Government bonds have  been a poor investment in the last five years. $100 invested in a global bond index in January 2020 would be worth $95 today. Invested in UK gilts, it would be worth just $67. Factor in an increase in US and UK price levels of over 20% during this time and real returns on bonds are much worse. The same pattern holds for European government bonds.

It wasn’t always so. Between 2000 and 2020 government bonds offered good returns, easily beating inflation and, in the case of the UK and the euro area, outperforming equities. US bonds outperformed equities between 2000 and 2016. Thereafter returns on US equities roared powered by the tech boom.

Bond prices move inversely with inflation and central bank interest rates. The steady downtrend in inflation and rates in the first two decades of this century sent bond prices soaring and was a boon for bond investors.

The high inflation of the last five years has reversed that process, forcing central banks to raise interest rates to levels that have not been seen in more than 16 years. No one expects a return to the sub 1.0% level of interest rates that prevailed for over ten years, between the financial crisis and the pandemic. 

Bonds have done badly in the last few years because markets think interest rates will need to run higher to control inflation. Investors have also become more nervous about rising levels of government indebtedness.

This is not really about the risk of governments defaulting.  Governments, such as the US or UK which print their own currency, can always create more money to pay creditors. The greater real risk is that governments reduce the real value of bonds by running higher inflation. A subtler approach would be to use regulation and taxes to force the private sector to hold more government bonds or to reduce the return on bonds.

The borrowing numbers are not attractive. Even at a time when the West is growing many governments are running high levels of borrowing. Worryingly, much of this debt is being used to fund current costs, such as benefits and public sector wages, rather than investment. Governments are not households, but a rough analogy is that of a consumer using a credit card to finance everyday spending.

Borrowing to finance public investment, such as infrastructure, can raise growth rates and pay for itself. The same cannot be said of current spending.  High levels of borrowing and rising debt risk a doom loop, with debt servicing costs eating up a rising portion of tax revenues, forcing the government to raise taxes to fund interest payments. In turn, heavier taxes weigh on growth and tax revenues, renewing the cycle.

It is easy to identify such risks and imbalances –  and impossible to predict when, or if, they will turn into a full-blown crisis. In markets, as in life, timing is everything.

In 2010 Bill Gross, founder of Pimco, the world’s largest bond fund manager, memorably warned that UK government bonds were, “resting on a bed of nitro-glycerine”. Gross argued that heavy government borrowing and the possibility of sterling devaluation, “present high risks for bond investors”. 

The logic was impeccable. Yet notwithstanding weak UK growth, a sharp fall in the pound after the Brexit referendum and high levels of government debt, UK bonds did pretty well over the ensuing ten years.

The final word goes to Ray Dalio, founder of the investment firm Bridgewater. He is willing and prepared to make predictions. His latest book, How Countries Go Broke, argues that the countries of the rich world are “in the late stages of their Big Debt Cycles” which, if “not controlled in some way, the probability of an unwanted major restructuring or monetization of debt assets… is very high – something like 65 per cent over the next five years”.

But if we stick to the current path worries about debt sustainability are almost certain to mount.

AI has driven the US stock market to new highs. Now it’s driving the US economy. In the first half of this year investment in IT and data centres accounted for all of the growth in the US economy. Tech investment accounts for just 6.1% of total US GDP yet between January and June this small sector kept America growing.

Just four companies, Google, Microsoft, Amazon and Meta, account for the lion’s share of this capital spending. They are leaving the rest of the world behind. Stanford University estimates that in 2024 US private investment in AI was 11 times Chinese levels and 5 times European levels.

Today’s surge in AI-related stocks and investment has drawn comparisons with earlier technology-driven booms. The railways, the telephone, electric lighting and power, electronics – each successive technology has driven equity valuations and investment. The last major tech boom was in the 1990s when capital flooded into computing, networks and software, and tech stocks soared. 

That set the modern standard for tech booms, one which, in some respects, AI is exceeding. IT capex accounts for a larger share of US GDP today than at the height of the dotcom boom. Tech valuations are higher. Meanwhile tech shares are even more dominant in equity indices. The Magnificent Seven tech stocks account for a third of the US S&P 500 index today, more than twice the share accounted for by tech behemoths including Lucent, Cisco and Dell in the late 1990s.

The dotcom boom turned to bust in March 2000, with the NASDAQ index of US tech stocks losing almost 80% of its value in the ensuing two and a half years. Investors were burned and companies failed. But the boom created new infrastructure and business models that brought lasting benefits. By the eve of the financial crisis, in 2007, the change wrought by the tech boom of the 1990s were widely thought to have raised productivity and growth rates.  

AI companies are hoping for similarly transformative effects today. While share prices and investment among AI providers have soared, the test is whether AI can raise productivity for the rest of the economy. A widely cited MIT survey of 300 companies released last month found that 95% of AI pilot projects fail. The report said that “just 5 per cent of integrated AI pilots are extracting millions in value, while the vast majority remain stuck with no measurable [profit and loss] impact”. The Economist suggests that data security concerns, shortages of technical expertise and poorly organised data make it harder for businesses to extract value from AI.

