Economy in Brief

This week, we examine a series of major US trade and tariff developments since early July. The US has expanded its network of bilateral trade deals, including deals with Indonesia and the Philippines, both securing tariff rates of 19%. Meanwhile, former President Trump has seemingly raised the general tariff floor from 10% to 15%, potentially affecting countries like Australia, New Zealand, and Singapore (see chart 1). India, once expected to be among the first to reach a deal, has yet to finalize an agreement ahead of the August 1 deadline. Attention remains on China’s suspected use of transshipments through third countries to circumvent tariffs. One possible, though inconclusive, indicator is the decline in China’s direct exports to the US alongside stable overall export levels—suggesting either the use of transshipment routes or a broader redirection of exports to other markets (see chart 2).

Japan also recently struck a significant deal with the US, reducing its reciprocal tariff from 24% to 15%. This announcement boosted Japanese equities and the yen (see chart 3). However, Japan’s auto exports to the US continue to decline, with firms absorbing tariff-related costs to maintain competitiveness (see chart 4). Despite political uncertainty following the ruling LDP’s losses in recent upper house elections, Japanese markets have remained resilient (see chart 5). As the Bank of Japan prepares to announce its next rate decision, real wages have posted their sharpest decline in two years, while household spending—driven by car purchases—has surged (see chart 6).

Latest US tariff developments Several significant US trade developments have occurred since early July. Notably, the number of bilateral trade deals secured by the US has increased. For instance, Indonesia reached an agreement that reduced tariffs from 32% to 19%, while the Philippines avoided a previously threatened 20% rate, settling instead at 19%. Meanwhile, former President Trump has reportedly raised the tariff floor from 10% to 15%. This suggests that countries previously facing the 10% rate—such as Australia, New Zealand, and Singapore (which runs a trade surplus with the US)—will now be subject to higher duties, as illustrated in chart 1. In contrast, India, once expected to be among the first to reach a deal, has yet to produce a substantive agreement as the August 1 deadline approaches.

Hypnotists are just trying to get you to focus on something and concentrate on it so that you can relax and they can put you into a hypnotic trance. Right now, you want to make sure that does not happen as you watch what is going on with money supply. It is not ‘entrancing’ and ought to be followed. The chart shows you that trends - and often excesses in ‘global money supply’ growth have begun in that money center country, the United States of America. And… well… here we go again? While it's very early in the game, it looks like, after a period of monetary weakness and re-escalation, U.S. money growth is now beginning to step up in the U.S. Meanwhile, in Europe and in the United Kingdom, money growth, especially real money growth, is beginning to tail off. All this is at a time when Japan's money growth, of course, has been marching to the step of a different drummer showing regular, consistent, nominal weakness and actual declines in the real money stock to try to tame its incipient inflation.

The Policy Zone We are no longer in the COVID era; or even in the post-COVID era. We are now in the post post-COVID era. And monetary policy is being made based on conditions rather than remedy perceived legacy problems in the economy from COVID. We need to make that transition in our analysis too, and ask ourselves, “What's really happening?” In the U.S., the popular dogma is to claim that central bank independence is being undercut and that Donald Trump's tariffs are going to raise the inflation rate and that the Fed is losing its battle with inflation and inflation is coming because of excessive fiscal policy and the imposition of tariffs. It's a story you can believe if you want to. There's certainly some evidence to support those points; whether they completely justify that point of view, it is still too early to say. However, clearly, money supply growth in the U.S. is ramping up. The U.S. 12-month growth rate is up to 4.5%, over six months the annualized rate hits 5.5%, and over three months the annualized rate hits 6.9%. It's hard to say that that's occurring because of Trump's tariffs. At the same time, the growth rate in real money balances - that's money supply deflated by the CPI - has boosted its growth rate from 1.8% over 12 months to a 2.9% annual rate over six months to a 4.4% annual rate over three months. Is the chase on for an inflation ‘uptick’ that will not be temporary?

Follow the leader, or go your own way? It will take some time to tell if the other money center countries are going to follow the leader or not. So far it looks like ‘or not.’ Money supply growth in the European Monetary Union (EMU) is actually decelerating slightly from 2.8% over 12 months to a 1.7% pace over six months to a 1.3% pace over three months. Similarly, in the EMU the growth of real balances has slipped from 0.8% over 12 months to a 0.2% annual rate over six months to a -0.6% annual rate (contraction) over three months. So far, euro area money supply is not tagging along with the U.S. trend.

Euro-credit trends Meanwhile, private credit growth in Europe has stabilized with the 12-month growth rate of 2.3% that moves up to 2.4% over six months and settles back to 2% over three months, a relatively stable performance that would seem to signal ongoing moderate growth. The growth rate of private credit, deflated for the effects of inflation, shows continued growth, and beyond that the trend is unclear. Over 12 months the growth rate is 0.3%, over six months that improves to 0.8%, and over three months it drops back to a 0.1% pace. I'm not good enough at splitting hair to be able to tell you what that trend is.

