Executive Summary

Uncertainty moderated in August with several tariff actions finalized; offsetting this, persistent economic strains in France, Germany, and the United Kingdom have heightened concerns around Europe. In the United States, the Federal Reserve looks set to cut rates at its September meeting after Bureau of Labor Statistics’ revision reveals softer labor market than anticipated.

Tariffs and trade remain the focus of much economic commentary and speculation. Updated US tariff rates for over 90 economies around the world came into effect on August 7, including deals with the European Union and Japan.

The data indicates that global container trade volumes steadied in July, gradually receding from April’s year-to-date high. At the same time, supply chain stress eased in July as June port volumes stabilized from earlier peaks. Export growth diverged in June, led by a strong rebound in US, China, and emerging markets, while import demand shifted unevenly in June, with the eurozone, Brazil, and Mexico up, while India saw a contraction. Inbound spot freight rates fell in August, cooling from 2025 highs, while outbound freight rates to Shanghai eased in July after June’s sharp spike.

At a country level, the US monthly deficit fell by 16.0% to $60.2 billion in June. Exports reached $277.3 billion, $1.3 billion less than in May; imports were also down on the previous month at $337.5 billion, $12.8 billion less than in May. At the same time, the euro area’s trade surplus narrowed sharply in June, dropping from May’s €16.5 billion to €7.0 billion. Compared with a year earlier, the trade balance was down by €13.7 billion. This weaker trade performance points to challenges for the region’s competitiveness and adds pressure on overall growth. Meanwhile, Brussels moved to implement reduced US car tariffs under the new EU-US trade framework, seeking to lower duties from 27.5% to 15% and apply the change retroactively from August 1, with enabling legislation expected by the end of the month.

China’s cross-border trade recorded a year-on-year growth rate of 5.9% in July, up from the 3.9% increase seen the previous month. Exports growth rose to 7.2%, up from the 5.8% in June. Meanwhile, imports growth saw an acceleration of 4.1% from June’s 1.1%. India’s merchandise trade deficit widened to an eight-month high of $27.35 billion in July, compared with $20.7 billion in June. Imports surged on strong demand for petroleum and crude products, electronic goods, and machinery. Exports held up, in part due to frontloading ahead of new US tariffs scheduled for late August. Brazil’s August trade surplus dropped significantly in July, coming in at US $4.7 billion, according to preliminary data, down from US $7.0 billion in July. Mexico recorded a marginal trade deficit of $17 million in July, as exports increased to $56.71 billion (up from $54.00 billion in June), while imports also rose to $56.72 billion (up from $53.49 billion). Despite this, total exports rose approximately 4% year on year in July, propelled by robust gains in manufacturing that more than offset steep falls in oil and automotive exports. Finally, Russia has seen the value of its exports contract in recent months: the year-on-year decline in the second quarter reached 6%, hit by a drop in oil prices and sanctions imposed on its oil sector.

An August update to the McKinsey Global Institute’s June 25 article “ The great trade rearrangement” takes account of recent tariff updates and confirms that the original conclusions still hold. Notably, the economies most “geopolitically distant” from the United States, particularly China, still face higher tariffs. Moreover, the trade rearrangement is creating an impetus for US firms to consider shifting sourcing away from higher-tariff economies and also for higher-tariff exporters to find new markets.

Exploring how trading flows could alter if US importers seek to minimize tariffs as implemented on August 7, a new simulation finds that June’s conclusions remain valid, with Europe potentially emerging at the center of trade rearrangement, both as exporter to the United States and importer from China. In all simulations, European imports from China and exports to the United States both increase by about $150 billion to $200 billion.

Meanwhile, growth remains anemic in some economies. In the eurozone, GDP grew in the second quarter of 2025, but at a slower pace than in the first, recording 0.1% versus 0.6%. Compared with the same quarter of 2024, GDP was up 1.4%. In the UK, GDP is estimated to have risen by 0.3% in Q2 (April–June), following an increase of 0.7% in Q1, according to estimates released by the Office for National Statistics on August 14. GDP is estimated to have risen by 1.2% in Q2 2025 versus the year-ago quarter. Concerns over the economy were likely responsible for the Bank of England’s decision to cut rates by 25 basis points in August, despite rising headline inflation. All eyes are now on the Fed, with rising optimism for an interest rate cut in September. In Russia, preliminary GDP growth estimates for the second quarter of 2025 reached 1.1% year on year, slowing from 1.4% in in the first quarter.