This could be due to lags. History shows it often takes time to fully harness the benefits of new technologies. It took more than 50 years from Faraday’s pioneering experiments to the early commercial exploitation of electricity in the 1880s. In 1987 the Nobel laureate Robert Solow famously said that “you can see the computer age everywhere but in the productivity statistics”. It was not until later, in the 1990s and early 2000s, that the productivity statistics caught up.

A less benign explanation is that the promise of AI has been over-hyped. The Economist notes that not all tech booms lead to transformational change, pointing out that, “much of the capex by Japanese electronics firms in the 1980s ultimately served no useful function”.  

You see AI in the stock market and in US GDP data. Now it needs to prove it can move the productivity statistics too.

With the return to the office well underway this week’s Briefing examines economic developments over the summer.

The good news is that activity has held up in the face of sweeping US tariffs and the world has so far largely avoided a retaliatory cycle of tit-for-tat tariffs. Despite the average tariff on US imports of goods shooting up from 2.4% at the start of the year to 18.6%, the IMF nudged up its forecast for global growth in July to 3.0%, only marginally below last year’s 3.3% rate.

This doesn’t mean that the world has shrugged off the effects of tariffs. The impact of tariffs on growth and inflation takes many months to feed through the system. Five months on from Donald Trump’s ‘liberation day’ announcement, we still don’t have a full picture of US tariff rates by country and product. The next key date is 10 November when a pause in the application of the highest US tariffs on China ends. The jury is still out on how America’s tilt towards protectionism will affect the global economy in coming years. 

What is clear is that tariffs have hit prospects for US growth harder than for most other countries. Economists slashed their forecasts for US growth since January and expect the economy to grow by 1.6% this year, just over half last year’s rate and the slowest pace of growth since the pandemic.

Hopes about the transformative effects of AI have ridden to the rescue, buoying sentiment and boosting US equities. That has fed through to a surge in investment in AI and data centres which has buoyed US growth. Were it not for tech – and a strong performance from the healthcare and real estate sectors – US activity would be faltering.

Two areas of concern are lacklustre levels of consumer confidence and a rapidly weakening jobs market. US inflation is drifting higher, partly as a result of the imposition of tariffs, adding to the squeeze. Barring a sharp pickup in the August inflation data on Thursday, we expect the Federal Reserve to cut interest rates when it meets next week.

What of China? The world’s second-largest economy saw a boost to demand from stockpiling ahead of the application of US tariffs. While trade with the US has fallen sharply trade with other countries continues to grow. It is a measure of the resilience of China’s economy that the IMF has raised its forecast for GDP growth this year from 4.0% in April to 4.8% in July, similar to last year’s 5.0% rate.

Momentum in the euro area is mildly positive. GDP forecasts for this year have been revised up since the spring, high-frequency data points to a gentle increase in activity and the ifo survey of German business confidence – one of Europe’s most important economic indicators – has risen steadily through this year.

The most obvious sign of increased confidence in Europe can be seen in stock markets. Euro area equities are up 27% so far this year while the UK is up 14%, both stronger than the US (11%). Higher spending on infrastructure and defence in Germany and an increased focus on growth-boosting reforms across the continent have helped boost sentiment. Expectations for euro area corporate earnings, too, have risen 13% since the start of the year. European equities trade at lower earnings multiples than in the US, making them attractive to investors concerned about exposure to the US technology sector and broader volatility in the US economy and the dollar.

The UK’s had a good year so far with the economy growing by 1.1% in the first half, making it the fastest-growing economy in the G7. One-off factors such as tariff-related stockpiling and the end of the stamp duty holiday have flattered the GDP numbers and we expect the pace of UK growth to slacken in the second half of the year.

The UK is an outlier in another, less desirable area, with inflation rising to 3.8% in July, higher than any other G7 economy. This has created a headache for the Bank of England, which is weighing the risk of above-target inflation against a weakening jobs market. Unemployment, at 4.7%, is at the highest level in over four years while HMRC data show that the number of payrolled jobs has been on a downward trend since last autumn.

The Bank has cut the UK base rate from a peak of 5.25% to 4.0%. Financial markets are pricing only one further rate cut in the spring of next year and an approximately even chance of one further final cut later in 2026.

Higher inflation has contributed to an upward drift in the yield, or interest rate, on UK government bonds, a process that has been exacerbated by weakened demand for long-dated gilts from defined benefit pension schemes. Last week the yield on 30-year gilts reached a 27-year high. Ten-year borrowing costs are higher than elsewhere in the G7.

This is adding to the difficulties facing UK chancellor Rachel Reeves, who is widely predicted to face a shortfall in tax revenues if she wishes to meet both her current spending plans and fiscal rules. One estimate from the National Institute of Economic and Social Research put the shortfall at £50bn if the chancellor wants to maintain the current level of fiscal headroom. The Autumn Budget will take place on 26 November and it seems inevitable that speculation over tax rises will continue until then, with potentially harmful effects on consumer and business sentiment.

The UK is far from alone in facing difficulties over its budget. French prime minister Francois Bayrou looks at risk of losing a confidence vote today as he seeks to find €44bn in spending cuts, including, among  other things, scrapping two public holidays.

