News of the week summary - 31/08/2025

Canada’s economy contracts sharply as tariffs bite

Canada’s economy shrank far more than expected in the second quarter, highlighting the vulnerability of a country so heavily tied to trade with the US. GDP fell at an annualized pace of 1.6%, compared with economists’ expectations of a more modest 0.6% contraction. This marks the second consecutive quarterly decline, after a 2% drop in the first quarter, pointing to an economy slipping into recessionary territory.

The main culprit was a steep fall in exports, down 7.5% in the quarter, largely due to US tariffs on Canadian goods. Shipments of cars and light trucks, a core part of Canada’s manufacturing base, fell almost 25%. Since the US is by far Canada’s largest trading partner, protectionist measures there ripple quickly across the Canadian economy. Meanwhile, imports from the US also fell sharply, reflecting weaker cross-border activity overall. Business investment slowed, showing how uncertainty over trade policy discourages companies from spending.

There was one bright spot: consumer spending proved more resilient than expected, helping cushion the downturn. Households continued to spend, a reminder that domestic demand can offset some of the external drag, though it is unlikely to carry the economy indefinitely if trade frictions persist.

Politically, Prime Minister Mark Carney has tried to de-escalate tensions by scrapping Canada’s retaliatory tariffs on US goods. His broader agenda is to reduce the country’s dependence on its southern neighbor by diversifying trade ties.

Financial markets are already anticipating that the Bank of Canada will respond with interest rate cuts. Lowering rates makes borrowing cheaper for households and businesses, which can stimulate domestic demand. Investors now see more than a 50% chance of a cut at the central bank’s September meeting, and consider at least one cut by year-end a certainty.

Smaller nations forge a new trade group

A coalition of small and medium-sized economies, led by Singapore and the United Arab Emirates, is preparing to launch a new trade grouping aimed at promoting openness and transparency in global commerce. The initiative, provisionally called FIT-P, is being developed by countries from Asia, Latin America, Africa and Europe, with potential members including Morocco, Rwanda, Malaysia, Norway, and several Latin American states. The official unveiling is expected later this year, with a larger in-person gathering planned for 2026.

The group’s purpose is to create a rules-based framework for cooperation at a time when the global trading system is under strain. In recent years, the United States has shifted away from multilateral trade rules under the World Trade Organization (WTO), opting instead for bilateral “mini-deals” with partners like the EU, UK, and Japan. These ad-hoc agreements, focused largely on narrowing US trade deficits, have disrupted supply chains and undermined the WTO principle of most-favoured nation treatment, which requires countries to treat all trade partners equally.

By contrast, FIT-P seeks to reinforce the idea that trade should be governed by clear, transparent rules rather than political bargaining. One practical area of focus will be digital trade, especially the mutual recognition of electronic documents and e-signatures. While seemingly technical, such measures are critical for efficiency, since many countries still require paper documentation for customs and shipping processes. Streamlining these practices would lower costs and speed up cross-border trade.

The initiative reflects a broader movement among smaller economies, who have less political and economic weights to negotiate trade deals in their own terms, to protect the stability of the global system. The EU and the 12-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) have also announced plans to deepen cooperation, seeing themselves as custodians of rules-based trade in an era of fragmentation. 

For now, FIT-P is expected to remain a loose coalition, allowing countries to experiment with common standards in emerging areas like the digital economy without the slow pace of formal WTO negotiations. However, if successful, it could evolve into a more ambitious forum, giving smaller states greater influence in shaping the global trading architecture.

US economy maintains strong momentum

Fresh data show the US economy performed better in the second quarter than previously thought, easing fears of a sharper slowdown. The Bureau of Economic Analysis revised GDP growth upward to an annualized 3.3%, compared with the initial 3.0% estimate. The key driver was stronger consumer spending and business investment, particularly in areas tied to intellectual property and technology, where the boom in artificial intelligence is spurring activity.

Economists often look beyond headline GDP and focus on real final sales to domestic purchasers, a measure of how much households and businesses are actually spending once trade and inventories are stripped out. This figure, seen as a cleaner gauge of underlying demand, was revised up to 1.9% from 1.2%. Consumers were spending more than initially estimated, especially on healthcare and pharmaceuticals, while businesses committed more capital to equipment, structures, and intangible assets.

The revision indicates that momentum in the economy is firmer than the July data had suggested. Still, growth across the first half of the year remains slower compared with previous years, reflecting the drag of earlier tariffs and a moderation in household consumption after a period of strength.

For the Federal Reserve, the numbers provide only a partial reprieve. The central bank is under pressure to cut interest rates, both from signs of cooling in the labor market and from political pressure at the White House. President Donald Trump has been pushing aggressively for easier monetary policy and has even clashed directly with Fed officials, escalating tensions around the institution’s independence.

While the upward revision points to resilience in parts of the economy, analysts argue it does not fundamentally change the outlook: underlying demand outside of technology-driven investment remains subdued. As a result, markets expect the Fed to move ahead with a rate cut in September. Lower rates would reduce borrowing costs for households and firms, supporting credit and spending at a time when risks of slowdown remain present.

Bayrou bets premiership on austerity gamble

French Prime Minister François Bayrou has thrown down a political gauntlet, calling a surprise confidence vote on September 8 to secure backing for his plan to rein in the country’s ballooning public deficit. The move puts his own premiership at stake: if lawmakers reject his programme of tax increases and spending cuts, his government will fall.

Bayrou has argued that decisive action is needed to restore France’s credibility with investors and address what he calls the “curse of indebtedness.” His plan, announced last month, includes €44 billion in measures for 2026, such as scrapping two national holidays, freezing pensions and welfare benefits for a year, and imposing a new “solidarity contribution” on wealthy households. He insists these steps are “urgent and indispensable” to repair the country’s degraded finances.

The gamble is risky for the PM. Bayrou’s centrist alliance lacks an outright majority in parliament, meaning he will need support from other parties to survive. Opposition is already mounting: Marine Le Pen’s far-right Rassemblement National has vowed to vote against the government, calling instead for fresh elections, and the Socialist Party leader Olivier Faure has also said he would vote against the government. Left-wing parties have condemned the plan as an austerity budget that disproportionately burdens workers, pensioners, and the poor.

Financial markets are watching closely. French borrowing costs have already climbed to levels on par with Italy’s, reflecting investor concerns over the country’s fiscal path. A failed vote could trigger renewed market volatility, as political instability combines with doubts about France’s willingness to deliver on deficit reduction.

Renewable energy industry fragilized by policy shifts

Ørsted, once hailed as the global champion of offshore wind, saw its shares collapse to a record low after the US abruptly halted its nearly completed $1.5 billion Revolution Wind project. The Bureau of Ocean Energy Management’s stop-work order, citing “national security concerns”, sent Ørsted’s stock down 16% in a single day, compounding a collapse of almost 90% since its 2021 peak.
This comes as Ørsted is preparing a $9.4 billion rights issue to shore up its balance sheet and fund projects like Sunrise Wind, another massive US development. Investors now fear that regulatory uncertainty in Washington could derail the fundraising and even force the company to reconsider its US ambitions altogether.

The case underscores the precarious economics of clean energy investment. Offshore wind projects require enormous upfront capital, financed long before revenues begin to flow. Rising global interest rates have already squeezed project returns, making financing harder. Now, political risk is compounding the challenge: a single decree can erase years of investment planning. The Trump administration previously froze a Norwegian Equinor wind farm before reversing course, costing the oil major $800 million. With Ørsted lacking Norway’s diplomatic leverage, the suspension may drag on longer.