Markets, Growth & Central Banks – Global Economic Insight (Aug. 2025)

Introduction

Inflation dynamics continued to moderate across most regions, although rates are still above targets. Eurozone headline inflation remained steady at 2% in July, with core inflation at 2.3%. U.S. consumer prices increased by 2.7% year-over-year in June, while the core CPI rose 2.9%. These metrics indicate that price pressures are receding but have not yet returned fully to central bank targets.

Geopolitical developments introduce significant uncertainty. In late July, the U.S. administration imposed 15% tariffs on certain imports, triggering retaliatory measures and unsettling financial markets. Consequently, major central banks have adopted cautious policy stances. The U.S. Federal Reserve kept the federal funds rate between 4.25% and 4.50%, citing persistent inflation risks. The European Central Bank, which cut its key rate to 2% by June, signaled a pause in further easing. The Bank of Japan maintained its policy rate at 0.5%, while hinting at potential increases later this year.

Looking ahead to August, investors are closely watching whether new tariff measures will undermine the nascent economic recovery. The balance of policy support, resilient service-sector demand, and lingering inflationary pressures will determine whether growth momentum can be sustained.

United States

US July 2025 Economic Review

Labour Market

The U.S. labour market exhibited signs of cooling in July. Non‑farm payrolls increased by 73,000, marking the smallest monthly gain since April. The unemployment rate inched up to 4.2%, and the labour force participation rate declined slightly to 62.2%. Notably, the payroll gains from earlier months were revised downward. Health care and social assistance industries continued to add jobs, while federal government employment contracted. Long‑term unemployment now makes up nearly one-quarter of the jobless population. Average hourly earnings rose by 0.3% month‑over‑month and 3.9% year‑over‑year, suggesting wages remain firm even as job growth moderates.

Inflation

The latest inflation data, from June, showed consumer prices increasing 2.7% year‑over‑year and 0.2% month‑over‑month. Core CPI, which excludes food and energy, rose 2.9% year‑over‑year. Food prices advanced 3.0%, while energy prices declined 0.8%. Shelter and services remained the major contributors to inflation. Producer input costs have stayed elevated; S&P Global’s input price index for July was 61.9, and service-sector firms reported similar pressures, partly because of newly implemented tariffs. Overall inflation has moderated from its 2024 peak but could accelerate again if tariffs continue to pass through supply chains.

Activity Indicators

Economic activity rebounded sharply in the second quarter, with GDP expanding at a 3.0% annualized rate after contracting 0.5% in the first quarter. However, much of this rebound reflected a record 30% drop in imports, which added roughly five percentage points to growth, while domestic demand grew just 1.2%. Consumer spending increased 1.4%, but business investment decelerated, residential investment contracted, and government spending decreased. High-frequency indicators were mixed: the ISM manufacturing PMI slipped into contraction territory at 48.0 (with an employment sub-index of 43.4 and prices paid at 64.8), while the S&P Global flash services PMI jumped to 55.2, the fastest pace since April 2024. Housing activity remained weak; July single-family housing starts fell to an annualized rate of 851,000 units, down 14.1% year‑over‑year.

Policy

At its 30 July meeting, the Federal Open Market Committee maintained the federal funds rate in the 4.25%–4.50% range. Chair Powell underscored that policymakers need additional data before considering rate cuts, highlighting ongoing inflation risks linked to new tariffs. Two committee members dissented, preferring an immediate cut. Fiscal policy turned more confrontational. President Donald Trump issued an executive order imposing 15% tariffs on most foreign goods and dismissed the commissioner of the Bureau of Labor Statistics following the weak jobs report. These actions unsettled financial markets and raised concerns about data credibility. Despite political pressure, the Federal Reserve affirmed its commitment to a data‑dependent approach and indicated readiness to maintain price stability.

US August 2025 Outlook and Expectations

Looking ahead, U.S. economic growth is expected to slow in August as trade frictions and policy uncertainty take a firmer toll. The sharp drop in imports that significantly boosted Q2 GDP is unlikely to be repeated. Meanwhile, higher consumer prices may weigh on household spending, and firms could scale back investment in response to rising input costs driven by tariffs.