In a warning shot to the public and his coalition partners Germany’s chancellor Friedrich Merz said last month that “the welfare state that we have today can no longer be financed with what we produce in the economy”.

Japan, Italy and Canada have also seen their borrowing costs rise this year. A notable exception is the world’s largest and most liquid debt market, that for US Treasuries where ten-year bond yields have slightly declined since the start of the year.

As well as Mr Trump’s tariffs announcements was the passage of his budget bill. It includes $4.1tn in tax cuts over the next ten years, but with only limited spending cuts, is set to add $3.3tn to federal deficits.

Mr Trump has continued to criticise Fed chairman Jerome Powell and last month attempted to fire Fed governor Lisa Cook. This has raised concerns that the independence of the US central bank, seen as a key safeguard against political interference and inflation, may be at risk.

Against a backdrop of growing worries about government debt and higher inflation investors have sought out supposed safe-haven assets. The dollar price of gold hit a fresh high just last week and has risen by 35% this year. Bitcoin also hit a record high last month and is up 20% since the start of the year. The US dollar has been a casualty of recent developments and has fallen by about 9% this year.

The world economy has managed to avoid some of the negative outcomes that seemed quite likely earlier in the year. But we are not out of the woods. The full impact of tariffs is still to be felt and US growth, like the US stock market, is heavily dependent on tech.  Concerns around government indebtedness and geopolitical risk are here to stay. The tectonic plates of public opinion are shifting in Europe, with Reform UK 11 points ahead in polls in the UK, Rassemblement National 6 points ahead in France and Alternative für Deutschland 1 point behind the CDU in Germany.

Please join me for our ‘Back to School’ webinar on Wednesday, 10 September, at 13:00 BST, as I examine prospects for the UK and global economies. Register for this 60-minute webinar at: https://deloitte.zoom.us/webinar/register/WN_W4wF3S8kT9iscpGQbGo8ig

Which has been the fastest-growing country in the group of seven major industrialised economies (G7) this year?

Surprisingly, it is the UK. Its economy grew by 1.1% in the first half of 2025, almost double the pace of the US, and outstripping all other G7 member countries. Germany, the poorest performer, saw no growth at all.

In opposition, Keir Starmer said his aim was to make the UK the fastest-growing economy in the G7. In the first half of this year, Mr Starmer’s done it. We don’t expect it to last.

UK outperformance is partly a function of the sharp slowdown in US and Canadian growth caused by tariffs. The Canadian economy grew by just 0.1% in the first half of this year, little better than Germany. US growth was stronger, but way below the rates of the last three years.

By contrast US tariffs may actually have supported UK activity. A surge in exports to the US and strong business and financial services exports gave a significant boost to first-quarter growth in the UK. Despite the announcement of major increases in US tariffs in early April – followed, swiftly, by a 90-day delay in their application to western economies – trade delivered a lesser, though still positive, uplift to UK activity in the second quarter.

The end of the previous government’s stamp duty holiday in April provided another, one-off boost with a surge in housing transactions lifting consumer spending. More generally good wage growth ensured that consumer expenditure made a sizeable contribution to first half growth. Higher public expenditure, especially in health and defence, also bolstered growth.

None of this looks like a recipe for sustained UK outperformance. This is partly because growth has been accompanied by a re-emergence of inflation, with the 12-month rate rising from 1.7% last September to 3.8% in July. Along with the mantle of fastest-growing economy, the UK has run the highest inflation rate in the G7 economy this year.

Coupled with a weakening jobs market this bout of inflation is likely to blunt consumer spending and could even slow the pace of Bank of England rate cuts. The UK cannot count on trade to take up the slack. A 10% tariff on UK exports to the US, along with a softening of global demand, is likely to weigh on exports in coming quarters.  

Ahead lies the budget, due in November or December. This is likely to be a consequential event. The National Institute of Economic and Social Research estimates that the government will miss its key fiscal targets by £41.2bn by the end of the Parliament. If this were to prove correct, the government would need to tighten fiscal policy in the budget, through tax increases or spending cuts, and on a scale even greater than last October’s tax rises. 

Stellar UK growth in the first half of this year overstates underlying strength of the economy. The boost from ‘one-offs’ like the ending of the stamp duty holiday will fade, while the drag from inflation, rising unemployment and US tariffs will increasingly weigh on activity. 

This points to a return to much lower rates of growth in the second half of the year. We don’t expect activity to grind to a halt, as it did in the latter part of 2024. It looks more like a return to low growth, punctuated by occasional upswings, which have characterised the last three years.  True exceptionalism will have to wait.

Oil is trading at close to its lowest price since 2021 at $67 a barrel, down from a peak of $130/b in 2022. The US Energy Information Administration expects prices to fall further to $51/b next year. This is despite heightened tensions in the Middle East, and the continued threat of disruption to oil supply in the region. Today’s subdued oil prices are in marked contrast to the 1970s when conflict in the Middle East led to a quadrupling of oil prices, triggering a global surge in inflation and recessions in the West. 

Why are oil prices so low today?

The outbreak of hostilities between Israel and Iran in June prompted fears that Iran might attempt to disrupt traffic in the Strait of Hormuz and led to a spike in oil prices. Prices fell back following the ceasefire between Israel and Iran on 24 June.

