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Daily Economic Update
02.07.2025US: Senate narrowly passes the tax and spending bill; it now moves to the House. The Senate passed Trump’s ‘One Big Beautiful Bill’ with a 51-50 vote (after a tie breaker from Vice President Vance) that would extend existing and provide newer personal and corporate tax breaks. This would hit fiscal revenue by around $4.5 trillion over the next decade, as per estimates by the non-partisan Congressional Budget Office. The bill sees higher spending on military and immigration enforcement measures. In terms of offsets, Medicaid and food stamp spending would see greater work requirements and other adjustments, that, along with other cuts such as clean energy incentives, could help the government save around $1.2 trillion over the same period, resulting in a net additional deficit of around $3.3 trillion over 10 years. The bill will also raise the federal debt ceiling by $5 trillion, just ahead of the summer deadline when the Treasury will likely run out of special measures to keep servicing the existing federal debt. The draft fiscal document now has to be passed by the House of Representatives, which will meet today, following the amendments enacted in the Senate before it moves to the President’s desk to be signed into law. However, given some disagreement amongst GOP House lawmakers about the Senate version, some additional changes to the document are possible, and the same version then must be approved by both chambers of Congress.
US: Fed Chair Powell leaves the door open for a July cut while Trump sticks with the July 9 deadline for higher tariffs. Chair Powell, at the ECB Forum on Central Banking, in a seeming departure from his more hawkish stance previously, kept open the possibility of an interest rate cut at the FOMC July meeting, saying that “it's going to depend on how the data evolved.” He also cautioned about the unsustainable US public debt trajectory and pitched for it to be addressed “sooner rather than later.” Meanwhile, President Trump said that he is not considering delaying the July 9 deadline for higher tariffs. With just one week to go, this could be his strategy to increase pressure on key trading partners to seal some trade frameworks, especially that the US administration has recently mentioned that a flurry of deals will be signed before the deadline. It is still possible that the deadline might be extended for some countries but not for others, depending on the size of the trading relationship and how close the parties are in reaching a deal. In terms of data releases, job openings in May unexpectedly increased to a six-month high of 7.77mn from 7.4mn in April, indicating that the labor market continues to be robust despite concerns about rising continuing jobless claims lately. Finally, manufacturing activity, as per the ISM PMI survey, eased its slump, improving more than forecast to a three-month high of 49 in June from May’s 48.5 but the survey details were rather weak, with accelerating job cuts (subindex at 45) and sustained inflationary pressures (the price measure at 69.7, hovering near its three-year high). Despite Powell’s more dovish tone, amid a better labor market read and inflation worries, UST 10Y bond yields changed a little yesterday, with the market pricing of a July rate cut remaining far from certain (around 20% probability).
Eurozone: In-line June inflation supporting ECB’s pause at its July meeting. Consumer price inflation inched up to 2% y/y in June from 1.9% in May, coming in line with consensus estimates and the ECB’s target. Core inflation was steady at 2.3%, also in line with forecasts and the lowest rate in more than three years. The closely-watched services inflation gauge edged up to 3.3% y/y from 3.2% in May, but that still confirmed the broad disinflationary trend given that services inflation had stood at 4.1% y/y in June last year and averaged 3.8% in the first four months of this year. Following an aggressive eight 25 bps interest rate cuts since June of last year, which brought the policy rate down to 2%, the ECB is widely expected to pause at its July meeting, with markets expecting one additional rate cut before year end. However, uncertainty around that remains elevated, especially given still-developing trade negotiations with the US. In fact, ECB President Lagarde, in the ECB’s annual retreat in Portugal, mentioned that high uncertainty is poised to remain a key feature of the global economy, likely making inflation “more volatile and requiring the ECB to act more forcefully” to keep it around target.
UK: BoE Governor sees current monetary stance restrictive, vows to move to more neutral gradually. The Bank of England (BoE) Governor Andrew Bailey, at the ECB Forum on Central Banking, stated that the current monetary policy in the UK remains restrictive but "the level of restrictiveness will come down over time" given softening labor market conditions, while adding that the stance would go “more neutral.” Futures markets continue to price in a minimum of two interest rate cuts of 25 bps before the end of the year. He also hinted at slowing the pace of the bank’s bond sale program (QT), citing steepening of yield curve, and seeing “much greater illiquidity” at the long duration end. Currently, the BoE is trimming its balance sheet by around £100bn a year including through active sale of government bonds and would decide about the QT plan for the year through September 2026 soon. Meanwhile, UK house prices declined 0.8% m/m in June from May’s downwardly revised gain of 0.4%, the biggest monthly drop in over two years, as per Nationwide data. On an annual basis, growth softened to an 11-month low of 2.1% from 3.5% in May. The demand for residential properties in the UK has weakened recently following the change in stamp duty structures effective April, which had boosted transactions in prior months. The company noted that the outlook over the summer still remains supportive for activity given modest unemployment levels, healthy real wage growth and prospects for further policy rate cuts by the Bank of England.
Saudi Arabia: Credit growth remains strong. Bank credit growth came in at 16.3% y/y in May (7.2% YTD), easing slightly from the 16.5% y/y recorded in the previous month. Private sector credit, which comprises the bulk (92%) of total lending, continued to grow strongly (14.9% y/y) with personal loans growth of 10.2% y/y. Mortgage loans, despite easing on an annual basis, grew faster in the year to May (18%) compared to the same period last year, likely supported by multiple interest rate cuts during H224. Total deposits growth, at 9.6% y/y (5.7% YTD), continued to fall short of credit growth, while the loan-to deposit ratio stood at a series high of 111%, unchanged from the previous month, an indication of tighter liquidity within the commercial banking sector. Saudi Central Bank (SAMA) reserve assets grew by 5% YTD to SR1.7 trillion ($459 billion).
Qatar: Economic growth moderates in Q1. GDP grew 3.7% y/y in Q1 25, slowing from 6.1% y/y in the previous quarter as hydrocarbon GDP growth softened to 1% y/y from 6.2% in Q4 24. In the non-hydrocarbon sector, the slowdown was more moderate with growth easing but remaining robust at 5.3% y/y from 6.2% in the preceding quarter, lifted by strong performance in ‘wholesale & retail trade’ and ‘accommodation & food services’ but weighed down by a notable contraction in both ‘financial & insurance activities’ and ‘information & communication’. Qatar’s economic outlook remains robust with operations on the North Field East expansion starting by the middle of next year, boosting hydrocarbon output and bolstering the state’s revenues in 2026. Though for this year, we see GDP growth matching last year’s rate of 2.4%.