Consumer sentiment continues to be subdued though some signs of improvement are visible. In the United States, the consumer confidence index (Conference Board) rose by 2.0 points in July to 97.2, from a revised 95.2 in June. However, in the eurozone, data highlights that, while manufacturing is beginning to recover, swathes of the broader economy continue to face headwinds, particularly in consumer-driven and interest-sensitive sectors. Among the emerging economies, consumer confidence in Brazil remained below the neutral 100 mark, with the seasonally adjusted June figure trending up at 86.7 (85.9 in June). At the same time, Brazil saw business confidence slide slightly to 91.3 (from 92.1 in June).

Nevertheless, consumption (measured by retail sales growth) remains stable. In the
US, retail and food services sales for July (adjusted for seasonal variation and holiday and trading-day differences) were $726.3 billion, up 0.5% from June’s revised $722.6 billion. In
Russia too, households remained resilient, with retail sales growing by 2% year on year in the first half of the year, supported by a tight labor market.

Inflation expectations have been broadly unchanged since July. In the US, median inflation expectations increased to 3.1% from 3.0% at the one-year-ahead horizon in July, and to 2.9% from 2.6% at the five-year-ahead horizon. Expectations remained steady at 3.0% for the three-year-ahead horizon.

On the commodities markets, gold prices remained stable amid Fed rate-cut optimism, although precious metals have trended up, in contrast to the price of copper, which has declined by around 15% since the end of July, driven by stockpiled inventories. Energy prices continued to be stable in August, with oil oscillating in the $65–70 range. Dairy and vegetable oils were the biggest drivers of July’s food price increases; however, livestock prices have also trended up.

Consumer inflation accelerated in the UK, while producer prices in the US reached their highest level this year. In contrast, emerging economies experienced a deceleration in both consumer and producer prices. In the US, the consumer price index (CPI) climbed 2.7% for the 12 months ending July, after rising 2.7% over the 12 months ending June. Core inflation rose slightly to 3.1% (annualized). By contrast, inflation held steady at 2% in the eurozone, with core inflation unchanged and services inflation easing to 3.1%.

In India, inflation dynamics have turned decisively favorable. Headline consumer price inflation eased to 1.55% in July, down 55 basis points from June 2025, marking the lowest rate since June 2017. Inflation was slightly down in Brazil, touching 5.32% in July, compared with 5.35% in July; however, it remains above the central bank’s upper target limit of 4.50%. Annual inflation in Mexico also declined in July, to 3.5%, down from 4.3% in June.

Manufacturing and services are traveling in opposite directions: while manufacturing has returned to contraction, growth in the global services sector has accelerated. Manufacturing in most economies slipped into contraction in July, although India stood out with accelerating growth. The services sector remained strong across countries, except in Brazil and Russia, where contraction has deepened.

Regional and Country Summary

US trade deficit down by 16% in June; Eurozone GDP grew 0.1% in the second quarter; Bank of England cut rates to 4% in August.

United States

US trade deficit down by 16% in June; August’s manufacturing PMI reached highest reading since May 2022; government announces 10% stake in chipmaker Intel.

June’s exports reached $277.3 billion, $1.3 billion less than in May. Imports in June were also down at $337.5 billion, $12.8 billion less than in May. The monthly deficit fell by 16.0% to $60.2 billion.

The industrial production index decreased slightly to 103.9 in July. August’s manufacturing PMI rose to 53.3 from 49.8 in July—the highest reading since May 2022. The services PMI declined slightly to 55.4 (55.7 in July).

On the housing market, the 30-year fixed-rate mortgage decreased slightly to 6.6%. Existing home sales rose by 2.0% in July. During July, housing residential starts were up at 1,428,000 (above the revised June estimate of 1,358,000), a 5.2% increase. Completions in July rose to 1,415,000, a 6.0% increase from the revised June estimate of 1,335,000.

The consumer price index (CPI) climbed 2.7% for the 12 months ending July, after rising 2.7% over the 12 months ending June. Core inflation rose slightly to 3.1% (annualized). In July, median inflation expectations increased to 3.1% from 3.0% at the one-year-ahead horizon and to 2.9% from 2.6% at the five-year-ahead horizon. Expectations remained steady at 3.0% for the three-year-ahead horizon.

