Daily Economic Update

US: Trump announces trade agreements with Japan and Philippines, more talks with China scheduled next week, while Bessent backs Fed independence. President Trump announced reaching a trade agreement with Japan, which would see a 15% tariff rate on Japanese products along with investments worth $550bn by Japanese investors. Although not yet officially confirmed, auto imports from Japan may also be subject to similar tariff rates versus the existing sectoral levy of 25%. Previously Trump had issued a letter threatening to hit Japanese goods with 25% duties effective August 1. Japan was the US’s fifth biggest trade partner in 5M25, with total goods trades worth $97bn (4% of US total merchandise trade). Japanese equity markets cheered the developments, with many benchmark indices posting an over 3% rise in trading this morning. Trump also announced another trade agreement, with the Philippines, subjecting goods imports from the latter to 19% duties versus the 20% rate threatened earlier. The US’s bilateral goods trade with Philippines stood at $10bn in 5M25 (0.4% of US’s total trade). On a similar topic, Treasury Secretary Bessent mentioned that he would hold further trade talks with Chinese counterparts next Monday and Tuesday, but this time in Stockholm following two rounds of discussions in Geneva and London previously. The current agreement is effective until August 12. Importantly, he said that, given “trade is in a very good place with China” discussions could include other things, likely Chinese imports of sanctioned Russian and Iranian oil. Finally, Bessent also backed preserving the independence of the Fed’s conduct of monetary policy, while saying that Fed Chair Powell need not “step down right now” before the expiry of his term in May 2026, amid mounting criticism from the Trump administration for not lowering interest rates and calls to fire Powell. However, Bessant supported a review of the Fed’s non-monetary operations, including the $2.5bn in spending on renovating the bank’s buildings.

UK: June fiscal deficit widens more than forecast, adding pressure on the government for consolidation. The UK fiscal deficit in June 2025 widened more than forecast to £20.7bn versus £14.1bn in June 2024, the second-highest June deficit on record. While government revenues continued to increase compared to last year following a hike in national insurance contributions (effective April 2025), it was more than offset by a surge in interest payments on retail price index-linked government securities. Accordingly, public sector net debt to GDP rose to 96.3% in June versus 95.8% in June 2024, with public sector net financial liabilities as a percentage of GDP rising to 83.8% from 81.6% in June last year. For the first three months of the current fiscal year starting in April, public borrowing stood at £57.8bn (+£7.5bn y/y). Amid potentially lower than expected receipts over the coming period given weak economic prospects, the government may struggle to find ways to boost revenues, as it had ruled out raising most income taxes or VAT in its election manifesto. Moreover, after the recent reversal of some welfare spending cuts, planned savings on outlays have also taken a hit, exerting greater pressure on the government for fiscal consolidation.

Japan: Uncertainty and fiscal concerns rise following the election setback. Following the ruling coalition’s loss of its majority in the upper house and the expected announcement of the prime minister’s resignation by end-August, according to media reports, the Bank of Japan (BoJ) could stick to its gradual policy tightening stance, with governor Kazuo Ueda’s board expected to hold the benchmark interest rate at 0.5% at the upcoming July 31 monetary policy meeting. Officials often cite persistent inflationary pressures, especially the surge in food prices, as justification for continued normalization, though they remain alert to potential fiscal loosening, especially with the opposition bloc push for tax cuts in response to households soaring cost of living. However, prime minister Shigeru Ishiba has dismissed tax cuts as inappropriate while countering with limited cash handouts amid renewed selling of long-term bonds, pushing 30 and 40-year yields to 3.02% and 3.32%, respectively. Moreover, the yen depreciated following the election results before bouncing to JPY146.6/$ on July 22, especially after the announcement of reaching a trade deal with the US (see above). While rises in government bond yields have traditionally pointed to economic optimism, a reduction in BoJ purchases and the government's looming borrowing needs could make bonds more sensitive to fiscal policy shifts. The fragile economic recovery, rising fiscal concerns, and political fragmentation are increasing the risk of triggering a dip in equity markets, bonds, and currency.

Egypt: Qatar expected to invest $4 billion in tourism industry. The authorities are nearing an agreement with the Qatar Investment Authority for a $4 billion investment in a major tourism project in the North Coast consisting of resorts and luxury villas, according to media sources citing government officials. Currently, the process of land allocation and licensing for the project is ongoing and expected to be finalized later this year. The investment will finance the development of a total of 60k feddan (250k m2), with the state’s share of total revenue expected to reach 15% once the project is complete. A first installment of $1 bn is expected upon contract signing later this year, with the remaining outlay expected in 2026. This follows last year’s larger, $35 bn Ras El Hekma agreement with the Abu Dhabi sovereign wealth fund. Meanwhile, other Arab countries have pledged to maintain their Central Bank of Egypt deposits amounting to $18 bn, minimizing the risk of large capital outflows with the possibility of conversion to direct investment. FDI is projected to reach $15.6 bn this fiscal year (starting July 1) from $13.2bn in FY24/25), in addition to stronger portfolio investment according to a recent report by the IMF. This comes amid increased divestment efforts by the authorities as one of the conditions of the $8 billion IMF support package, with $3 billion in asset sales expected by the government in the current fiscal year, up from $600mn in the last fiscal year. The FDI, asset sales, and financing commitments from regional partners, should help to close a projected $5.8 billion funding gap (excluding expected inflows from the IMF extended fund facility) in FY25/26 (from $11.4bn last year). This is also positive for public finances, which stand to benefit from continued fiscal discipline including subsidy cuts and tax revenue growth, and a potential recovery in Suez Canal revenue, helping to meet the revised primary surplus target of 4% of GDP for FY25/26.

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