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10 Jun 2025 | 3 minutes to read
Tariffs on trade will raise USD 400bn more in revenues over the next ten years than tax giveaways will cost, according to Washington's Congressional Budget Office (CBO). Their reckoning assumes that President Trump's use of the International Emergency Economic Powers Act to enforce tariffs will not be struck down by the US courts. Trump's "big, beautiful" budget, currently being considered by the Senate, would otherwise be in trouble. In its current form the bill will push the US’s fiscal position closer to its limit, given that it already spends c. USD 2trn more per year than it raises in revenues – approximately 6.7% of GDP. Many economists doubt the CBO's calculations. Its report may also favour the Republicans' agenda, given they control the house, senate and presidency. A public spat between Elon Musk and Trump spiced up the debate.
Elsewhere, the latest US labour market figures appeared strong at first glance, but the details of the print may suggest some underlying softness. Non-farm payrolls increased by 139,000 in May - more than the 125,000 forecasters had anticipated – while the unemployment rate held steady at 4.2%. However, the print marked a decline from the 147,000 April figure, while the jobs added were concentrated in just a few industries - notably healthcare, leisure & hospitality and education. Ahead of the closely watched non-farm count, payrolls processing firm ADP reported private sector job creation of just 37,000 in May, the lowest since March 2023 and well below forecasts of 115,000. With tariff inflation benign for the time being, and some cracks appearing in the labour market, the US Federal Reserve (Fed) may find itself under ever greater scrutiny. Indeed, President Trump was quick to once again publicly call on Fed Chair, Jerome Powell, to urgently cut interest rates.
Prime Minister Sir Keir Starmer set out the government’s defence strategy for the next decade as his administration published its Strategic Defence Review last week. The review, which commenced shortly after Labour’s general election victory last year, was led by former NATO Secretary General, Lord Robertson, with Defence Secretary, John Healey, overseeing. The government pledged to accept all 62 of the review’s recommendations. The strategic goals include a Nato-first policy, with the UK’s “biggest contribution” to the military alliance since it was founded in 1949, increased “war-fighting readiness”, and a “defence dividend” - with investment in the sector used to foster job creation and growth. As far as military resources are concerned, the review outlined plans to enhance and leverage digital, artificial intelligence (AI), and autonomous systems to boost military lethality and speed up procurement. It also pledged to invest GBP 15bn in the sovereign warhead programme, as the Trident nuclear deterrent is renewed. As was announced previously, the UK’s defence budget is to rise to 2.5% of GDP by 2027, with a target of 3% in the next parliament. The UK government will publish a wider spending review on Wednesday this week, with tight settlements expected for many departments.
The European Central Bank (ECB) lowered borrowing costs by 25 bps to 2% last week. The interest rate cut – the eighth since last June - was expected by financial markets, while another two cuts are currently priced in before the end of the year. However, the central bank did hint at a pause in its monetary easing cycle after seeing inflation fall below the 2% target. Following the announcement, ECB president, Christine Lagarde, stated that the Bank was ‘in a good position’ and ‘getting to the end of a monetary policy cycle that was responding to compounded shocks.’ The current cycle has seen the benchmark interest rate halve from a peak of 4% in June.
Immediately after Lagarde’s remarks, the euro gained 0.5% against the US dollar. The ECB are now increasingly optimistic over the prospect of the Eurozone economy experiencing a ‘soft landing’, where inflation will sustainably return to its 2% target without triggering a recession. Headline inflation is indeed projected to average 2% in 2025, while the ECB predict it will fall to 1.6% in 2026 before returning to 2% in 2027. The central bank’s projections are for modest real GDP growth in the coming years.
The Organisation for Economic Co-operation and Development (OECD) has downgraded its global growth outlook for 2025. The international organisation cited the mounting impact of global trade tensions for the faster than previously expected slowdown in economic activity.
Global growth is now projected to slow from 3.3% in 2024 to 2.9% in both 2025 and 2026. The slowdown is expected to hit hardest in the US, Canada, Mexico and China – economies most exposed to US trade tariffs. This revision follows the International Monetary Fund’s (IMF) April downgrade of its 2025 global growth forecast from 3.3% to 2.8%.
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