July’s retail and food services sales (adjusted for seasonal variation and holiday and trading-day differences) were $726.3 billion, up 0.5% from June’s revised $722.6 billion.

The consumer confidence index (Conference Board) improved by 2.0 points in July to 97.2, from a revised 95.2 in June.

Total nonfarm payroll employment changed little in July (+73,000) and has shown little change since April. Unemployment remained at 4.2%.

In July, the S&P 500 was up 2.2%, bringing the one-year return to 14.8%. The Dow Jones gained 0.08% over the month and was up 3.7% year to date. In July, the CBOE Volatility Index averaged 20.4 (16.8 in June).

At the Jackson Hole symposium, Fed Chair Jerome Powell expressed openness to a September interest rate cut, though he cautioned that the policy would remain data driven. He highlighted labor market weakness and persistent inflation pressures rooted in tariffs. Powell also reaffirmed the Fed’s independence amid rising political pressure.

The US government acquired a passive equity stake in Intel—worth approximately 9.9%—with the purchase of 433.3 million shares worth around $8.9 billion. This was funded via previously awarded but unpaid CHIPS Act and Secure Enclave grants. The holding comes with no board or governance rights, but positions the government as Intel’s largest shareholder and signals a notable shift toward state investment in tech.

The United States has announced a sharp increase in tariffs on Indian imports, doubling duties to 50% starting August 27. The move, signed off by US President Donald Trump, is aimed at pressuring India over its continued purchase of Russian oil as Washington pushes for an end to the war in Ukraine.

Eurozone

The eurozone economy remains fragile, with slower growth, weak demand, stable inflation, and only manufacturing showing momentum.

GDP grew in the second quarter of 2025, but at a slower pace than in the first, recording 0.1% versus 0.6%. Compared with the same quarter of 2024, GDP was up 1.4%.

In August, the eurozone economy showed a clear divergence between sectors. Manufacturing emerged as a relative bright spot, with activity expanding further and signalling renewed momentum after months of weakness. This was reflected in the manufacturing purchasing managers’ index (PMI) climbing into the expansion zone to reach 50.5, supported by improving demand and a gradual easing of supply pressures. By contrast, services activity lost some steam, slipping closer to stagnation (PMI: 50.7), while construction remained firmly in contraction (PMI: 45.2), weighed down by high financing costs and subdued investment. Taken together, the data highlight that, while manufacturing is beginning to recover, swathes of the broader economy continue to face headwinds, particularly in consumer-driven and interest-sensitive sectors.

Retail sales showed modest growth, pointing to some resilience in household spending. Nevertheless, consumer confidence continued to deteriorate in August, staying well below its long-term average and highlighting the fragile outlook for domestic demand.

Inflation held steady at 2%, with core inflation unchanged and services inflation easing to 3.1%.

In June 2025, the euro area’s trade surplus narrowed sharply, dropping from €16.5 billion in May to €7.0 billion. The main drag came from chemicals, where the surplus fell to €15.1 billion (versus €24.4 billion in the previous month). Compared with a year earlier, the trade balance was down by €13.7 billion, reflecting smaller surpluses in chemicals (from €20.6 billion to €15.1 billion), machinery and vehicles (from €17.4 billion to €13.6 billion), and a shift in other manufactured products from surplus to deficit (surplus of €2.4 billion to a deficit of €0.4 billion). This weaker trade performance points to challenges for the region’s competitiveness and adds pressure on overall growth.

Brussels moved to implement reduced US car tariffs under the new EU-US trade framework, seeking to lower duties from 27.5% to 15% and apply the change retroactively from August 1, with enabling legislation expected by the end of the month.

At the same time, European leaders, led by Council President António Costa, met on August 19 to coordinate security guarantees for Ukraine and prepare a 19th sanctions package against Russia.

United Kingdom

GDP grew 0.3% in Q2; CPI inflation rose to 3.8% in July; Bank of England cut Bank Rate to 4% in August.

UK GDP is estimated to have grown by 0.3% in Q2 (April–June), following an increase of 0.7% in Q1, according to estimates released by the Office for National Statistics on August 14. GDP is estimated to have risen by 1.2% in Q2 2025 versus the year-ago quarter.

