Economy in Brief: July 2025

The current and future economy watchers indexes advanced in June. In the current index, only services, housing, and employment readings weakened. In the future index, the reading for corporations weakened based on weakness for nonmanufacturing corporations. However, the improvement signaled is still quite downbeat since it only indicates that the ongoing deterioration is slower. The diffusion readings continue to be below 50, indicating pullbacks across all categories are still in train and are only letting up slightly.

While the improvements in the month-to-month readings were widespread, they were mostly small and no reading in either the current or the future survey has a diffusion value above 50%. That means that all these economy watcher readings are actually showing deterioration although on the month the rate of deterioration slowed across most category readings. In fact, there are no month-to-month readings at or above 50 in either the current or future survey in the last three months. To get a category reading of 50 or higher, we must go back to February when the reading for future employment was 50. We go back to August 2024 to find a majority of future sector reading at 50 or higher and to March 2024 to get a majority of current readings above 50.

The far-right hand column assesses the level of the June diffusion readings vs. past readings back to 2002. On that 23-year timeline, all the current and future readings have percentile standings below the 50% mark leaving all of them below their respective median readings for the period.

In the current survey, retailing and nonmanufacturers with diffusion percentile standings in their respective 41st percentiles have the strongest queue readings. The weakest reading in the current survey are the 21st percentile standings for housing and for employment.

For the future survey percentile readings, the strongest is a 45.5 percentile standing for eating and drinking places. The weakest future reading is the 24.5 percentile reading for employment.

Seeing such weakness in the current and future indexes in employment a reading that is a lynchpin for all sectors is clearly not reassuring.

At the bottom of the table, there are collected results for monthly data on month-to-month changes on the breadth of improvement. We see monthly that after a poor performance in April with most reporting categories worsening, May and June show most of them improving month-to-month on the order of 70% to 100%. Similar metrics for three-month and six-month changes perform much worse. These calculations are executed on changes in averages the twelve-month and average six-month and average 3-month data. On those comparisons, we see average diffusion is up broadly over 12 months compared to 12-months earlier. But the averages over six months and over three months are showing declines across all categories.

While the monthly data are showing some month-to-month improvement, the broader data show that the pace of improvement linked to broad averages is still not in place. And it is still a nefarious since of ‘improvement’ for the overall readings in which the diffusion data are only signaling that the categories are getting worse at a slower pace. Japan continues to struggle with weakness as the Bank of Japan wrestles with inflation and the United States and Japan spar over tariffs.

This week, we look at the latest US trade developments and their implications for Asia, as President Trump unveiled new tariff rates on 14 countries (chart 1). Though some rates were lower and implementation delayed to August 1, the move signals the US tariff pause is ending and deepens investor uncertainty in Asia. Market sentiment has weakened, reflecting both renewed policy risks and stalled trade negotiations in the region (chart 2).

Vietnam stands out as a rare exception, having secured a deal with the US that reduced its tariff rate from 46% to 20%. However, the agreement includes a 40% tariff on “transshipments,” aimed at curbing indirect exports from third countries, such as China. In return, the US has gained tariff-free access to Vietnamese markets—an offsetting benefit for American firms. Nonetheless, the 20% rate remains high and could raise costs for US consumers if passed through supply chains (chart 3). Japan, by contrast, faces a more delicate balancing act. A 25% tariff was confirmed, while pressure persists over access for US agricultural exports—particularly rice (chart 4). Domestic sensitivities remain elevated amid a rice shortage and looming upper house elections, limiting Tokyo’s room to manoeuvre.

Regional central banks are responding cautiously. The Reserve Bank of Australia held rates steady, defying expectations of a cut and citing a need for more information (chart 5). Rate decisions from South Korea, New Zealand, and Malaysia are due this week, with South Korea’s central bank seen likely to hold, amid rising home prices and mortgage growth (chart 6).

