PESTLE & MORTAR 17 July 2025

#1

U.S. Economy Has Mixed Indicators

The U.S. economy is presenting a complex and contradictory picture, reflecting the mixed effects of President Trump’s economic policies. According to the Wall Street Journal’s latest survey of professional forecasters, expectations have modestly improved in recent months, with stronger job growth, reduced recession risk, and slightly cooler inflation compared to earlier in the year. Much of this optimism stems from Trump’s temporary pause on some of the aggressive tariffs he had threatened in the spring. Nonetheless, uncertainty remains high as the administration recently renewed threats of steep new tariffs on major trading partners starting August 1, which could still disrupt supply chains and dampen business confidence. Growth projections have edged up slightly, with economists now forecasting 1% real GDP growth in Q4 2025, better than the 0.8% expected in April, but still far below the 2%+ forecasts from early in the year. Recession risk has declined to 33%, down from 45%, but remains elevated compared to pre-spring levels. Inflation, while still above the Federal Reserve’s 2% target, has not surged as feared; core inflation hit 2.8% in May, the lowest in four years. However, economists warn that the effects of recent tariffs may not be fully reflected yet, especially as companies burn through inventories stockpiled before the duties took effect. Meanwhile, the labor market remains resilient, with unemployment dipping to 4.1% and job gains averaging 150,000 per month. Still, forecasts suggest employment growth will slow and unemployment will credibly climb to 4.5% by year-end. On top of this, Trump’s newly passed economic legislation, which includes tax cuts and some spending reductions, is expected to slightly boost GDP in the short term, but these gains are likely to be entirely offset by the administration’s crackdown on immigration, which economists warn will likely reduce future labor supply and economic output. Overall, the U.S. economy is proving more durable than anticipated, but remains vulnerable to policy volatility, especially on trade and immigration, making sustained growth far from assured.Enter some rich text here.

#2

China’s Economy Has Mixed Indicators

China’s economy is facing a complex set of challenges despite reporting stronger-than-expected second-quarter GDP growth of 5.2% year-over-year. Beneath the headline data, many Chinese workers and businesses are grappling with slowing income growth, job insecurity, and a push toward side hustles and pay cuts, which are signs of persistent economic malaise not captured in official statistics. At the same time, China’s export sector is under pressure from ongoing U.S. tariffs, leading many Chinese manufacturers to shift production to countries like Vietnam to avoid trade penalties. However, while production is moving offshore, Chinese firms remain central players in the global supply chain, retaining control of capital, technology, and management in these new facilities. The relocation is not without cost: productivity in Vietnam is lower, logistics are more complex, and Trump’s threat to impose penalties on transshipped goods adds further uncertainty. Politically, this trend undermines the U.S. goal of decoupling from China, as Chinese firms adapt to new geographies while remaining dominant exporters. Trump’s trade policy is aimed not only at limiting direct imports from China but also at discouraging indirect trade via Chinese-owned factories abroad. However, that has proven difficult to enforce. The U.S.-China trade relationship remains tense, with low mutual trust and rising geopolitical friction. Economically, China’s apparent resilience is masking deep structural issues, including weak consumer demand, declining productivity, and the long-term impact of demographic decline. The migration of supply chains out of China may protect export volumes in the short term, but it risks eroding China's manufacturing dominance over time, especially if trade partners enforce tougher rules of origin.

#3

New Tariff Threats and Windfalls

The latest U.S. budget data shows a dramatic surge in tariff collections, with June alone bringing in $27.2 billion and pushing total fiscal-year customs revenue past $100 billion for the first time in history. This figure represents a near doubling from the previous year and makes tariffs the fourth-largest source of federal revenue. The increase is largely driven by the Trump administration’s sweeping tariff regime, which includes significant duties on Chinese goods, select European imports, and now potentially South Korean products. While these tariffs are bolstering U.S. fiscal coffers and contributing to monthly budget surpluses, they are also creating inflationary pressures by raising prices on consumer goods such as electronics, furniture, and apparel. This complicates the Federal Reserve’s monetary policy, potentially delaying interest rate cuts and undermining consumer purchasing power. In response, key trade partners like the European Union and South Korea are racing to negotiate bilateral trade deals with Washington in an attempt to avoid the full impact of impending tariffs (some as high as 30%) that are set to take effect as early as August 1. The U.S. is gaining short-term leverage from these tariffs, but at the cost of rising friction with allies, the risk of retaliatory tariffs, and erosion of longstanding trade norms. The current trajectory signals the increasing weaponization of trade policy as a tool of national strategy that delivers immediate fiscal and political gains but introduces long-term uncertainty into the global economic system.