Financial markets are currently pricing in over an 80% probability of a Federal Reserve rate cut in September, reflecting concerns over weaker hiring trends and escalating trade tensions. However, if inflation accelerates again—particularly due to tariff pass-through or wage pressures—the Fed may delay easing until later in the year. Fiscal policy remains volatile, with the potential for further tariffs or retaliatory measures posing additional risks to supply chains and inflation expectations.

The housing market is likely to remain under pressure amid elevated mortgage rates and increasing construction costs. Meanwhile, the ongoing corporate earnings season in August will be key to assessing margin resilience and whether firms can pass on tariff-induced cost increases. Overall, the economy is poised for slower expansion, with growth increasingly reliant on services and government expenditures.

While August is relatively light on major economic releases, several key indicators will help shape the policy and market outlook:

• Non-Farm Payrolls (Aug 1): July’s labour market data, already released, disappointed expectations. Payrolls rose by just 73,000, while prior months were revised lower. The unemployment rate ticked up to 4.2%, and labour force participation declined for a third consecutive month—signs of potential underlying weakness.
• ISM PMIs – Manufacturing (Aug 1 Final), Services (Aug 5): Manufacturing is expected to remain in contractionary territory (below 50), although the new orders index may stabilize if supply conditions improve. The services sector should remain resilient, though the employment sub-index will be closely watched for early signs of softening.
• Consumer Price Index – July (Aug 12): Inflation is projected to edge higher, driven by tariff impacts and strong wage growth. If headline CPI rises above 3%, the Fed may hold off on cuts. A softer reading, however, could bolster expectations for a September easing.
• Retail Sales – July (Aug 15): A key gauge of consumer strength. Modest growth is anticipated, but any weakness in discretionary spending categories—such as autos—would signal growing caution.
• FOMC Meeting Minutes (Aug 20): Investors will scrutinize the July meeting minutes for insights into how the Fed is assessing trade developments and the criteria for future rate cuts.
• Labour Market Developments: Weekly jobless claims will offer high-frequency signals. The August employment report (due Sept 6) will be critical in determining whether July’s soft payroll figure was an anomaly or the start of a more persistent slowdown. Most economists expect moderate job growth of around 100,000.

USD and Wall Street Outlook – August 2025

Financial markets entered August under renewed pressure amid escalating trade tensions and signs of labour market softening. On August 1, the S&P 500 declined by 1.6%, marking its sharpest daily drop since May, while the Nasdaq Composite tumbled 2.24% and the Dow Jones Industrial Average lost 1.23%. The sell-off was triggered by the announcement of new tariffs and a disappointing July jobs report, with heavyweight technology stocks—particularly Amazon and Apple—leading the losses. The CBOE Volatility Index (VIX) spiked to a two-month high, reflecting increased investor nervousness and a risk-off tone.

The U.S. dollar's outlook for August will be driven largely by inflation dynamics and shifting interest rate expectations. Should the July Consumer Price Index indicate renewed price acceleration, Treasury yields may climb, lending support to the dollar, especially against lower-yielding currencies like the euro and yen. However, growing market consensus around a potential Fed rate cut in September may limit the greenback’s upside. The euro has seen a modest recovery, aided by reduced U.S.–EU trade tensions, though its gains remain capped by subdued Eurozone growth prospects. The Japanese yen could remain volatile, supported by the Bank of Japan’s recent hawkish messaging but also influenced by global safe-haven flows during periods of heightened uncertainty.

Wall Street is poised for a volatile month, with several key risk events on the horizon, including July CPI data, the release of FOMC minutes, and ongoing trade negotiations. Corporate earnings, particularly from consumer-facing and industrial sectors, will offer insights into the impact of tariffs on profit margins. Technology stocks remain vulnerable to regulatory overhang and valuation concerns. A deteriorating labour market or weakening retail sales could shift investor sentiment toward defensive sectors, while resilient service-sector data may provide a temporary boost. Investors are advised to adopt a cautious, diversified positioning in the face of elevated macro uncertainty.