On August 7, the Bank of England’s Monetary Policy Committee (MPC) voted by a 5–4 margin to reduce the Bank Rate by 25 basis points to 4%—the fifth cut since August 2024—taking the rate to its lowest level in over two years. The MPC noted that disinflationary pressures continue to ease, especially in domestic prices and wages, but judged that upside risks to medium-term inflation have risen. Inflation is projected to peak at around 4% in September before easing back toward the 2% target, with the path for future rate cuts to be determined by how disinflation persists. Meanwhile, modest GDP growth and emerging slack in the labor market offer scope for gradual and data dependent unwinding of monetary restraint.

The consumer price index (CPI) rose to 3.8% in July, a slight increase from June’s 3.6%. The upward move was largely the result of transport, particularly air fares, partially offset by housing and household service. On a monthly basis, CPI rose by 0.1% in July 2025 (0.2% in July 2024). Core CPI rose by 3.8% in the 12 months to July 2025 (June 3.7%).

The seasonally adjusted S&P Global UK Manufacturing purchasing managers’ index (PMI) rose to a six-month high of 48.0 in July, up from 47.7 in June but below the earlier flash estimate of 48.2. The PMI has signaled contraction in each of the past ten months. Weak domestic and overseas demand, subdued client confidence, and concerns over government policy continued to weigh on output, new orders, exports, and employment.

The UK service sector slowed in July amid weak domestic and overseas demand. New business declined for the third time in four months and job cuts accelerated, although business confidence improved. Nevertheless, the services PMI signaled modest growth, albeit down from 52.8 in June at 51.8, to record a third consecutive month above the neutral 50.0 mark.

The seasonally adjusted S&P Global UK Construction PMI fell to 44.3 in July, down from 48.8 in June, signaling the steepest contraction in over five years. Activity declined across all three main subsectors, led by a renewed drop in residential building and a sharp fall in civil engineering, while commercial construction was also down. Firms reported site delays, weaker demand, and reduced public sector work as key factors behind the fall.

In July 2025, growth in average total pay was 4.6%, while real total pay rose 0.5%.
Unemployment was estimated at 4.7%. The UK economic inactivity rate (for people aged 16 to 64 years) was estimated at 21.0% in April–June, below year-ago estimates, and down in the latest quarter. The estimated number of vacancies in May–July 2025 was 718,000, a decrease of 44,000 on the quarter. Vacancies declined for the 37th consecutive quarterly period.

UK long-term borrowing costs surged in August, with 30-year gilt yields nearing 5.64%, their highest since 1998. The move threatens to shrink fiscal headroom by billions, adding pressure on Chancellor of the Exchequer Rachel Reeves ahead of the Autumn Budget.
UK business leaders have turned more pessimistic than at any time since 2016, with the Institute of Directors’ (IoD) confidence index dropping to –72. Over 80% of executives expect conditions to worsen, citing rising costs, tariffs, and looming tax increases.

China experiences moderate slowdown; India’s PMIs continue to climb; inflation and unemployment down in Brazil and Mexico.

China

In July, China’s economic activities experienced a moderate slowdown, with growth rates in industrial production, investment, and retail sales all decelerating; however, exports continued to demonstrate resilient growth momentum.

China’s industrial output growth softened to 5.7% year on year in July, compared with 6.8% in June. Looking at individual sectors, manufacturing’s output remained resilient with 6.2% growth, despite dropping from June’s 7.4% expansion. The mining sector’s output growth also slowed to 5.0%, 1.1% down from June. Meanwhile, the utility sector’s output growth rose to 3.3%, compared to 1.8% in June.

Investment activities saw a significant shift in July. Overall fixed-asset investment registered a year-on-year contraction of –5.2% in July, a visible slowdown from the 0.5% growth in June. Contractions happened across sectors: manufacturing investment growth dropped to –0.3% in July, from the 5.1% recorded in June. Infrastructure investment growth tumbled as well, ending –5.3% in July (versus 2.0% in June). Real estate investment continued to weaken with a contraction of −18.4% (–12.8% in June).

The real estate market continued to shrink in July. On the demand side, sales revenue for new residential properties decreased by −8.1% year on year, the same level as in June. On the supply side, the contraction in floor space started narrowed to −8.7% year on year in July, from –13.2% in June.

In July, new credit fell to RMB 1.1 trillion, down from RMB 4.2 trillion in June. Meanwhile, total social financing reached RMB 431.2 trillion in July, marking a 9.0% year-on-year increase, which was in line with the growth observed in June.

