Asset Management: Monthly Macro Insights - August 2025

The global economy started 2025 on a solid footing as businesses and consumers rushed to front-run tariffs by producing and buying more goods. Although several factors have unfolded more constructively than feared, was the drop in economic activity averted, or only delayed?

H1 better than expected…

The April “Liberation Day” recession risk was partly associated with the threat of a concentrated shock magnified by a sentiment slide. Although uncertainty around the final US tariff rate remains, tail-risks have been trimmed. However, a significant downshift in US and global growth in the second half of this year seems likely, albeit the lack of recent historical precedents which widens the error band around any forecast.

…but risks remain to the downside

So far, China has held up relatively well in the face of higher tariffs, thanks to front-loading by exporters and resilient shipments to markets outside the US. More broadly, nearly all countries have seen an acceleration in manufacturing output in 2025, with outsized gains concentrated in Asia and Europe. Within this bounce, there has been a concentrated activity in technology and pharmaceuticals.

Yet, a front-loading hangover promoting a stall in global industry and CapEx spending is to be expected as the sector cannot sustain the boomy pace seen so far this year. Forecasts for business investment in 2026 in all G7 countries are lower now than they were when Trump took office.

In fact, the full brunt of the trade war might have only been delayed, and the unwinding of front-loading in the few sectors where it has occurred will be amplified by a weakening in US demand as tariff and immigration policies bite.

A complicated dual mandate

The Fed held rates in the 4.25 per cent to 4.5 per cent range for the fifth consecutive meeting in July. For the first time in more than 30 years, two governors – Waller and Bowman – dissented, stating they preferred a -25 bps cut rather than hold rates higher for longer. They fear the deterioration in growth and the labour market could be more consequential than the rise in inflation. In fact, the Fed is increasingly caught in a dilemma between its two mandates: full employment and price stability.

In the end, tariffs may not be as high as initially feared. Nevertheless, they are a tax that will disrupt supply chains and global trade. The consequences could prove more damaging than expected, especially as the inflationary pressures they cause hamper central bankers' ability to adopt accommodative monetary policy.