Q2 2025 U.S. Earnings Review

As of early August, the second-quarter earnings season in the U.S. is approximately two-thirds complete, and results have surpassed expectations. According to LSEG data, 317 companies in the S&P 500 had reported through July 30, representing about 63% of the index. Aggregate year-over-year earnings growth is tracking at 9.8%, significantly higher than the 5.8% projected at the beginning of July.

The earnings "beat rate"—the percentage of companies exceeding analysts’ consensus estimates—has been notably strong. LSEG reports that 81% of reporting firms outperformed earnings forecasts, compared to the 76% average over the past four quarters. Alternative trackers such as Wall Street Horizon and FactSet also place the beat rate near 80% for both earnings and revenues, exceeding 1‑, 5‑, and 10‑year norms.

Much of the upside surprise has come from mega-cap technology companies, particularly Microsoft, Meta Platforms, and Alphabet. These firms continue to benefit from robust spending on artificial intelligence infrastructure, which is supporting top-line growth and profit margins while boosting overall investor sentiment.

Beyond the S&P 500, results among smaller-cap U.S. companies have been more mixed. While many have posted profit growth, earnings beats are closer to long-term averages, and forward guidance has turned more cautious amid tariff-related cost pressures and signs of slowing domestic demand.

Globally, the earnings season only began in earnest in late July. Wall Street Horizon notes that just 14% of over 11,000 public companies worldwide had reported as of July 31. The busiest weeks for global earnings fall between July 28 and August 15, with more than 2,000 companies reporting per week.

Investors remain focused on upcoming reports from the remaining “Magnificent Seven” tech firms—Apple and Amazon are due in the first week of August, while Nvidia reports on August 27. In sum, Q2 results point to solid earnings momentum and historically high beat rates, though sentiment remains vulnerable to trade-policy risks and macroeconomic uncertainty.

Euro Area

EU July 2025 Economic Review

The eurozone economy showed tentative signs of improvement in July, though overall momentum remained subdued.

Activity Indicators

The preliminary HCOB Eurozone Composite PMI rose to 51.0 in July—an 11-month high—driven by stronger services activity and a stabilizing manufacturing sector. The services PMI climbed to 51.2 (from 50.5), while the manufacturing PMI improved to 49.8, the highest level since July 2021. Although overall output remained flat, the decline in new business halted for the first time since May 2024. Notably, Germany’s manufacturing PMI rose to a 35-month high of 49.1, while Ireland led among member states with a reading above 53. Meanwhile, input cost pressures eased, with services input prices falling to a nine-month low, indicating a broader disinflationary trend in service-sector inflation.

Economic Growth

Eurostat’s flash estimate showed that euro area GDP grew by just 0.1% quarter-over-quarter in Q2, a sharp deceleration from the 0.6% expansion in Q1. Growth across the broader EU stood slightly higher at 0.2%, suggesting broad-based stagnation across the region.

Inflation and Labour Market

Headline inflation in the euro area held steady at 2.0% in July, while core inflation came in at 2.3%. Services inflation moderated to 3.1%, offsetting a slight uptick in goods inflation. Labour market conditions remained firm. The unemployment rate for June stood at 6.2% in the euro area and 5.9% in the EU—near multi-decade lows—underscoring continued labour market resilience despite tepid economic activity.

Monetary and Fiscal Policy

Having reduced its policy rate to 2% by June, the European Central Bank opted to hold rates steady in July, citing the convergence of inflation toward its target. However, policymakers warned that escalating trade tensions with the U.S.—including newly imposed 15% tariffs on most EU goods—could weaken growth prospects while simultaneously alleviating some price pressures. Market pricing now reflects less than a 50% probability of another ECB rate cut this year. On the fiscal front, Germany is reportedly preparing additional budgetary measures to cushion the economy against trade-related headwinds.

EU August 2025 Outlook and Expectations

The eurozone recovery is expected to continue at a modest pace in August, supported by easing trade tensions and resilient domestic demand. Manufacturing activity is likely to hover near the 50 expansion threshold, helped by the recent U.S.–EU trade agreement, which reduced tariffs to 15% and improved business sentiment. Stabilization in new orders and backlogs may offer some support, although weak global demand is expected to keep export volumes subdued. Services sector growth should remain positive but may be restrained by elevated price levels.