The overall surveyed urban unemployment rate edged up to 5.2% in July (5.0% in June). The youth unemployment rate climbed to 17.8% in July (14.5% in June), due to seasonal factors related to the graduation cycle.

Cross-border trade recorded a year-on-year growth rate of 5.9% in July, up from the 3.9% increase seen the previous month. Specifically, export growth rose to 7.2%, up from the 5.8% in June. Meanwhile, import growth saw an acceleration of 4.1% from June’s 1.1%.

On August 11, 2025, US President Donald Trump signed an executive order extending the current tariff truce with China for another 90 days, shifting the deadline to November 10. The United States would continue suspending 24 percentage points of the additional ad valorem duty rate on Chinese goods (including those from Hong Kong and Macao) for 90 days from August 12, 2025, while retaining a 10% reciprocal tariff. Similarly, China would continue suspending 24 percentage points of the additional ad valorem duty rate on US goods for the same period, while retaining a 10% tariff, while also removing or suspending certain non-tariff countermeasures against the US.

India

India’s economy continues to demonstrate resilience and balance, supported by strong domestic demand, cooling inflation, buoyant capital markets, and rising exports. Record levels of foreign exchange reserves, a stable current account deficit, and surging foreign investment flows further reinforce growing international confidence in the country’s long-term trajectory. However, persistent trade uncertainties and episodes of financial market volatility remain sources of risk.

Inflation dynamics have turned decisively favorable. Headline consumer price inflation eased to 1.55% in July, down 55 basis points from June 2025, marking the lowest rate since June 2017. Food prices registered deflation of 1.76%, the steepest since January 2019. Rural inflation declined by 1.74% and urban inflation by 1.90%, reflecting broad-based price relief. On a month-to-month basis, food inflation fell by 75 basis points, indicating an acceleration in the pace of disinflation. With inflation holding well below the Reserve Bank of India’s (RBI) 4% target, the case for additional monetary easing has strengthened, while households benefit from improved price stability.

Activity indicators point to robust momentum in the private sector. The HSBC India Manufacturing Purchasing Managers’ Index (PMI) rose to 59.8 in August 2025, from 59.1 in July, its strongest reading since January 2008, driven primarily by buoyant domestic spending. The services sector expanded even more strongly, with the PMI climbing to a survey-record 65.6 in August, up sharply from 60.5 the prior month.

By contrast, infrastructure output has softened. Growth in core industries slowed to 2.0% year on year in July, the weakest in two months. Energy-related sectors were the main drag: crude oil and natural gas production contracted by 1.3% and 3.2% respectively, coal output plunged by 12.3%, and petroleum refinery products slipped by 1.0%. Fertilizers offered a modest positive contribution at 2.0%. In contrast, cement and steel output rose strongly, by 11.7% and 12.8% respectively, and electricity generation edged up 0.5%. Even so, July’s growth was slightly below June’s revised 2.2%, signaling broad-based strain in energy-intensive sectors.

Financial markets reflected both resilience and sensitivity to global conditions. Gains were largely supported by domestic investor participation, though volatility persisted amid shifting expectations for US interest rates and tariff developments. Benchmark equity indexes ended August modestly above July levels. Sectoral performance diverged: consumer durables and pharmaceuticals outperformed in early August, while export-oriented technology stocks lagged amid global growth concerns. Toward the end of the month, however, signs of a potential US Federal Reserve rate cut spurred renewed optimism, lifting markets across sectors.

External balances weakened. India’s merchandise trade deficit widened to an eight-month high of $27.35 billion in July, compared with $20.7 billion in June. Imports surged on strong demand for petroleum and crude products, electronic goods, and machinery. Exports held up, in part due to frontloading ahead of new US tariffs scheduled for late August, but the sharp rise in imports outpaced gains, contributing to the widening deficit.

Monetary policy remained on hold. At its August meeting, the RBI’s Monetary Policy Committee (MPC) opted for a “dovish pause”, keeping the policy repo rate unchanged at 5.5%. The decision allows the central bank to assess the impact of earlier cuts and to account for heightened uncertainty stemming from US trade policy developments. Liquidity conditions are expected to stay accommodative, supported by a planned cut to the cash reserve ratio (CRR) in September.

Meanwhile, India and China’s leaders met on the sidelines of the Shanghai Cooperation Organisation (SCO) summit on August 31. PM Narendra Modi and China’s President Xi Jinping pledged to pursue partnership rather than rivalry.