Supply and demand fundamentals also point to lower prices. US tariffs have dimmed prospects for global growth and demand growth in China, the world’s second-largest consumer of oil, remains subdued. Meanwhile oil supply is rising.  OPEC+ has been reversing cuts to production introduced in 2022 in an attempt to bolster prices. Analysts expect a glut of oil to hit the market towards the end of the year.

Five longer-term shifts have also helped reduce the vulnerability of western economies to the disruption of energy supplies from the Middle East.  

First, OPEC’s hold over the oil market has weakened. Its market share has fallen from 50% in the 1970s to around 30% today as supply has surged elsewhere, particularly in the US. Fracking has enabled the US to more than double its oil output in the last 20 years. It is now the world’s leading oil producer, accounting for one-fifth of global output.

Second, the creation of strategic petroleum reserves since the 1970s has provided a buffer against oil shocks. Members of the International Energy Agency are required to ensure oil stock levels equivalent to no less than 90 days of net imports and to be ready to collectively respond to severe supply disruptions. The UK, for instance, currently has stocks equivalent to about four months of net oil imports.

Third, economic activity has become less energy intensive. Vehicles, appliances and industrial processes are more productive, generating more output for a given level of energy input. Despite a shift towards larger, heavier cars the mpg (miles per gallon) of the average US car has doubled over the last 50 years. In countries with stringent regulations electricity consumption of many household appliances has halved in the last two decades.

Fourth, the composition of economic activity in the West has moved from energy-intensive manufacturing towards services. Even in the US, with its cheap and abundant energy, manufacturing’s share of GDP has fallen from 20% to under 10% today.

Finally, oil’s share of global energy has declined from an average of 42% in the 1970s to 30% last year. Gas, solar, wind, nuclear and coal have all increased their share in the mix.  The contribution of solar and wind is relatively small, consisting of a combined 6% of global energy supply, but is growing at a breakneck rate. Solar output has risen by an average of 25% each year since 2018, doubling every three years. Energy output from wind is increasing by 12% a year. By contrast average growth in energy from oil is less than 1% a year.

In the UK solar power output so far this year has exceeded the total for 2024 due to sunny weather and the rapid rollout of panels. Plans for battery storage have surged and planning consents for new renewable capacity have reached record levels.

In the 1970s it was widely thought that the world was likely to run out of oil, causing energy shortages and driving up prices. The so-called peak oil theory did not anticipate new extraction techniques, such as fracking. Nor could it foresee the emergence of the US as the world’s leading oil producer or the reduced role of OPEC and Middle East oil producers in global energy supply.

Hydrocarbons, including oil, are still critically important for global growth. But the fact that the oil price remains subdued in the face of geopolitical instability speaks to a shift in the global energy landscape. It has been made possible by gains in energy efficiency,  new technologies and the exploitation of new sources of supply. This adaptability bodes well for the transition to renewables.

We have been pondering the forces at work in the UK housing market. Here are six developments that we think warrant attention.

First, house prices have held up in the face of rising interest rates. The Bank of England raised rates from 0.1% in late 2021 to a peak of 5.25% in 2023, the highest since 2008. But rather than falling, as was widely expected, house prices have risen by 10% since late 2021. (This has not been enough to keep up with inflation, which rose 21% over this period, but it’s a stronger performance than was seen in the wake of previous aggressive interest rate raising cycles.) Why have house prices held up? Most households have fixed-rate mortgages which, unlike the variable-rate deals that were the norm until the 2000s, delay and spread the impact of rising interest rates on mortgage payments. More stringent regulation of mortgage lending that was put in place after the financial crisis means that borrowers are better placed to cope with higher mortgage rates. Consumers have also drawn down on savings built up during the pandemic, enabling them to offset some of the cost of higher mortgage rates. Most importantly, unemployment has remained low and wage growth has proved stronger than expected.

Second, house prices in London and the south have underperformed the rest of the UK in the last couple of years. House prices in the South East, South West and London have fallen by 1%-2% since early 2023 while prices in Northern Ireland, Scotland, Yorkshire and the Humber, the North West and North East have risen by 6%-14%. This reverses the trend of outperformance by the south that had been in place since 2010. Higher interest rates have hit southern households which tend to have larger mortgages relative to their incomes. This has squeezed housing activity and prices most in areas with the highest house prices.

Third, the pandemic ‘race for space’ that led buyers to opt for larger properties seems to be unwinding. The FT reports that nearly 20% of the homes on the market so far this year were purchased in 2021 and 2022, well above the 12% share that homes owned for three and or four years normally account for. Lucian Cook, Savills’ director of residential research, says that return to the office mandates and the realities of long commutes mean that moving further from work has become a more daunting prospect.

Fourth, more people own their homes outright, but fewer have mortgages. Most of the large cohort of households that bought property in the 1980s and 1990s have paid off their mortgages, lifting the proportion of the adult population who are outright homeowners from 25% in 2000 to almost a third today. Meanwhile the inflow of people into home ownership has slowed. High house prices and tougher criteria for mortgage lending mean that the proportion of adults with a mortgage fell from 36% in 2000 to 24% in 2023. As a result more people are renting, and over half of those aged 19-29 live with their parents.