Analysts forecast third-quarter GDP growth of approximately 0.3% quarter-over-quarter, underpinned by household consumption and government spending. The outlook remains cautiously optimistic, but progress is expected to be gradual given lingering external headwinds and tight financial conditions.

Key Data and Events to Watch:

• HCOB Final Services PMI (Aug 5): The final reading is anticipated to confirm the preliminary figure of 51.2. A downward revision could signal a weaker-than-expected rebound in service sector momentum.
• ECB Monetary Policy Account (Aug 8): Markets will closely examine the minutes from the July meeting for insights on policymakers’ assessment of trade-related risks and the threshold for any further rate adjustments. Barring a sharp drop in inflation, the ECB is expected to maintain its key rate at 2% through year-end.
• Retail Sales (Aug 6) & Industrial Production (Aug 14): These indicators will test whether recent gains in manufacturing sentiment are translating into real output and whether consumer spending is holding up despite price pressures.
• July Inflation (Aug 20): Headline CPI is expected to edge slightly higher to 2.1%, while Core CPI may decelerate marginally to 2.3%, reinforcing the view of easing—but still persistent—price pressures.
• Unemployment Rate (Aug 30): The jobless rate is projected to remain steady at around 6.2%. Any signs of labour-market cooling could influence the ECB’s stance in the coming months.

Euro Outlook – August 2025

The euro enters August on the back of renewed volatility, following a strong first-half rally and a sharp pullback in late July. After appreciating by 14% in H1 2025 to reach a four-year high of $1.1830, the common currency reversed course, falling nearly 2% in July—its steepest monthly decline since April. The sell-off was largely triggered by the unexpected terms of the U.S.–EU trade agreement, signed on July 28, which imposed a 15% tariff on most EU goods. This policy shift challenged the bullish consensus around euro-zone outperformance, with the euro retreating to the $1.14–$1.15 range by month-end and marking its first monthly loss of the year.

The earlier rally had been underpinned by record net long positions in euro futures ($18.4 billion), expectations of looser U.S. monetary policy, and optimism over Germany’s pivot toward fiscal stimulus. However, analysts now view the July decline as a positioning correction rather than a deterioration in euro-area fundamentals. As ING put it, the market has undergone “a reality check.”

Looking ahead, the euro’s trajectory in August will be shaped by diverging monetary policy paths and shifting market sentiment. The European Central Bank, having cut its deposit rate to 2.0% in June, signaled a pause in further easing as July inflation data (headline: 2.0%, core: 2.3%) met its medium-term target. As a result, markets now assign less than a 50% probability to another ECB rate cut in 2025.

On the U.S. side, the Federal Reserve held rates steady at 4.25%–4.50% in July, with Chair Powell maintaining a cautious tone. However, a weaker-than-expected July jobs report—showing only 73,000 payroll additions—prompted a dovish shift in rate expectations. The dollar index fell 1.2% on August 1, while the euro surged 1.37% to $1.1571, its strongest daily gain since April.

Strategists broadly expect a choppy trading range for EUR/USD in August, with forecasts centered between $1.14 and $1.18. Rabobank’s Jane Foley warns that previous euro strength reflected “too much optimism,” and further unwinding of long positions may occur. Conversely, analysts at ING and State Street argue the correction is temporary and that improving eurozone fundamentals still support a gradual uptrend.

Market participants will closely monitor several catalysts this month, including eurozone Q2 GDP revisions, August flash PMIs, and the August 20 inflation release. On the U.S. side, attention turns to the next employment report (Sept 6) and developments in trade negotiations with China. Should U.S. data continue to disappoint and the Fed pivot toward easing, the euro may regain strength. However, sustained U.S. resilience or renewed geopolitical tensions could keep the dollar in favor and cap euro gains.

United Kingdom

UK July 2025 Economic Review

The UK economy entered the second half of 2025 facing persistent headwinds, marked by sluggish growth and a deteriorating labour market.