#4

Rubio’s State Department Faces Trouble

The State Department under Secretary of State Marco Rubio is undergoing a sweeping and controversial transformation that is likely to have profound consequences for U.S. foreign policy. In a move framed as a bureaucratic streamlining effort, the department issued reduction-in-force (RIF) notices to over 1,100 civil servants and 250 foreign service officers, with expectations that nearly 3,000 employees will ultimately be dismissed. Entire leadership teams, including those managing Afghan relocation efforts and refugee coordination, have been let go, raising concerns not only about institutional capacity but also about the abandonment of long-standing moral and strategic commitments. The hollowing out of American diplomacy signals a withdrawal from global engagement at a moment of heightened international instability, including conflicts in Ukraine, Gaza, and Sudan. Rubio’s dual role as Secretary of State and National Security Adviser has compounded dysfunction, forcing him to cancel key trips and weakening U.S. engagement in critical regions such as the Indo-Pacific. His recent visit to Malaysia, overshadowed by mixed messages on trade and distractions from bilateral meetings with China and Russia, failed to reassure Southeast Asian allies of U.S. commitment. These cuts, combined with weak strategic messaging, have created the perception that the U.S. is deprioritizing diplomacy, retreating from multilateral institutions like ASEAN, and replacing experienced professionals with politically motivated appointments. The result is a leaner but less capable State Department, which threatens to leave the U.S. outmaneuvered by rivals like China that continue to expand their diplomatic influence.

#5

U.S. Allowing Nvidia to Sell Chips to China

The U.S. has reversed course on export restrictions for Nvidia’s H20 AI chip, granting assurances that the company will receive licenses to resume sales to China, a major win for Nvidia and a significant shift in the geopolitical technology landscape. The decision came just days after Nvidia CEO Jensen Huang met with President Trump, arguing that allowing Nvidia to sell its chips globally would help preserve U.S. leadership in AI. The move comes despite previous Commerce Department restrictions in April that halted sales and cost Nvidia billions, reflecting a balancing act between protecting national security and maintaining economic competitiveness. Huang, who has emerged as a key player in U.S.-China tech diplomacy, also met Chinese officials in Beijing, signaling his commitment to navigating regulatory barriers in both capitals. Shares of Nvidia rose over 4% on the news, and AMD followed suit with a 5% jump, anticipating a similar easing of restrictions. Importantly, this shift allows Nvidia to regain access to one of its most lucrative markets and will drive fresh revenue growth as the company also prepares to launch a new AI chip tailored for China. The return of H20 shipments and a compliant chip architecture built on Nvidia’s advanced Blackwell platform indicate the firm’s adaptive strategy amid shifting policy goalposts. The decision also reflects a softening in the U.S.-China trade standoff following a recent truce that included mutual concessions on rare-earth minerals and tech exports. The move is being read in Beijing as a goodwill gesture, potentially easing broader bilateral tensions. However, the political risks remain high. Bipartisan concerns in Congress persist over the national security implications of AI tech reaching China, and the Commerce Department retains the authority to reimpose restrictions if relations deteriorate.

#6

China’s Military Expansion

China is rapidly expanding its military footprint across the Pacific, signaling a more assertive and provocative posture that is alarming U.S. defense planners and regional allies. Beijing has moved beyond its traditional areas of influence, sending aircraft carriers past the second island chain, conducting live-fire drills near Australia, and increasing aerial incursions into Taiwan’s air defense zone. These maneuvers are viewed by U.S. officials not just as power projection but as rehearsals for a potential invasion of Taiwan. In response, the U.S. is dispersing forces throughout the Indo-Pacific, deploying advanced missile systems in the Philippines, bolstering its military presence on Guam, and pushing allies like Japan and Australia to dramatically increase defense spending. At the center of this strategic shift is Elbridge Colby, the Pentagon’s undersecretary of defense for policy, who is leading efforts to reorient U.S. national security toward China as the primary threat. Colby has urged allies to prioritize military readiness, criticized longstanding policies of strategic ambiguity, and advocated for tough resource trade-offs, such as temporarily pausing arms deliveries to Ukraine, to ensure the U.S. can deter a conflict in Asia. While this prioritization reflects a growing consensus that the Pacific is the focal point of 21st-century geopolitics, it has sparked tension within the Trump administration and among allies wary of over-committing or undermining transatlantic and Middle Eastern stability. As China continues to flex its power, the U.S. faces the complex challenge of deterring aggression in the Pacific without overextending itself globally.