Fifth, mortgages are getting longer. 25-year mortgages were once the norm. Today half of new borrowers take on a mortgage with a term of 30 years or more, up from just 12% in 2005. New mortgages with terms of 40 years or more, which were almost unknown at the turn of the century, now account for just under 10% of new mortgage lending.

Sixth, mortgage rates are at their lowest level for nearly three years. The average two-year mortgage rate fell below 5.0% for the first time since September 2022 last week, having been close to 7.0% in 2023. The Bank of England has cut interest rates from 5.25% to 4.0% in the last year and mortgage rates have drifted lower in response. This is good news for new buyers. However, just as fixed-rate mortgages delay the transmission of rising interest rates to mortgage payments, so they slow the pass through of interest rate cuts to existing mortgage holders. The Bank estimates that due to lags in mortgage refinancing, reflecting the length of fixed-rate deals, many borrowers will see their mortgage rates rise when they refinance. Thus, despite interest rate cuts, the average mortgage rate paid by UK households is set to rise, not fall, over the next 12 months.

PS: Last week’s briefing concluded that tariffs are yet to fully feed through to US businesses and consumers, with a more complete picture likely to emerge in the coming months. In the meantime, three additional points warrant consideration.

First, president Trump’s executive order to extend the tariff truce with China for another 90 days has averted a return to tit-for-tat tariffs, which previously saw US levies of up to 145% on Chinese goods. While the news caused global stock markets to rally last week, the extension leaves the vexed question of US-China trade relations unsettled.

Second, the pharmaceuticals industry faces significant uncertainty about US tariffs. Pharmaceuticals are currently exempt from US import tariffs pending an investigation into the sector, which Mr Trump has hinted could result in tariff rates on pharma products reaching as high as 250%. Higher rates on pharmaceuticals would increase the average US tariff for a number of European nations where pharmaceuticals make up a large share of exports to the US. For Ireland, Denmark and Switzerland, pharma accounts for 40%-50% of exports to the US.

Third, as part of efforts to win over the US administration many countries and companies have pledged to step up purchases of US products or investment into the US. We’d be cautious in interpreting some of the numbers that have emerged. The newly signed US-EU trade agreement, for instance, projects €750 billion in EU purchases of US energy products and €600 billion in investment by 2028. Details of how the EU will triple energy purchases are unclear while the €600 billion investment is based on the private sector’s future investment intentions, as opposed to publicly funded, and therefore state-controlled, investment.

First the good news. US tariffs are settling at lower levels than had seemed likely in early April. Negotiations with trading partners, including the EU, Japan and the UK, have resulted in the average US tariff on goods imports dropping from the 28% rate president Donald Trump announced on 2 April to 18.6% today.

The bad news is that this is a sizeable shock to the global trading system, with far higher tariff rates than economists had expected at the start of the year. US tariffs have risen sevenfold since January to the highest level since the 1930s.

Tariffs tend to raise inflation, squeeze consumer incomes and depress growth. Yet the US has defied the direst economic predictions. Inflation is under control, the economy is growing, the equity market is booming and federal revenues from tariffs have surged.

Could the US be winning on tariffs? This week’s briefing assesses the evidence. 

Tariffs have not caused a spike in inflation. At 2.7% in June, inflation was below levels seen over most of the last year. Forecasts for US inflation next year haven’t changed much since January – not what one might have expected given how far US tariffs have risen.

Prospects for US growth have certainly weakened since April, with economists paring back their forecasts for GDP growth. But talk of recession, which was widespread in spring, has dried up, and in the last couple of months economists have nudged up their US growth forecasts. The general expectation is that US growth will outpace every other G7 economy this year and next.

Investors have flocked into US stocks since Mr Trump announced a 90-day pause in tariffs on 9 April. US equities have outperformed other major markets, and are up 26%, with the S&P 500 hitting an all-time high.

US government revenues from tariffs have surged, fulfilling what Mr Trump sees as one of the main aims of the policy. The Budget Lab at Yale, an academic think tank, estimates that higher tariffs will raise $2.1tn between 2025 and 2034, enough to finance about 60% of the cost of the administration’s tax cutting ‘One Big Beautiful Bill’ which passed into law last month.

Retaliation against US tariffs has been limited and the world has not descended into a trade war. Several major trading partners have accepted US tariffs, some grudgingly. German chancellor Friedrich Merz said the US-EU trade deal would "substantially damage" his nation's finances, while French prime minister Francois Bayrou said it was tantamount to "submission".

Some trading partners have also agreed to increase investment in the US and their purchases of US products. The EU has undertaken to buy $750bn worth of energy products from the US over the next three years, up from a current rate of $75bn a year, and to invest $600bn including in US defence equipment. Saudi Arabia, the UAE and Qatar have pledged significant new investments.

An array of companies – including Apple, Meta, Softbank and the world’s largest semiconductor manufacturer TSMC – have announced new investments in the US in recent months. The Trump administration sees this as furthering its aim of bringing manufacturing back to the US.

Yet it would be premature to declare that tariffs have been a success for the US economy.