Labour Market

The Office for National Statistics’ July labour market update (covering March–May) indicated increasing slack. The employment rate stood at 75.2%, while the unemployment rate rose to 4.7%. Economic inactivity remained elevated at 21.0%. Payrolled employees declined by 0.3% year-over-year, and vacancies fell for the 36th consecutive period, pointing to reduced hiring appetite across industries. Average total pay rose by 5.0%, still outpacing inflation and resulting in real wage growth of 1.1%. However, the overall weakening in employment metrics suggests a likely rise in unemployment ahead, as firms adjust to mounting labour costs.

Inflation and Growth

Official July CPI figures are due on August 20. In June, headline CPI stood at 3.6% year-over-year, well above the Bank of England’s 2% target, while core inflation held close to 4.0%. Elevated energy tariffs and higher social-security contributions continue to fuel cost pressures. Monthly GDP data showed a meager 0.1% quarterly growth in June, and early indicators suggest that momentum weakened further in July. The S&P Global/CIPS preliminary composite PMI dipped to 51.0, with the employment sub-index hitting its lowest level since February. The services PMI eased to 51.2, while manufacturing edged up to 48.2, still signaling contraction. Final July data (released Aug 1) confirmed an uptick in manufacturing output and a five-month high in expectations, but firms continued to cut jobs due to persistent cost burdens, blaming April’s rise in employer national insurance contributions and newly imposed U.S. tariffs.

Monetary and Fiscal Policy

The Bank of England’s Monetary Policy Committee is widely expected to cut the Bank Rate by 25 basis points to 4.00% at its August 7 meeting. Governor Catherine Mann has emphasized the growing downside risks to growth and a cooling labour market, though some hawkish committee members remain concerned about inflation, which remains elevated at 3.6%. The BoE has already implemented four rate cuts over the past 12 months and maintains a cautious, data-dependent stance. Fiscal policy remains in flux. The recently elected Labour government is preparing an autumn budget centered on infrastructure and green investment. However, business sentiment has been dampened by the recent hike in employer national insurance contributions, which many firms view as a drag on hiring and competitiveness.

UK August 2025 Outlook and Expectations

August presents a critical juncture for the UK economy, as policymakers and investors assess whether the country can avoid tipping into recession. GDP growth is expected to stagnate in Q3, held back by subdued business investment and cautious consumer sentiment. Although real wages are projected to rise further, higher employer social-security contributions and import tariffs are eroding corporate margins and may dampen hiring.

The fiscal outlook will begin to take shape as the new Labour government prepares its first budget. While markets anticipate modest fiscal stimulus—particularly in infrastructure and green investment—elevated public debt limits the scope for aggressive spending. As a result, confidence may remain fragile. The British pound is likely to remain under pressure against both the euro and the U.S. dollar, weighed down by diverging monetary policy paths and ongoing political uncertainty.

The UK thus faces a precarious balancing act: bringing inflation sustainably back to target without deepening the economic slowdown.

Key Data and Events to Watch:

• BoE Interest Rate Decision (Aug 7): Markets widely expect a 25-basis-point cut to bring the Bank Rate to 4.00%. Investor focus will be on the vote split and any forward guidance on the pace of future cuts. Another three-way split, as seen in May, is possible and would underscore internal divisions.
• Final PMI Surveys (Aug 5): Manufacturing may inch closer to the 50-mark, indicating stabilization in orders. However, service activity could cool if consumers scale back discretionary spending.
• Labour Market Report (Aug 12): Covering the June–August period, this release will be key to confirming whether unemployment is trending higher. Data on vacancies and wage growth will be crucial for shaping monetary policy expectations.
• July CPI (Aug 20): Headline inflation is expected to ease slightly due to falling energy prices. However, strong wage growth and tariff effects may keep core inflation elevated near 4%. A higher-than-anticipated reading could delay further rate cuts from the Bank of England.

British Pound (GBP) Outlook – August 2025

Sterling suffered its steepest monthly loss since the September 2022 "Truss crash," falling approximately 3.7% against the U.S. dollar in July. GBP/USD dropped from $1.378 in early July to as low as $1.3316 by month-end, marking a sharp reversal following a strong performance earlier in the year.

The downturn accelerated after the U.S.–EU trade deal was signed on July 28, boosting U.S. equities and strengthening the dollar. Concurrently, weak UK retail sales, tepid business sentiment, and fading fiscal optimism further pressured the pound. UK gilt yields declined, and investor attention shifted to the Bank of England’s (BoE) next move amid mounting recession risks.