Brazil

Falling inflation and improving job market provide best news for Brazil’s economy.

Inflation was slightly down, touching 5.32% in July, compared with 5.35% in July. Inflation remains above the central bank’s upper target limit of 4.50%.

The three-month moving average unemployment rate fell to 5.8% in June (from 6.2% in May), down for a second consecutive month.

On the financial markets, the average monthly real–US dollar exchange rate was BRL 5.53 per USD in July (versus BRL 5.54 in June). The Bovespa equities index fell back in July, losing 4.1% in value; however, August results up until the 25th are already indicating reinvigorated activity, registering gains of 4.2%.

Consumer confidence remained below the neutral 100 mark, with the seasonally adjusted June figure (from FGV) trending up at 86.7 (85.9 in June). Business confidence slid slightly to 91.3 (from 92.1 in June).

Brazil’s manufacturing industry is slowing: the Monthly Industrial Physical Production (PIM) Index dropped from 106.9 in May to 103.8 in June (versus the neutral 100 line taken from the 2022 average). The decline was driven by reduced factory production, which slid 3.2%; meanwhile the extractive industry was down 1.1%.

The Monthly Services Survey (PMS) revenue index climbed to 127.7 in June, from 120.8 in May (versus the neutral 100 line). This was mirrored in the volume index, which rose to 108.84 (from 102.38). The largest revenue increase was in “other services” (up 5.7% since May), followed by audiovisual services (up 5.1%). Both sectors also saw the biggest volume increases, up 5.5% and 5.5% respectively. The standout negative was the accommodation services segment, which recorded a revenue drop of 8.6% accompanied by a volume decrease of 7.4%.

On August 5, the Banco Central do Brasil’s Monetary Policy Committee (Copom) maintained the Selic rate at 15% in a unanimous decision. Copom emphasized that the interest rates scenario was partially driven by a tough international environment, especially noting the tariff hikes instigated by the US administration against Brazil. The central bank’s position is that its focus should be on domestic channels of inflation transmission from the external shock.

August’s trade balance recorded a surplus of US $4.7 billion, according to preliminary data, down from US $7.0 billion in July. The lower surplus was driven by a reduction in exports (US $22.8 billion in August, down from US $32.3 billion in July) accompanied by a drop in imports (US $18 billion in August, down from US $25.2 billion in July).

Russia

Economic activity in Russia continues to stagnate amid increasingly severe imbalances, high interest rates, falling oil prices, and despite fiscal and monetary policy support; inflation remains high; presidents Putin and Trump met in Alaska.

Preliminary GDP growth estimates for Q2 2025 reached 1.1% year on year, slowing from 1.4% in Q1. The reading landed below recent international forecasts of 1.5–1.8%. Preliminary data also confirms that sequential output returned to modest growth of 0.3%, after a 0.6% contraction in Q1, so avoiding technical recession. Households remained resilient, with retail sales growing by 2% year on year in the first half of the year, supported by a tight labor market.

International forecasters have recently cut their outlook for Russia’s GDP growth this year. The IMF now expects GDP to rise by 0.9%, with Oxford Economics suggesting 1.0%. Consensus Economics, an average of analyst forecasts, predicts 1.4% growth. The Central Bank of Russia (CBR) maintained its earlier forecast expecting GDP to grow by 1–2% this year. Consumption will still be supported by wage growth and government investment backed by military spending. However, export volumes will suffer from sanctions and weaker global demand.

Consumer inflation in July fell to 8.8% year on year, while recent forecasts assume slightly faster declines than previously expected, to around 6–7% at year-end. Despite recent disinflation there are still risk factors such as persistently high inflation expectations, wage growth, and currency volatility. Nevertheless, in response to the recent slowdown in growth and inflation, the CBR lowered its key rate by 200 basis points to 18% in July. In June, it began lowering the key rate from a historical high of 21%.

Accumulated federal budget revenues grew by just 3% year on year in the first seven months of the year, as declining oil and gas receipts, driven by lower prices, were offset by other revenue streams. Total expenses grew by 21%. As a result, the federal budget deficit widened to 2% of GDP, already above the upwardly revised whole-year target of 1.7%. The finance ministry has announced its intention to further revise the budget framework in September. However, recent developments have limited fiscal room for additional stimulus.