Although tariff rates have risen, their full effect has yet to be felt. Decisions by companies on margins and stock levels have significantly softened the initial impact of tariffs on the US economy.

Goldman Sachs estimates that US businesses have absorbed around three-fifths of the extra cost duties imposed so far. Foreign suppliers are also bearing some of the load. Given the chopping and changes in tariff policy since 2 April, with rate rises, cuts and pauses, businesses may have been hoping for a reprieve and, therefore, prepared to absorb some of the cost. For US companies the prospect of lower business taxes, courtesy of the ‘One Big Beautiful Bill’, has probably helped. In any case squeezing margins is no free lunch for the economy since they weigh on corporate spending, investment and risk appetite. 

The other mitigating factor is the role of stocks, or inventories. US companies stepped up imports and built up stocks ahead of Mr Trump’s ‘liberation day’ announcement. Those tariff-free goods have been feeding into the market and have cushioned the impact of tariffs on consumers.

Stockpiling, the 90-day pause in the application of tariffs and a squeeze on corporate margins mean that the actual tariff rate paid by US consumers has lagged well behind the headline, average rate, which now stands at 18.6%. Tariff-free stocks will run out and there are limits to how far margins can be squeezed. In the coming months, the effect of higher tariffs is likely to become increasingly apparent to US consumers and businesses and in the inflation numbers. Tariffs are already showing up in the price of some items including car parts and furniture. Economists expect headline inflation to drift up from 2.7% in June to 3.4% by December.

US activity may not have collapsed, but prospects have weakened since April’s tariff announcement. The US is likely to grow at about half last year’s rate in 2025. The jobs market is cooling, and US activity is distinctly lopsided. Deloitte’s chief economist in the US, Ira Kalish, points out that in the first half of 2025 technology investment, mostly related to AI, accounted for 59% of US growth. Enthusiasm about AI has also powered US equities higher since April’s low, with the big tech stocks far outpacing the rest of the market.

The effect of hiking tariffs to 18.6% is yet to fully feed through to US businesses and consumers. A more complete picture will emerge in the coming months. But it’s hard to see why the effect of such large tariff increases would deviate from the past pattern of increasing prices, reducing consumer choice and weakening growth.

With the summer holidays upon us, this week’s briefing provides a reading list of articles – and one podcast – designed to offer a distraction from the rigours of travel, leisure or, indeed, of continuing work. These articles are free, although some websites may have restrictions on how many articles can be read without charge. 

The proliferation of remakes, sequels and franchises in film, television and theatre has sparked criticism of a lack of originality in modern entertainment. Noah Smith's blog post explores this apparent stagnation in American pop culture, attributing it to technological shifts, creative constraints and a decline in avant-garde innovation. 

https://www.noahpinion.blog/p/why-has-american-pop-culture-stagnated 

Tariffs, rearmament, a cash-strapped welfare state and calls for new taxes on wealth may sound familiar but equally could describe Britain in the early part of the 20th century. This Works in Progress essay describes how the Liberal government of the day failed in its ambition to introduce a land-value tax and, the author contends, left a legacy of overreliance on other taxes and ineffective local government. 

https://worksinprogress.co/issue/the-failure-of-the-land-value-tax 

A smaller global population appears to be the obvious solution to the challenges of climate change. Author and researcher Hannah Ritchie refutes this idea, demonstrating that even drastic restrictions on having children would not turn the tide on carbon reduction.

https://www.sustainabilitybynumbers.com/p/population-growth-decline-climate 

This account of the closure of an ethylene cracking plant on Teesside shows how industrial leadership is won – and lost. Ed Conway describes how the British chemicals industry pioneered innovations that were the envy of the world. That advantage has slipped away as foreign companies have caught up, regulation has added to costs and the supply of cheap, plentiful energy from the North Sea energy has wound down. 

https://edconway.substack.com/p/a-dying-industry-dies-a-bit-more 

The jet airline was one of the great innovations of the 20th century. This article from Construction Physics traces the jet engine's origins in the 1930s, charting subsequent industrial advancements and exploring the engineering challenges that underpin this multibillion-dollar industry. 

https://www.construction-physics.com/p/why-its-so-hard-to-build-a-jet-engine 

The emergence of AI-powered chatbots in late 2022 sparked great excitement but the limitations of using models trained to imitate behaviours in their large training datasets quickly became apparent. More recently, as this article from Timothy B Lee explains, developers have been using learning by doing or ‘reinforcement’ learning to create ‘agents’ that can think step by step, reflect and respond to novel situations. As the capabilities of these AI models continue to increase, so too does the potential for economic gains and disruption. 

https://www.understandingai.org/p/reinforcement-learning-explained 

Globalisation has come under increasing pressure since the financial crisis. This research piece from our colleagues in Germany examines how the unwinding of financial integration and a decline in multilateral cooperation have weakened global economic linkages. It concludes by offering advice on how businesses can navigate increasingly fractured and contested global systems. (Downloading this report requires registration.) 

https://www.deloitte.com/de/de/issues/efficiency-resiliency/geoeconomic-dynamics-index-globalization.html 

Electricity grids balance consumer demand with power generation. The intermittent nature of wind and solar energy means that batteries have become a key tool in this matching task. Following our recent Monday Briefing on the UK energy sector, this article by Construction Physics discusses the growing role of batteries in the US grid and explores how batteries are helping to improve grid stability and reliability. 

https://www.construction-physics.com/p/batteries-are-making-the-electrical 

The UK’s recent Strategic Defence Review described Russia as “an immediate and pressing threat”. The Wargame, a five-part podcast from Tortoise Media and Sky News, pits a team of former British politicians and military leaders against a simulated Russian attack on the UK. The podcast explores vulnerabilities and underinvestment in the UK’s defence capabilities, examines the extent of dependence on our allies and offers a stark conclusion on the UK’s preparedness. The series is available on major podcast platforms. 