As of early August, GBP has stabilized in the $1.320–1.325 range, buoyed by weaker-than-expected U.S. employment data that temporarily softened dollar strength. Nevertheless, volatility remains elevated ahead of key U.S. and UK data, particularly nonfarm payrolls and retail sales figures.

Sterling’s trajectory this month will largely hinge on monetary policy divergence and fiscal credibility. The BoE is widely expected to lower the Bank Rate by 25 basis points to 4.00% at its August 7 meeting, though internal divisions on the committee persist. Investor sentiment is also clouded by uncertainty over the UK’s fiscal direction, with markets wary of surprise shifts in tax or debt policy under the new government.

Seasonally, August has historically been the weakest month for GBP/USD, with average losses of around 0.5%, a trend that may shape speculative positioning.

Most analysts anticipate GBP/USD will trade within a broad $1.30–$1.34 range throughout the month. MUFG’s consensus points to a Q3 closing level near $1.3233, with scope for gains toward the mid‑$1.35s if the dollar weakens or UK yields stage a rebound.

China 

CN July 2025 Economic Review

China’s economic momentum weakened further in July, as both official and private-sector data signaled a renewed slowdown in activity across manufacturing and services.

Purchasing Managers’ Indices (PMIs)

The National Bureau of Statistics (NBS) reported that the official manufacturing PMI declined to 49.3 in July from 49.7 in June—its lowest reading since April—indicating continued contraction. New export orders fell to 47.1, while the employment sub-index remained in negative territory, highlighting persistent labor market softness. Manufacturing output was hit by a combination of extreme weather events—high temperatures and flooding—and subdued external demand.

The non-manufacturing PMI, which covers services and construction, fell to 50.1, with the services component slipping to 50.0, signaling stagnation. Meanwhile, the Caixin manufacturing PMI, which focuses on smaller private enterprises, dropped to 49.5 (from 50.4), marking the fourth contraction in five months. Firms reported weaker output and new orders, continued job cuts, and rising input costs as authorities moved to rein in aggressive price competition.

Growth Data

Official GDP data showed the economy expanded by 5.2% year-over-year in Q2. However, underlying indicators pointed to fragile domestic demand. Industrial production rose 5.1% year-over-year in June, while retail sales grew just 2.7%, and fixed-asset investment increased 3.6% in the first half of the year, according to a Reuters summary. Youth unemployment remained elevated, reaching an estimated 17% in July. The property sector continued to contract, with floor-space sales falling and real estate developers under growing liquidity strain.

Policy Developments

Authorities acknowledged the broad-based deceleration and pledged policy support. In late July, the Politburo committed to correcting “disorderly competition” and boosting consumption, particularly through targeted subsidies such as childcare support. While Beijing signaled a willingness to provide stimulus to the property and manufacturing sectors, large-scale fiscal expansion remains constrained by high levels of local government debt.

On the monetary front, the People’s Bank of China maintained an accommodative stance, holding policy rates steady in July after having cut reserve requirement ratios for smaller banks earlier in the year. Trade developments offered some marginal relief: China and the U.S. reached a deal to maintain most tariffs at 15%, easing fears of a broader trade escalation.

CN August 2025 Outlook and Expectations

China’s near-term outlook hinges on the effectiveness of policy support in mitigating persistent structural challenges, including a weakened property sector, fragile domestic demand, and ongoing trade frictions. Economists expect GDP growth to decelerate to around 4.5% year-over-year in the second half of 2025, down from stronger figures earlier in the year.

Beijing has rolled out targeted stimulus measures—ranging from tax relief and lower mortgage rates to increased government bond issuance—to stabilize investment and revive housing demand. However, the impact may be uneven. Structural issues in real estate, cautious consumer sentiment, and weak private-sector confidence continue to weigh on the recovery.

The export sector could see some marginal benefit from the recently signed U.S.–China trade agreement, but the 15% tariff level remains elevated, limiting upside. Foreign investor sentiment remains cautious, reflecting both regulatory unpredictability and rising geopolitical risk. As such, China is expected to post a modest cyclical rebound in services while manufacturing and real estate continue to lag.

