18 August 2025: The economy is neither as good nor as bad as it is believed to be

The release of industrial production and Q2 GDP data last week shows that the economy, while far from being in a “Goldilocks” state, is neither in as good nor as bad a condition as politicians would have us believe.

The Chancellor told reporters that she welcomes the latest economic data, showing that GDP rose by 0.3% in the three months to June. Rachel Reeves said the figures are "positive, with a strong start to the year and continued growth in the second quarter".

However, shadow chancellor Sir Mel Stride says the GDP figures showing economic growth slowing down are a result of the government "taxing the living daylights out of businesses".

The fact is that the economy slowed by less than had been feared, but nonetheless, it did slow compared to Q1. Official figures published on Thursday showed that after an unusually strong 0.7% expansion in the first three months of 2025, gross domestic product grew 0.3% in the second quarter.

That was above the 0.1% forecast by the Bank of England and a Reuters poll of economists.

It is no coincidence that the slowdown in Q2 coincided with the new measures that came into force in April, including the increase in the minimum wage and the increase in employers’ national insurance contributions.

Much of the growth reflected higher public spending and businesses at home and abroad building up stocks of goods ahead of higher U.S. tariffs.

Business investment fell by 4% from the first quarter, and household spending growth was still weak.

As she prepares to raise taxes again in October’s budget, there is a fear that the country will see barely any growth before this Parliament is halfway done.

The former leader of the Labour Party, Lord Kinnock, has told the Prime Minister that Labour must scrap the two-child cap on benefits to lift children out of poverty. Kinnock has called for a 'Robin Hood' wealth tax.

Kinnock also claimed rising levels of poverty 'would make Charles Dickens furious' and claimed the Tories had undone hard work that was begun by Gordon Brown.

The 83-year-old, who led Labour in opposition from 1983 to 1992, is the latest senior party figure to urge the current Government to end the two-child limit on benefits.

Doing away with the cap would cost approximately £2.5 billion a year. The actual cost of scrapping the two-child benefit cap would require detailed analysis and data from government sources or independent studies. It would also depend on the specific policy changes implemented and the broader economic context.

Inflation data for July is due to be published this week. It is expected that core CPI will remain at 3.7%. Given the inconclusive vote at the last MPC meeting, despite a cut being agreed, it is likely that such a level of inflation would see another cut deferred.

The pound had a strong week last week, rising to a high of 1.3594 and closing at 1.3562. A lot of the action this week will be centred around the inflation data.

U.S. President Donald Trump said on Friday he would announce tariffs on imports of steel and semiconductor chips in the coming weeks.

"I'll be setting tariffs next week and the week after on steel and on, I would say, chips," Trump told reporters aboard Air Force One as he headed to a meeting with Russian President Vladimir Putin in Alaska.

He said the rates would be lower at the start to allow companies to build up domestic manufacturing in the U.S., rising sharply later, following a pattern he has also outlined for tariffs on pharmaceuticals. He gave no exact idea of rates.

In February, tariffs were imposed on steel and aluminium at a flat 25%, but he announced in May that he would double the rate to 50% to boost domestic manufacturers.

It was not immediately clear if another tariff increase on the metals was in the offing.

The President said last week he would impose a tariff of 100% on imports of semiconductors, but companies that committed to building up manufacturing in the United States would be exempt.

It is feared that companies that choose to continue to manufacture outside the U.S. would eventually face 300% tariffs, which would effectively price them out of exporting to the country.

Chicago Fed President Austan Goolsbee was active on the speaking circuit last week.

Speaking on Friday, he said that a mixed bag of inflation data this week, coupled with lingering uncertainty over tariffs, has given him some hesitation about lowering interest rates.

Previously, Goolsbee had spoken of a “golden path” that would combine moderating inflation and a stable labour market and lead to lower rates. But in a CNBC interview, Goolsbee said he still wants to see some more convincing data before the Federal Open Market Committee meets on Sept. 16-17. Goolsbee is one of 12 FOMC voters this year.