Spotify - https://open.spotify.com/show/4lHtW6x1D6R0E1QmGLkBK1 

Apple Podcasts - https://podcasts.apple.com/ai/podcast/the-wargame/id1547225334 

YouTube - https://www.youtube.com/watch?v=9LEbjMAkU4I

UK electricity prices are among the highest for developed economies. The UK’s reliance on gas to generate electricity meant prices surged following Russia’s invasion of Ukraine. Despite falling back from the 2022 peak, electricity prices are currently more than 50% higher than before the invasion. High energy prices have squeezed households and created huge challenges for energy-intensive businesses.

In 2023, the UK had the highest industrial electricity prices among 24 members of the International Energy Agency (IEA), a group of developed economies. UK firms paid around 50% more for electricity than German and French competitors, and four times as much as companies in the US. India and China are not members of the IEA, but data for 2024 shows UK firms pay around three times as much for electricity as those in India and China.

Raine Newton-Smith, head of the Confederation of British Industry, said recently that 40% of UK firms were holding back on investment due to high energy bills. Earlier this year Jim Ratcliffe, owner of petrochemicals group Ineos, said energy prices were killing the UK’s chemical industry.

Energy-intensive industries, mainly operating in international markets, include paper products, petrochemicals, metals and inorganic products such as cement, ceramics and glass. In the UK, the combined output of these sectors has fallen by one-third since 2021 and is now at its lowest level since data started to be collected in 1990. It’s not just the UK. The European Central Bank reports that euro area manufacturers are increasingly relying on imports, rather than domestic production, for energy-intensive intermediate goods.

US electricity prices are low partly because of America’s abundant domestic supply of cheap gas. The same cannot be said for France or Germany, which, like the UK, import fossil fuels. The UK’s unusually heavy dependence on gas helps explain why UK industry and consumers pay more for electricity than those in France and Germany.

In 2024, gas accounted for 30% of UK electricity generation, 16% in Germany and just 3% in France. Germany has a diversified mix of energy generation, with more than two-thirds coming from coal, solar and wind. France generates almost 70% of its electricity from nuclear.

EU members produce on average almost 50% more electricity than the UK on a per capita basis. Sweden and Finland are the leaders, with the lowest prices among the EU and by far the highest per capita electricity generation.  These countries combine renewables and nuclear to generate around four times as much electricity per person as the UK.

The UK’s reliance on gas means it is often expensive gas that sets the price for all electricity due to Britain’s system of marginal pricing. The final unit of supply needed to meet demand sets the price for all electricity sold. So even if 99% of demand is met with cheaper low-carbon energy, the gas plant that is required for the last 1% will set the price. In 2021 gas power stations accounted for 43% of UK electricity output but set the system price 97% of the time. In comparison, gas sets the marginal price for electricity in the EU 36% of the time. In France, with its huge nuclear capacity, gas sets the price only 7% of the time.

Policies designed to encourage decarbonisation have also added to electricity prices – though this effect is dwarfed by the impact of higher gas prices. The renewables obligations, the feed-in tariffs and the climate change levy collectively account for about 10% of industrial users’ electricity bills. Fewer exemptions are available from these levies than for comparable schemes in Germany, France and the Netherlands.

In the UK, all electricity-related costs are included in the customer bill. In other countries some components — mostly policy — are paid through general taxation. This applies both to domestic and industrial energy prices.

Renewables accounted for just over half of all UK electricity production last year, up from 2.5% in 2000. At the same time, the cost of renewable energy technology, such as solar panels, has fallen precipitously. So if the UK technology is getting cheaper and the UK is producing more green electricity, why aren’t bills lower?

A number of factors are at work. First, consumers and industry are still paying for renewables that came online several years ago when costs were higher. Under the contracts for difference system, operating since 2014, each vintage of contract guarantees energy suppliers a ‘strike price’ for the next 15 years; earlier strike prices, set up to nine years ago, at a time when costs and risks were greater, were higher than more recent ones. Second, land, labour and capital are major costs for renewable producers, and, unlike green technology, they’ve risen in price. Third, and most obviously, solar and wind are subject to the vagaries of the weather and are frequently offline. Renewables need backup capacity, storage, transmission and system balancing, the costs of which are added to bills.

The government recently set out measures to reduce costs for some industrial users of electricity. Next year the government plans to reduce electricity network charges for industrial businesses and in 2027 it will exempt about 7,000 energy-intensive businesses from some green levies.