Key Data and Events to Watch:

• Inflation (Aug 9): Consumer prices remain close to zero, raising concerns about deflation. Weak domestic demand and falling pork prices are key deflationary drivers. Producer price inflation is also likely to stay in negative territory. Persistently low inflation gives the People’s Bank of China (PBoC) room to ease policy further if growth slows.
• Industrial Production, Retail Sales & Fixed-Asset Investment (Aug 15): Industrial output is expected to grow around 5% year-over-year, while retail sales are likely to remain subdued—below 3%—amid weak consumer confidence. A stronger print would signal that fiscal and monetary stimulus is beginning to take hold.
• Surveyed Unemployment Rate: While the government no longer publishes youth unemployment figures—last reported above 21% in 2023—analysts estimate the rate remains above 16%. A notable decline could improve market sentiment.
• PMI Surveys (Aug 31 – Official, Sept 1 – Caixin): Markets will closely monitor whether the manufacturing PMI rebounds above the 50 thresholds. Any improvement will likely hinge on export orders and stability in the property sector.

Japan

JP July 2025 Economic Review

Japan’s economy delivered mixed signals in July, with diverging trends across manufacturing and services, alongside persistent inflationary pressures and an evolving policy stance from the Bank of Japan (BOJ).

Economic Activity

Manufacturing conditions softened, with the S&P Global Manufacturing PMI falling to 48.8 from 50.1 in June, signaling a return to contraction. The decline was driven by weakening new export orders and cautious sentiment amid ongoing uncertainty surrounding U.S. trade policy. Employment growth in the sector also slowed.

Conversely, the services sector continued to expand at a solid pace. The Services PMI rose to 53.5, supported by strong domestic demand, particularly in tourism and hospitality. This lifted the Composite PMI to 51.5, indicating modest overall growth. However, input costs remained elevated due to rising food and energy prices.

Inflation and Wages

Inflation remained well above the BOJ’s 2% target. The national core Consumer Price Index (excluding fresh food) rose 3.3% year-over-year in June, down slightly from 3.7% in May but still marking the 39th consecutive month above target. The core CPI (excluding both energy and fresh food) increased 3.4% y/y, with food prices surging 8.2% and service-sector inflation climbing 1.5%, reflecting underlying wage growth.

Labour market conditions were steady. The unemployment rate held at 2.5% in June. Real wages turned positive following record spring wage negotiations, though persistent inflation continues to erode household purchasing power.

Monetary Policy

At its July 31 meeting, the Bank of Japan left its short-term policy rate unchanged at 0.5%. The board revised its inflation forecast for the current fiscal year to 2.7% and projected 1.8% inflation for FY2026. BOJ Governor Kazuo Ueda struck a more optimistic tone, noting that progress toward the inflation target was on track, and signaled that a rate hike later in the year remained a possibility.

The recent U.S.–Japan trade agreement, which reduced tariffs on Japanese cars and goods to 15%, alleviated a key external risk, according to BOJ commentary. Nonetheless, the board acknowledged that rising food costs could trigger second-round inflation effects and slightly downgraded its outlook for private consumption.

JP August 2025 Outlook and Expectations

Japan enters August with cautious optimism as investors monitor the pace of recovery in manufacturing and the resilience of the services sector. With signs of continued strength in domestic demand, the economy is poised for modest growth, though external risks—particularly from China and global trade disruptions—remain a drag.

The Bank of Japan is expected to continue its gradual normalization of monetary policy. A rate hike could be considered as early as October if inflation and wage growth persist, but Governor Kazuo Ueda has reiterated that any shift will depend on incoming data over the next few months. Market expectations of tightening may lend support to the yen, while safe-haven demand amid global uncertainty could further lift the currency.

Japanese equities may benefit from the recent U.S.–Japan trade agreement and steady domestic consumption. However, weak external demand—especially from China—and sluggish exports pose downside risks. Overall, Japan’s growth is likely to remain services- and tourism-led, with a cautious monetary and fiscal stance prevailing unless global conditions deteriorate further.