The value of exports has contracted in recent months: the year-on-year decline in Q2 reached 6%, hit by a drop in oil prices and sanctions imposed on the Russian oil sector. Goods imports stabilized after growth in the summer, subdued by fading demand. The Q2 value grew by 3% year on year, mainly thanks to a healthy reading in April. The outlook for foreign trade remains constrained by another EU sanctions package and US secondary sanctions on countries buying Russian oil.

The Russian and US presidents met in Alaska on August 15 to continue peace negotiations to end the war in Ukraine, but without a breakthrough.

Mexico

Inflation and unemployment declined; exports and imports rose, registering marginal trade deficit; FDI reached record high.

In July, annual inflation in Mexico declined to 3.5%, down from 4.3% in June.

On the currency front, the peso continued to appreciate against the US dollar, strengthening from MXN 19.0 = USD 1 in June to 18.7 in July and August.

The S&P Global Mexico Manufacturing PMI rose from 49.1 in July to 50.2 in August, rising above the neutral 50.0 mark for the first time in 14 months. However, the figure pointed to only a slight improvement in business conditions. The uptick was supported by a rebound in new orders, which grew at a modest pace, ending a 13-month stretch of declines.

In the labor market, total unemployment declined slightly to 2.59% in July, the lowest this year. At the same time, formal employment saw a substantial increase of 1.3 million jobs.

Mexico recorded a marginal trade deficit of $17 million in July, as exports increased to $56.71 billion (up from $54.00 billion in June), while imports also rose to $56.72 billion (up from $53.49 billion). In July 2025, Mexico’s total exports rebounded, rising approximately 4% year on year, propelled by robust gains in manufacturing that more than offset steep falls in oil and automotive exports. Meanwhile, agricultural exports also softened.

In July 2025, US President Donald Trump announced plans to impose 30% tariffs on all Mexican imports starting August 1. At the end of July, the US granted Mexico a 90-day extension to allow time for further discussions. This decision was announced following a call between President Trump and Mexico’s president Claudia Sheinbaum. In return, Mexico pledged to immediately eliminate non-tariff barriers and enter negotiations with the US within that period. The US Treasury Secretary stated that the goal is to conclude trade negotiations with Mexico no later than October 2025.

Towards the end of August, the US eliminated the “de minimis” exemption, which until then allowed low-value packages (up to $800) to be imported duty-free. This particularly affected direct e-commerce from Mexico to the US. In response to the lack of operational clarity, Mexico temporarily suspended postal and package shipments to the US while both countries work to define joint procedures.

In the second quarter of 2025, foreign direct investment in Mexico reached a record high of US $34.265 billion, a 10% annual increase. The majority came from reinvested profits (84.4%), while manufacturing received 36% of the total. The US remains the main source of investment (42.9%), with Spain standing out as the second-largest driver.

McKinsey’s Global Economics Intelligence (GEI) provides macroeconomic data and analysis of the world economy. Each monthly release includes an executive summary on global critical trends and risks, as well as focused insights on the latest national and regional developments. Detailed visualized data for the global economy, with focused reports on selected individual economies, are also provided as PDF downloads on McKinsey.com. The reports available free to email subscribers and through the McKinsey Insights App. To add a name to our subscriber list, click here. GEI is a joint project of McKinsey’s Strategy and Corporate Finance Practice and the McKinsey Global Institute.

The data and analysis in McKinsey’s Global Economics Intelligence are developed by Jeffrey Condon, a senior expert in McKinsey’s Atlanta office; Krzysztof Kwiatkowski is an expert in the Greater Boston office; and Sven Smit, a senior partner in the Amsterdam office.

The authors wish to thank Nick de Cent, as well as José Álvares, Roman Büschgens, Darien Ghersinich, Gabriel Marini, Marianthi Marouli, Tomasz Mataczynski, Frances Matamoros, Alejandro Morales, Beatriz Oliveira, Erik Rong, Vanshika Tandon, Valeria Valverde, and Sebastian Vargas for their contributions to this article.

The invasion of Ukraine continues to have deep human, as well as social and economic, impact across countries and sectors. The implications of the invasion are rapidly evolving and are inherently uncertain. As a result, this document, and the data and analysis it sets out, should be treated as a best-efforts perspective at a specific point of time, which seeks to help inform discussion and decisions taken by leaders of relevant organizations. The document does not set out economic or geopolitical forecasts and should not be treated as doing so. It also does not provide legal analysis, including but not limited to legal advice on sanctions or export control issues.