Global Economic Overview (Japan, US, China, Europe) July 1, 2025 - Risk of US Labor Market Cooling May Increase

Overview

## 1. Report Overview This global economic overview report dated July 1, 2025, by Marubeni Economic Research Institute analyzes the latest economic trends in four major regions: Japan, the United States, China, and Europe. It particularly examines in detail the challenges each region faces, including the risk of cooling in the US labor market, the continued downturn in China's housing market, the fading momentum of economic improvement in Europe, and Japan's persistently high prices. ## 2. Key Points - **Japan**: Overall CPI remains elevated at +3.5% YoY in May. Rice prices surging +101.7% YoY are a major contributing factor - **United States**: Real disposable income fell sharply by -0.7% MoM in May. Signs of cooling in the labor market with increasing continuing jobless claims - **China**: Housing market downturn continues. New home sales area down -4.6% YoY, new construction starts plummeted -17.7% YoY - **Europe**: Eurozone composite PMI in June remained flat at 50.2. Balancing increased defense spending with fiscal consolidation is a challenge ## 3. US Economic Analysis ### Income and Consumption Trends Real disposable income fell sharply by -0.7% MoM in May (vs. +0.6% in April). This was due to special factors as the increase in personal social security benefits from the previous month declined, though the upward trend in labor income itself continues. Real personal consumption expenditure also decreased by -0.3% MoM (vs. +0.1% in April), with durable goods particularly showing a reaction decline from pre-tariff rush purchases. ### Industrial Production The industrial production index in May declined by -0.2% MoM (vs. +0.1% in April). While manufacturing (+0.1%) and mining (+0.1%) rose, utilities (-2.9%) were a drag. In capacity utilization, declining trends were notable in durable goods manufacturing sectors excluding high-tech industries and automobiles/parts. ## 4. Chinese Economic Analysis ### Severe Housing Market Downturn New home sales area in May declined -4.6% YoY, with the decline progressing. The effects of housing sales support measures introduced in autumn 2024 are waning. New construction starts plunged -17.7% YoY and completions fell -20.7% YoY, both continuing sharp declines. ### Price Trends Sales prices in 70 major cities fell -0.2% MoM, marking 24 consecutive months of decline. Cities with falling prices increased to 53 (up 8 from previous month), with even the capital Beijing returning to negative territory. Only 13 cities saw increases (down 9) and 4 remained flat (up 1). ### Structural Challenges New construction starts and sales area, which were around 1.5 billion square meters before the pandemic, have drastically fallen to 800 million and 500 million square meters respectively. With both uncompleted housing and housing inventory accumulating, no exit from the housing recession is in sight. ## 5. European Economic Analysis ### Stagnant Business Sentiment The June Eurozone composite PMI flash reading remained flat at 50.2 (May: 50.2). While services PMI rose to 50.0 (May: 49.7), manufacturing PMI stayed flat at 49.4 (May: 49.4). Manufacturing had been recovering as production adjustments ran their course, but this has paused due to weak demand, US tariff policies, and Middle East instability. ### Fiscal Challenges NATO members have agreed to expand defense spending to 2% of GDP, but fiscal situations vary greatly by country. Among major countries, public debt-to-GDP ratios have risen compared to the 2010s except for Germany. Italy and France in particular exceed the EU's 3% fiscal deficit-to-GDP criterion and are subject to excessive deficit procedures requiring deficit reduction. ## 6. Japanese Economic Analysis ### Price Trends May's overall CPI remained elevated at +3.5% YoY. Main upward factors include: - Rice prices: +101.7% YoY, contributing +0.6 percentage points - Food excluding fresh items: +7.7% YoY, contributing +1.8 percentage points (prepared foods like rice balls accelerating) Meanwhile, fresh food prices turned negative YoY, and electricity costs saw slower growth despite the end of government subsidies due to base effects from last May's sharp increase in renewable energy surcharges. ### Future Outlook - Electricity/gas subsidies (for July-September usage) and gasoline subsidies will be downward factors - Rice prices have already begun falling and the positive YoY effect is expected to disappear around October - Food prices excluding rice will continue rising due to food companies' aggressive price hike stance - Price pass-through of labor costs expected to continue backed by high wage increases in the 2025 spring labor negotiations ## 7. Monetary Policy Trends ### United States With rising risks of labor market cooling, the Fed needs careful policy management. Close attention to deteriorating employment conditions is necessary, including increasing continuing jobless claims. ### Europe The ECB needs to balance between fading economic improvement momentum and the need for fiscal consolidation. While market concerns about high-debt countries have temporarily eased, risks remain for renewed doubts about fiscal sustainability due to defense spending pressure. ### Japan With price deceleration expected to remain gradual, the BOJ is expected to continue cautious policy management. The balance between upward price pressure from wage increases and downward factors from government subsidies needs monitoring. ## 8. Market Impact ### Bond Market In Europe, the yield spread between Italian and German government bonds is approaching its lowest level since the European debt crisis (2010-12), with concerns about high-debt countries temporarily easing. However, the challenge of balancing increased defense spending with fiscal consolidation poses future market instability risks. ### Foreign Exchange Market Exchange rate volatility factors are increasing due to differences in monetary policy directions and economic growth rate disparities among countries. Particular attention focuses on how US labor market developments impact currency markets. ### Stock Market Markets are cautiously assessing how regional challenges like declining US manufacturing capacity utilization, China's housing recession, and Europe's stagnant sentiment affect corporate earnings. ## 9. Risk Factors ### Geopolitical Risks - Intensified trade friction from US tariff policies - Oil price impacts from Middle East instability - European defense spending pressure against the backdrop of the Ukraine situation ### Economic Structural Risks - United States: Sharp slowdown in personal consumption due to rapid labor market cooling - China: Spillover to the financial system from further housing market deterioration - Europe: Recession from failure to balance fiscal consolidation with growth support - Japan: Excessive inflation from wage-price spiral ### Policy Risks - Economic overheating or excessive slowdown from central bank policy misjudgments - Failure to coordinate fiscal and monetary policies - Global trade contraction from cascading protectionist policies ## 10. Conclusion and Future Outlook The global economy as of July 2025 presents a complex situation where regions face different challenges while mutually influencing each other. In the US, labor market cooling risks are beginning to materialize, raising concerns about impacts on personal consumption. In China, structural adjustments in the housing market continue, creating downward pressure on the overall economy. Europe faces the conflicting challenges of defense spending increases and fiscal consolidation as economic improvement momentum fades. Japan faces the challenge of achieving a soft landing through appropriate policy management amid persistently high prices. Going forward, the global economy will require navigation in a highly uncertain environment, dealing with these region-specific challenges plus heightened geopolitical risks and protectionist policy impacts. Policy authorities in each country and region need careful and flexible responses aimed at returning to sustainable growth trajectories while balancing short-term economic trends with medium- to long-term structural reforms. Particularly noteworthy are the turning points in advanced country labor markets and progress in structural adjustments in emerging economies. These developments will be crucial factors determining the future direction of the global economy.