Key Indicators and Events to Watch:

• au Jibun Bank Services PMI (Aug 5): July’s final reading is expected to confirm strength at 53.5, underscoring continued expansion in services.
• Labour Market Data (Aug 30): The unemployment rate is projected to remain near 2.5%. Any uptick could delay the BOJ’s plans for further tightening.
• Q2 GDP and GDP Price Index (Aug 15): Following a Q1 contraction of –0.2%, analysts expect a Q2 rebound of 0.3% quarter-over-quarter, signaling a modest return to growth.
• August PMI Surveys (Aug 22 – Manufacturing Flash; Sept 2 – Final Caixin): Manufacturing is expected to stabilize, supported by improved trade conditions. Services activity may ease but is likely to remain in expansion territory above 50.
• July Core CPI (Aug 23): Inflation is forecast to remain above 3%, though food price trends will be closely watched for signs of persistent cost pressures. A gradual decline could reinforce the BOJ’s patient approach.
• June Household Spending & July Retail Sales (Aug 27): These figures will gauge whether spring wage gains are translating into stronger consumer spending. Weak readings would support maintaining an accommodative policy.

Emerging Economies 

EM July 2025 Review and August Outlook

Emerging markets entered August with resilient but uneven growth trajectories, as domestic dynamics diverged and external pressures—particularly from trade disruptions—intensified. Differentiated inflation paths have led to increasingly divergent monetary policy responses, creating a complex landscape for investors navigating these economies.

July 2025 Economic Review

Brazil:

Consumer prices rose 0.24% m/m in June, lifting annual inflation to 5.35%—well above the 3% target. In response, the central bank raised the Selic rate to 15% and held it steady in July, emphasizing that a restrictive stance would persist until inflation returns to the tolerance band, likely not before early 2026. Policymakers cited U.S. tariffs as a key contributor to higher import costs. While the rate hike likely ends the current tightening cycle, it signals prolonged monetary restraint that may further suppress economic growth.

India:

India maintained strong momentum in July. HSBC’s flash composite PMI printed at 60.7, with manufacturing hitting a 17-year high of 59.2 and services at 59.8. Output and employment surged, underpinned by robust domestic and export demand. However, business confidence slipped to its lowest since March 2023, and input prices rose sharply. Retail inflation eased to a six-year low of 3.54% y/y in June, thanks to falling food prices, allowing the Reserve Bank of India (RBI) to maintain its accommodative stance. Unemployment edged up slightly to 5.6%.

Mexico:

Annual inflation eased to 3.6% in early July, nearing the central bank’s 3% target, though core inflation held around 4.0%. The central bank kept the policy rate at 11% but hinted at gradual easing later this year as economic momentum softens.

Africa & Middle East:

South Africa’s producer inflation moderated to 4.2% y/y in June, with monthly prices down 0.2%, reflecting weaker commodity dynamics. Central banks in Turkey and Egypt kept rates unchanged amid persistent inflation, highlighting the strain from U.S. tariffs and subdued global demand.

EM August 2025 Outlook and Expectations

Monetary Policy Trends:

• Brazil is expected to keep the Selic rate at 15% until clear disinflation emerges.
• India’s RBI is likely to hold policy steady but may shift to a neutral bias if food inflation resurfaces.
• Mexico could cut rates by 25 basis points in September if inflation continues to ease.
• South Africa may delay easing as inflation stabilizes. Diverging paths across central banks could trigger capital flow shifts and add to currency volatility.

Growth Outlook:

• India is poised to remain the fastest-growing major economy, with Q2 GDP (due Aug 31) expected to exceed 7% y/y, led by strength in manufacturing and services.
• Brazil may face stagnation due to tight monetary conditions; PMI surveys will indicate whether the industrial downturn deepens.
• Mexico’s manufacturing sector, highly sensitive to U.S. demand, may face crosscurrents from U.S. tariffs and trade rebalancing.

Inflation Risks:

Food price volatility—especially in grains and oilseeds—remains a key concern across several EMs, including India, Brazil, and parts of Africa. Weather-related disruptions and supply chain pressures could trigger price spikes, forcing central banks to remain cautious despite growth risks.