U.K. money weakens In the U.K., nominal money supply growth seems to be slowing, but that isn't crystal clear, with the 3.5% annual rate over 12 months moving up to a 4.1% annual rate over six months been slipping back to 1.7% over three months. It may take a few months to be able to tell if the step down to 1.7% is real or just volatility averaging out the step up over six months. U.K. money growth does not appear to be excessive or rogue; when we look at real balances, 12-month growth is -0.4%, six-month growth is -0.1% and the three-month growth rate is -1.6%. On that profile, real money growth in the U.K. does not appear to be following the U.S. rule book either.

Japan- dealing with its own complex issues We know that Japan has been off on its own for a while. Japan clearly has been fighting off a bout of inflation. But, since that development is relatively new, and the previous battle with deflation was relatively long-lived, if we think in terms of inflation averaging, Japan is still dealing with an extremely small problem. Despite the appearance of some real inflation (depending on the price index you look at to establish Japanese inflation trends), Japan's inflation overshoot in contexts is only making up for lost time.

Money growth in Japan is 0.9% over 12 months; however, it's only running at a 0.1% annualized over six months and over three months. The growth of real money balances in Japan is negative. Real balance growth rates are negative on balance over three years and two years; the 12-month growth rate for real money balances is -2.3%, over six months it is -2.2%, and over three months it is -2%. The degree of restriction has faded but faded only very marginally. The main point is that in Japan, real money balances are contracting and so there is a fight to reduce inflation going on behind the scenes and that's clearing up; you can see it in the money growth rates on the chart as well if not from the level or real interest rates. Japan is balancing complex needs.

German consumer climate fell to -21.5 in August after logging -20.3 in July; July had posted a slight deterioration compared to June which had a -20.0 reading; however, previously in May the reading had improved sharply to -20.8 from -24.3 in April. The month of May had seemed to signal an improvement that took the climate readings from the -24 to -25 range into the -20 range. And while the -20 level held for three months in a row, there's now been a deterioration back to -21.5 in August and some renewed concerns about the economy.

Resilience and questions... So far there has been a good deal of economic resilience in Germany and in Europe; however, the recent deal by NATO members to spend 5% of GDP on defense is channeling a lot of that money to the United States to purchase missiles to help Ukraine in defense against Russia. However, 1 1/2 percentage points of that military spending pledge can actually be infrastructure spending that can be used for domestic purposes to bolster military preparedness and operations. Therefore, that portion of the spending, at least, remains as stimulus for the European economy.

The inflation setting Inflation in the euro area is basically at ‘target’ for the headline and close to it for the core; the year-over-year core rate is about 2.3%. Even so, Europe is looking at a pace that's close to 2%, but still higher than 2% after a long stretch of inflation being over the 2% target. In today's press conference, ECB President Christine Lagarde, speaking on the inflation picture and outlook in the EMU, said that the bank's target was an intermediate target and that the ECB expected inflation to be at its target over the intermediate term. The question I would have for her and for the ECB at this point is whether that means that the inflation target has become “aspirational” and is no longer operational? If the ECB is going to be happy with an inflation rate that stays above 2% as long as it thinks that ‘in the intermediate term’ inflation is going back to 2% has something significant changed? And since all forecasts are notoriously wrong – is this now a credibility issue for the ECB?

German eco-climate In Germany, the GfK measure is for August; components for the climate measure are up-to-date through July. Economic expectations took a turn lower after posting 20.1 in June; they slipped to 10.1 in July. The most recent observation of record for income expectations, however, advanced from 12.8 in June to 15.2 in July, continuing a string of improvements. The propensity to buy metric worsened and remained negative at -9.2 in July compared to -6.2 in June. The overall climate metric is now at its weakest since April 2025; economic expectations are their lowest since April 2025. Income expectations are trending higher, nonetheless. The propensity to buy metric at -9.2 in July is at its weakest reading since February 2025; but that was a single-isolated low, setting that observation aside, the ‘propensity to buy’ is the weakest it's been since August 2024. The German consumer clearly hasn't recovered in terms of having faith and purchasing power restored even though income expectations have risen more substantially.

Queue standing assessments In terms of the queue percentile standings (ranked data observations), climate has been weaker than this 11.5% of the time, economic expectations have been weaker 59% of the time, income expectations have been weaker 50.7% of the time, while the propensity to buy has been weaker only 29.1% of the time. Economic expectations are above their median - above a ranking value of 50% - while income expectations have only returned to their median estimate, marginally above 50%, at a reading of 50.7%. The propensity to buy languishes at the bottom 1/3 of its historic queue of values. The climate headline remains in disaster territory.

Other Europe: Other EMU and the U.K. These observations for Germany contrast to observations in the rest of Europe where data lag. Consumer confidence metrics for Italy, France, and the U.K. are up-to-date only through June. And through that period, Italy shows the last two observations a little bit stronger, France shows the most recent two observations as, very similar, but weaker than April, while the U.K. shows the progression towards stronger readings from April to May to June. However, the rankings for these countries are quite mixed. For Italy consumers held confidence in June at a 73.2 percentile standing, relatively firm, while in France the standing is at its 26.4 percentile and in the U.K. it is at its 37.5 percentile. The climate in Germany is exceptionally low although the readings for the European countries in the table are somewhat more similar to the readings for the German climate components that are up-to-date through July.