Reports this week on consumer and producer prices “put in a note of unease” on where inflation is headed, as services prices, which are obviously not going to be transitory, are “kicking up,” he said. So I feel like we still need another inflation report, at least, to figure out if we’re still on the golden path.

Goolsbee’s comments were somewhat echoed by his colleague in St Louis, Alberto Musalem, who told Reuters, “The Federal Reserve now faces risks to both its inflation and jobs goals, with policymakers needing to balance which seems the more serious threat in deciding whether it is appropriate to reduce interest rates”.

Between tariffs pushing up prices and job growth slowing, there are risks on both sides of our mandate, and when that happens, when you have risks on both sides, you have to take a balanced approach, which means you have to think about the likelihood of missing on each side of the mandate, the size of the potential miss, and how long that miss will be in place.

This week, the minutes of the latest FOMC meeting will be published. It is unlikely that they will show any surprises, while the market is now looking forward to the Fed’s Annual Symposium, which, as usual, is being held in Jackson Hole, Wyoming.

Fed Chairman Jerome Powell will make the keynote address on Friday. Before that happens, data will have been published showing preliminary Manufacturing and Services output for August.

The dollar index saw a second consecutive weekly decline last week, falling to a low of 97.63 and closing at 97.85. With the end of summer approaching and the possibility of a little more clarity over tariffs, the index may be in a position to stage a recovery in what remains of the quarter.

The ECB continues to congratulate itself on bringing inflation down, despite cutting interest rates by 200 basis points in the past year. However, the cuts have had very little effect on growth and activity within the Eurozone. In fact, the nations within the European Union, but not in the Eurozone, have experienced marginally higher growth rates than those that are.

Eurozone growth slowed down in the second quarter, expanding at a 0.2% annual rate, from 0.6% in the first quarter, European statistics agency Eurostat says.

The results, in line with earlier estimates, may appear disappointing to some, but, to most analysts, are a sign of resilience to the turbulence and uncertainty that hit the global economy as a result of US President Donald Trump’s on-again, off-again tariff policy.

Seasonally adjusted eurozone growth, compared to the same quarter of 2024, was 1.4% in the second quarter, slightly down from 1.5% in the first.

Although a rate cut before the end of the year would be welcome, the inflation and growth pictures for the regions do not point to a cut before Q1’26.

However, the ECB appears to be avoiding any mention of a recession, although when the tariff picture clears, the effect could be devastating for the economy, even as Ursula von der Leyen is congratulated for the effort she made in her recent negotiations with President Trump. She is obviously no Vladimir Putin, but to be fair, she has a lot less to lose than the Russian dictator.

However, the picture is not clear. While the eurozone economy barely grew in the second quarter. Germany and Italy contracted, while Spain continued to shine.

In truth, Europe’s economic momentum nearly stalled in the second quarter of 2025, with growth barely registering and industry output sliding sharply, raising concerns over whether the region’s recovery is already running out of steam.

According to Eurostat’s second estimate released on Thursday, seasonally adjusted GDP in the euro area rose by just 0.1% in the three months to June, unchanged from the initial flash reading. The wider European Union (EU) grew by 0.2%, also in line with earlier estimates.

Around one in four industrial companies in Germany reported a decline in their competitiveness compared to countries outside the EU, according to the latest IFO survey.

The figure remained high compared to a previous survey in April. There is also no sign of a turnaround in competition within Europe: The share of companies with declining competitiveness compared to other EU member states fell only slightly from 13.4% to 12%.

“German industry is struggling with structural disadvantages, such as energy prices, regulation and investment conditions,” said Klaus Wohlrabe, head of surveys at IFO. “Many companies are losing ground in a global comparison as a result.”

The Bundesbank's monthly report is due to be published later this morning, and it is expected to continue in a downbeat manner. Even the optimism that was garnered by the announcement of two new investment funds, one backed by the Government and one by Germany’s major industrial companies, has failed to lift sentiment

The week’s major event will be the publication of the inflation data for July. It is expected that the ECB will prove to have been right not to cut rates again in July, with price increases predicted to remain at 2%.

The single currency performed well last week but retained its well-trodden range. It reached a high of 1/1730 and closed at 1.1707.

Have a great day!