Latest US tariff developments As previously signalled, US President Trump on Monday unveiled a new round of tariff rates targeting 14 countries, confirming initial fears that the US would move forward with reciprocal tariffs following its 90-day pause. While investor concerns—renewed late last week—have begun to materialize, there are two modest sources of relief. First, as shown in chart 1, many of the newly announced US tariff rates are actually lower than those initially unveiled on “Liberation Day,” April 2. Second, President Trump has delayed the effective date of the tariffs to August 1, offering a temporary window for countries that have not yet done so to negotiate trade deals with the US. However, while the extension allows more time for dialogue, it does not constitute a formal delay in implementation—at least for now. That said, progress in trade negotiations with the US remains limited across most Asian economies. In some cases, such as Japan, talks may have even come to an impasse—this will be explored further in subsequent sections. Vietnam, however, stands out as an exception, having secured a trade agreement with the US late last week; this development will also be discussed in more detail later on.

German industrial production rose by a sharp 1.2% in May but only after a 1.6% plunge in April which followed a 2.3% surge in March. This has been an unusually turbulent period for industrial production. However, on balance, German IP shows acceleration (from 12-months to 6-months to 3-months) for headline IP, for consumer goods output, for capital goods output, as well as for manufacturing overall and for real manufacturing orders.

Data trends This collected pattern of accelerating trends is exceptionally good news and tends to push the volatility in output into the background. Typically, volatility tends to reduce the meaning of any trend since depending on where you are in a volatility, up-vs-down pattern, the trend will be not just exaggerated but even switched in direction. However, with not just growth but acceleration in play and with accelerating trends in play for so many categories- including real orders- the uptrend appears to be solidly established even in the face of volatility. And the chart seems to confirm that (drawn on year-over-year sector trends).

Knowledge beyond data In addition, we know that there are other conditions stirring in Europe that give us cause to think that output solidifying is a real event not just the luck of the draw on one month’s volatility. The shift is to get NATO countries to pay for more of their own defense and to pay more period. At the recent NATO meeting, member countries pledged to spend 5% of GDP on defense that should help to light a fire of demand across Europe. At the same time, the good news is that inflation headlines in the EMU and across major member countries are mostly on target while core inflation remains stubborn at an elevated pace near 2.5%, mostly across the EMU.

Quarter-to-date (QTD) The volatility leaves German IP growing at less than a 1% annual rate in Q2 over the Q1 average (quarter-to-date, or QTD)– a far less portent reading than the three-month rate of 7.7% (saar). But manufacturing, unimpeded by the weakness in construction, shows a QTD annual rate rise of 2.9%. Real manufacturing orders are advancing at a 16.4% annual rate in the quarter while real sales are declining.

Surveys show improvements over three months compared to six-months, but all of them also show some slippage over six months compared to 12-months. Yet, all of the three-month averages are above the 12-month averages. Survey data generally show momentum is turning higher, but not markedly.

Queue standings – longer term comparisons The queue standing data compare current growth rates (Y/Y) or (in the case of surveys) levels to past performance. Total IP, consumer goods, capital goods, manufacturing output, and real orders all have May readings above their historic median growth rates/or levels (rankings over 50%). But construction and intermediate goods sectors lag badly. Real sales are weak, and the surveys all show weak signal compared to all levels since January 2000. This tells us that the momentum in German industry (12-month growth) is solid and strong, but that the level of activity is weak – and quite weak- compared to past performance. This is also clear from the far-right column that measures current output relative to output in January 2020, just before Covid. These are aggregate changes. Germany’s output is still 1.7% lower in May 2025 than it was in January 2020 – nearly five- and one-half years down the road. This has been a very weak period for Germany. Only capital goods output among sectors is higher, rising by 4.9% over a period of five-plus years and making most of that in the last 12 months. The surveys show conditions have weakened on balance over this period as well.

Some other Europe Portugal and Norway give us a look at two other European economies. Both show growth in May as well as QTD. Norway is supercharged with the strong oil market in play as a tailwind. Its queue standing for growth has a 99-percentile reading. Both Portugal and Norway are stronger relative to January 2020; Portugal by 11.8% and Norway by 8.3%.