Macroeconomic Focus – October 2025

Is US exceptionalism faltering?

The US administration has toughened up since mid-February. In addition to the prospect of American disengagement from Ukraine and the profound consequences for European defence, tariff threats are escalating. The latest announcements are for 20% on Chinese imports and up to 25% (excluding energy) on goods from Canada, Mexico and potentially Europe. The average US import tariff could exceed 10%, a level unseen since the 1940s. Aside from the inflation risk, this increase, in the event of reciprocal tariffs, could lead to a negative-sum game for the global and US economy. The US could suffer a 1.3% growth hit and a 0.8% inflation rebound (core PCE), according to an extrapolation of work done by the Fed in 2018.

Inflation seems to be proving sticky: the Fed’s preferred measure, the PCE index, is still rising at an annual rate of 2.6%. Services inflation excluding healthcare and housing remains at lofty levels. Several consumer-facing companies have already warned of price rises to come and a deterioration in January’s confidence indices reflected concerns among households (University of Michigan Consumer Sentiment and Conference Board Consumer Confidence).

In January, US consumer spending retreated 0.2% compared to December’s excellent reading and confirmed a slowdown in retail sales. In addition to inflation, respondents reported to being less optimistic about the job market. While job creation numbers remain reasonable, the unemployment rate is rising slightly and an expanded measure (U-6), which includes underemployed and discouraged workers, rose sharply in February to 8%. This reflects the rise of precarious employment with people on the lowest incomes increasingly taking on several jobs to support themselves.

Against this cautious backdrop and despite rising incomes, households are saving more (4.6% in January) rather than investing massively in property. The property sector, which is still under pressure from high mortgage rates (just below 7%), displays no tangible signs of improvement as the particularly harsh winter comes to an end. In February, pending home sales waned by 4.6% and the NAHB confidence index deteriorated. In services, political uncertainty (federal spending cuts, tariffs, immigration policy) took its toll on sentiment, with February’s flash PMI slipping into contraction at 49.7. February’s industry data sent conflicting signals with the manufacturing PMI in expansion territory for the second straight month, but a less buoyant ISM report. This could indicate stockpiling before additional tariffs take effect.

The US economy was surprisingly upbeat in 2024, driven by strong consumer and government spending. Yet as 2025 settles in, weak consumer confidence, slower Magnificent-7 earnings growth and the prospect of squeezed government spending along with a potentially negative domestic impact from tariffs could reduce the gap between the US and the rest of the world in terms of economic performance. 

Economic growth is running at around 1% — broadly in line with the pace seen in the United States this year — despite ongoing trade headwinds. Exports have been hit by tariffs since the second quarter, and the trade balance with the U.S. has worsened sharply after a first-quarter surge in shipments made in anticipation of those measures. Tariffs on healthcare products could extend these challenges, though the third quarter is expected to be less difficult than the second.

Since the summer, Germany’s manufacturing PMI surveys have shown steady improvement. In October, services saw an exceptional rebound, pointing to a possible recovery in domestic demand in Germany.This outlook is supported by a stimulus budget worth 1.6% of GDP from the NextGen EU plan and the early rollout of Germany’s own fiscal package.

France, meanwhile, continues to struggle with reducing its public deficit, and business sentiment has been dampened by political uncertainty. The Lecornu government managed to avoid censure by compromising on its finance bill, but fiscal consolidation efforts will be modest. Uncertainty over the budgetary trajectory naturally poses a risk for credit ratings, with S&P downgrading France from AA to A+ in October. This is not a new development — it has been weighing on sentiment for several months. In October, consumer confidence began to stabilize.

Against this backdrop of moderate European growth, core inflation remains lower than in the United States (+2.4% in September), helped by slow wage growth. At this level, the balance of risks is improving, giving the ECB greater flexibility. With economic activity stable, the central bank has room to act if domestic demand weakens.

Despite ongoing tensions, trade has continued to support growth. The drop in exports to the United States has so far been offset by stronger shipments to other markets. Industrial production rose by 6.5% in September, following a solid August, underscoring the resilience of China’s export engine at the end of the third quarter. This strength has helped cushion the slowdown in domestic demand.

Retail sales growth eased to 3% in September, down from 3.4% in August. More importantly, investment is showing clear signs of weakness — not only due to the collapse in real estate activity, but also, in all likelihood, because of “anti‑involution” measures designed to restore healthier dynamics in industries plagued by price wars.

In some sectors, China’s production capacity alone exceeds global demand, creating a damaging spiral for producer prices and margins. The 2015‑2016 reforms had boosted producer prices, but today’s challenge is broader: overcapacity affects both traditional industries and new, innovative private sectors. The goal is no longer simply to lift commodity prices, but to foster a virtuous cycle in a more value‑added industrial base. Cutting capacity, however, would mean closing factories, laying off workers, and accepting slower growth — outcomes that run counter to the government’s economic objectives.

Over the first nine months of the year, China has managed to strike a balance: fixed capital formation fell by 0.5% year‑on‑year without derailing overall growth. Between January and September, GDP expanded by 5.2% — a solid performance given the headwinds from the United States. Achieving 4.5% growth in Q4 would be enough to meet the annual target of 5%. This momentum should encourage policymakers to press ahead with “anti‑involution” reforms, while weak domestic demand is likely to be cushioned by more accommodative fiscal and monetary policies if needed.