Economic data continues to be resilient in the face of enormous tariffs being levied although it is difficult to say at this stage what tariffs exactly are being levied.  A rapid escalation followed by an equally rapid de-escalation, multiple meetings, offers, suspensions, letters and a looming (new) deadline has seen the global economy somewhat inured to the noise surrounding tariffs and trade wars.  Business simply goes on, but the front running of expected tariffs will inevitably lead to lumpy and difficult to decipher economic data, making the job of policy makers that but more difficult.

Tariff noise aside, there are some clear trends visible in the global economy.  The US economy continues to expand, driven by investment spending and the AI capex boom, with little or no evidence of inflationary pressures. Indeed, it seems obvious that the acceleration of AI will ultimately lead to disinflationary impulses in the global economy.

US

Tariff noise aside, which will make economic data very difficult to decipher, the AI led capex boom is deepening and broadening out across industries, a generational investment cycle that has hugely positive implications across sectors and geographies.  The US remains at the forefront of this investment cycle.

It does seem clear that the labour market in the US has weakened however, though it remains resilient.  Inflation is falling, and is close enough to the Federal Reserve’s target to warrant some insurance cuts, given heightened levels of uncertainty.  In the short-term however, most analysts remain busy searching for any evidence of tariff-induced inflation, the small rise in goods inflation (which contributed all of 5 basis points to the 23 basis points month over month gain in core CPI) being heralded as the beginning of a rising inflation cycle. Goods price inflation has also ticked up in producer prices, but services inflation remains on a downward path.  It does seem inevitable that increased tariffs will cause a small acceleration in goods price inflation, but policy makers should only be concerned if this leaks out into other sectors that are unaffected by tariffs.  So far, there is no evidence of this.

Concerns about the sustainability of US Federal Debt abound, and the passage of the One Big Beautiful Bill (OBBB) adds to this concern, as do the constant rumours about the potential removal of the FOMC Chair, and the political pressure to cut rates, Federal Reserve independence being a cornerstone of the stability of US debt markets.  The president, however, has a point – the combination of potential weakness in the labour market, continued progress on inflation and the difficulty in extrapolating economic trends from very noisy data over the next few months means the case for insurance cuts from the Federal Reserve remains quite strong.  But Chair Powell has been consistent in his message over the last few months that policy is in a good place and there is no hurry for the Fed to act.  Other voices on the FOMC are leaning towards a resumption of rate cuts though, and expectations are for two more rate cuts before year end.

Europe

The ECB has cut rates quite aggressively by ECB standards, and although the commentary that accompanied the last rate cut was construed as slightly hawkish, this is understandable after eight rate cuts in the last year, and a policy rate that is approaching neutral.  Markets still expect more rate cuts though, given the general level of malaise in the European economic data, the risks surrounding tariffs, falling inflation, the strength of the euro and the exposure of the economy to global trade trends.

The much written about German stimulus is a positive, as is the recent news of the “Made for Germany” initiative across more than 60 companies with plans for more than 600bln euro in investments by 2028.

China

Trade concerns mean the economic picture remains clouded, there has clearly been persistent front-loading of trade, but there has been a moderate improvement in sentiment of late with a recovery in PMI indicators.  The outlook for the Chinese economy however remains heavily dependent on where the tariff levels finally settle, and despite ongoing talks and de-escalation we have seen, these remain very high and will likely constrain growth until more reasonable levels are agreed on.