Such measures are palliatives, not a cure since they shift the incidence of higher electricity costs to other energy consumers or to taxpayers. Gas prices could, of course, fall further and, in the meantime, the technology for renewables and battery storage is getting cheaper. Other costs, however, continue to rise while a huge programme of investment in Britain’s energy system lies ahead. Renewables offer the ultimate prospect of cheap, secure energy. Getting there will take time and a lot of capital.

The first half of this year has been good for equities. Global equity markets have risen by 9.5% following gains of 15% in 2024 and almost 21% in 2023. This year’s upward progression has been far from smooth.

Equities hit the buffers in April with most major indices falling sharply on the announcement of US tariffs on 2 April. The US market fell 18% from its February peak, the sharpest decline since the pandemic. Technology, financial, oil and gas stocks saw the biggest declines on concerns that tariffs would hit US growth. Other equity markets also sold off sharply, though the US suffered one of the largest declines.

Since then, equities have bounced back on the US decision to leave time for negotiation and postpone the introduction of many tariffs until 1 August. Renewed enthusiasm for equities comes despite the fact that, on current announcements, the average US tariff on imports of goods is eight times higher than at the start of the year and at the highest level since the early 1900s.

In recent weeks president Donald Trump has proposed a 50% tariff on imports of copper and a 200% tariff on pharmaceutical products. Markets appear to have shrugged off the news, with the S&P 500 index trading near record highs and up 25% from April’s low. Investors seem to be betting that tariffs may not reach the levels threatened by Washington or that they will not have a major impact.

In the US, the ‘magnificent seven’ major technology stocks, now account for 27% of the US equity market, up from just 5% in 2013. The performance of these behemoths, from Apple to Tesla, has an outsize impact on the performance of the US market. The magnificent seven sold off in early April but have since risen 39%. Since the start of the year, they have risen by 5%.

The fortunes of these tech firms have diverged. Nvidia, Microsoft and Meta have risen 20% to 30% on a tide of optimism about AI. Amazon and Alphabet are broadly flat since the start of year while shares in Apple and Tesla are down by nearly 20%. The latter have both said that tariffs will significantly raise their costs.

In May Apple CEO Tim Cook said that then prevailing tariffs would cost the business $900m. Tesla’s share price has suffered from the impact of tariffs and CEO Elon Musk’s feud with President Trump.

Retail, and in particular consumer discretionary stocks, have been among the poorest performing US sectors.  Exercise bike maker Peloton has fallen in value by a quarter, while premium fitness retailer Lululemon is down 39%. US firms face a weaker consumption outlook as confidence has softened since the start of the year. Lululemon manufactures most of its products in Vietnam, Cambodia, Sri Lanka and Indonesia, countries that are threatened with high US tariffs.

The US has been the star equity market of recent years, with gains far eclipsing those in most of the rest of the world. That pattern has gone into reverse this year as investors have started to question the notion of US exceptionalism. So far this year the US market is up 7%. Euro area stocks have risen 26%, Chinese stocks 25% and the UK 11%.

Banks have performed strongly across Europe. Expectations for the sector were low at the start of the year but it has delivered strong earnings, share buybacks and high dividends. Euro area bank stocks rose by over 50% in the first half of this year, with UK banks up 27%.

Defence stocks have performed strongly in the wake of rising international tensions and NATO’s commitment to spend 3.5% of GDP on defence. Shares in Germany’s largest defence contractor, Rheinmetall, have almost tripled in value this year.

Returns on government bonds have been poor this year. Yields on government bonds, especially long-dated bonds, have tracked upwards on investor concerns about inflation and levels of government borrowing. (Rising bond yields mean lower bond prices.) The tax cuts in Mr Trump’s “big, beautiful bill” will add significantly to US debt levels which are forecast to rise from 100% of GDP to 211% by 2055. In March Germany changed its constitution to allow for a significant increase in borrowing to finance higher spending on defence and infrastructure. As in the US, the long-term path of public borrowing in Germany has shifted up.

2025 has not been a good year for the US dollar that has come under pressure as investors weigh the impact of US tariffs, sharply higher public borrowing and White House criticism of the Federal Reserve. Against a trade-weighted basket of foreign currencies the dollar has fallen 11% so far this year.

The oil price spiked during the conflict between Israel and Iran in June on fears Tehran might disrupt oil production and shipping in the region. That spike was short-lived, and oil is trading well below levels at the start of the year. Following the ceasefire between Israel and Iran the market switched back to the fundamentals of softer global demand and rising supply as OPEC+ raises oil production. 

Uncertainty has been good for gold, which has seen its price rise 28% this year. Investors turn to gold when there are concerns about the economic outlook, or market volatility, particularly when other ‘safe-haven assets’, such as government bonds, are out of favour. Bitcoin, another supposed hedge against risk, has continued the ascent that started in 2023 and has risen 25% this year.  

Investors seem to be counting on a benign outcome, in which US tariffs and growing geopolitical tensions have little impact on equity valuations. That sits uncomfortably with the IMF’s recent observation that amid volatility in equity, bond and currency markets, the risk of financial instability has “increased significantly”. For now, equity markets are shrugging off such risks.