Consult data, says chief economist John Leer.

Data: Morning Consult; Chart: Axios Visuals