#7

Changing British Foreign Policy

French President Emmanuel Macron’s recent state visit to the United Kingdom and the upcoming visit of German Chancellor Friedrich Merz signal a quiet but deliberate reorientation of British foreign policy under Prime Minister Keir Starmer. Despite media outcry labeling the Macron summit a “surrender,” particularly from anti-European voices still emboldened by Brexit, Starmer has pressed ahead with a slow but strategic rapprochement with Europe. While public attention focused on the modest “one in, one out” migrant deal with France, the deeper significance of the summit lay in defense and security agreements, including a declaration of mutual assistance, enhanced coordination of nuclear deterrents, and joint development of military technology. A similar treaty with Germany is expected to follow, focusing on illegal migration, scientific collaboration, and youth exchanges framed to avoid triggering domestic backlash over free movement. These developments reflect a broader effort to revive the E3 security framework and prepare Europe for greater defense autonomy amid U.S. unpredictability under Trump. However, Starmer’s foreign policy reset faces significant political headwinds at home. His first year in office has drawn criticism over economic uncertainty, welfare policy reversals, and waning support from the surging far-right Reform UK party led by Nigel Farage. In this context, international cooperation offers Starmer a platform of pragmatic leadership abroad, even as he finds little political reward for it domestically. Together, Starmer, Macron, and Merz represent a centrist, pro-European axis attempting to assert strategic coherence in an increasingly volatile global landscape, with Britain quietly stepping back toward the center of European affairs.

#8

Japan Faces Increased Instability

Japan’s ruling coalition, led by Prime Minister Shigeru Ishiba’s Liberal Democratic Party (LDP) and its junior partner Komeito, is projected to lose its majority in the upper house in the upcoming July 20 election, according to recent polling. This follows the coalition’s earlier loss of its lower house majority and reflects growing public dissatisfaction over rising living costs, especially food prices, and the government’s failure to deliver promised tax relief. The decline in support has fueled momentum for opposition parties, particularly populist factions like Sanseito, that advocate for tax cuts and expanded public spending. Politically, a loss of the upper house would leave Ishiba’s government significantly weakened, hampering its ability to pass legislation and potentially triggering snap elections or internal leadership challenges. The prospect of a fragmented parliament and increased fiscal stimulus has rattled financial markets, driving Japanese government bond yields to multi-decade highs and complicating the Bank of Japan’s efforts to gradually raise interest rates. The timing is especially sensitive as Japan faces a looming trade deadline with the U.S., which threatens to impose 25% tariffs on key Japanese exports if a bilateral agreement isn’t reached by August 1. A fractured coalition would likely force Ishiba to compromise on fiscal policy and shift Japan toward a more populist, debt-financed economic approach, with far-reaching implications for domestic stability and international economic relations.

#9

Ultra-Orthodox Party Leaves Israeli Coalition

Prime Minister Benjamin Netanyahu’s governing coalition is on the verge of collapse following the resignation of United Torah Judaism (UTJ), an ultra-Orthodox party, over a contentious military conscription bill. The proposed law, prompted by a Supreme Court ruling that struck down long-standing exemptions for yeshiva students, aims to gradually integrate the ultra-Orthodox community into the Israel Defense Forces. UTJ views the legislation as a violation of religious tradition and accused the government of failing to uphold its commitments. With UTJ’s departure, Netanyahu is left with a fragile one-seat majority in the Knesset, placing his government in a highly vulnerable position. If additional defections occur from Shas, another ultra-Orthodox party, the coalition would be highly likely to fall, triggering new elections. This political crisis also constrains Netanyahu’s room to maneuver in ongoing cease-fire negotiations with Hamas, as he becomes increasingly reliant on far-right coalition partners who strongly oppose concessions in Gaza. The turmoil threatens to paralyze legislative action, erode confidence among international allies, and inject greater uncertainty into Israeli foreign policy.

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