30/08/2025 by Tony Redondo
Will it be France or the UK that triggers the next financial crash that sees a number of highly indebted countries economies fall like dominoes?
France’s debts are out of control. There is no space left to raise taxes any further. The political establishment can’t agree on anything other than kicking the can down the road. French Prime Ministers François Bayrou’s minority government has recalled Parliament to sit on the 8th of September for a vote of confidence after failing to pass its Budget that would have put in place some modest controls on public spending. No cuts, just a slowdown in the rate of increase. The odds are against Bayrou surviving his vote of confidence. The French Government would then fall, and President Macron will have to look for another PM or call fresh elections.
France’s budget deficit is forecast to exceed 5% of GDP this year. Economic growth has flatlined. The tax rises imposed last year have done nothing to fix the hole in the nation’s finances, while the debt-to-GDP ratio has climbed over 110% and state spending now accounts for 58% of total output. France is by no means alone in its addiction to state spending but is leading the way. It already has the third largest outstanding debt in the world.
French government bond yields have jumped to their highest level since March, and the premium investors require to hold French debt rather than German bonds widened sharply widened to their biggest gap since April. French long-term borrowing costs are at their highest level since 2011.
In the UK, leading economists are warning that Rachel Reeves’ tax-and-spend gamble is driving Britain towards a 1970s-style debt crisis and bailout from the IMF (International Monetary Fund). Prof Jagjit Chadha, who recently stepped down as the head of the highly respected NIESR (National Institute for Economic and Social Research) claimed the economy was at risk of “collapse”, saying the financial situation was “as perilous the period leading up to the IMF loan of 1976”, when Britain had to be bailed out by the global banking body. Andrew Sentance, a former member of the BoE’s (Bank of England) rate-setting MPC (Monetary Policy Committee) also said the situation was “very reminiscent of the 1970s” and added, “Rachel Reeves is on course to deliver a Healey 1976-style crisis in late 2025 or 26. Like Healey, she has massively boosted public spending, borrowing and taxes – fuelling both demand-pull and cost-push inflation. Unless policies are reversed, we are heading for an economic crash. “We’ve still got bond yields that are even higher than the US. In fact, we’re even higher than Greece when it comes to borrowing costs, which is an indictment of where the UK is at the moment, or where it’s perceived to be by the financial markets.”
The bond markets are already charging Britain a ‘moron premium’ with Britain’s long-term borrowing costs already at their highest level since 1998. There are fears the OBR (Office for Budget Responsibility) will downgrade its growth forecast for the UK, a move that would further limit Reeves’s room for manoeuvre. After the National Health Service and welfare, debt interest is now the third-largest ongoing cost for the UK government which now spends more than twice as much paying interest on its debt than on defence or education.
Rupert Harrison, a senior adviser to bond giant Pimco, said the market viewed the Government’s credibility on spending cuts as “very low” and expected higher taxes to be announced. Harrison was chief of staff to former chancellor George Osborne from 2006 to 2015 warned that borrowing costs were at risk of moving higher if there was any hint that the Chancellor would not stick to her fiscal rules.
Britain’s debt costs have been the highest among G7 economies since the Chancellor’s Spring Statement in March.
Currency Exchange Rates Update
The Pound was little changed against the Euro last week but has fallen over 5% against the single currency in 2025 to date. Seasonally, the Pound tends to underperform against the Euro in the third quarter of the year.
The Pound fell 0.2% last week but is up nearly 11% in 2025 against the US Dollar.
The US dollar index rose in August for only the second time this year to date.
This week, the key economic data releases include:
Monday UK Nationwide House Prices
EU PMI Manufacturing & Unemployment
Tuesday EU CPI Inflation
Wednesday Australia GDP
Thursday US Trade Balance
Friday UK Halifax House Prices & Retail Sales
EU GDP
US NFP Employment
What’s in the news?
UK
A YouGov poll showed 82% of Brits feel the UK is in a bad state and 60% expect it to get worse in the next year.
A report by electoral calculus shows Reform UK has 31% of the vote share with Ed Davey’s Liberal Democrat Party in second place with 20%. Labour only slightly edges the Tories to third with 17% with the Conservatives in fourth position with just 16% of the vote share.
Not so good news
Andrew Bailey, the BoE Governor has expressed concerns about the UK’s weak economic growth and declining workforce, highlighting a rise in long-term sickness and a significant drop in youth employment. Currently, 21% of Britons aged 16-64 are inactive in the labour market. This poses challenges for the UK’s inflation rate, which is the highest in the G7 at 3.8%. Mr Bailey has emphasised the need to enhance productivity.
The think tank, the CSJ (Centre for Social Justice), reported that one million people are out of work and claiming a combination of sickness, disability and housing benefits worth at least £25,000 a year, above the minimum wage. Many of these claimants are not required to look for work because they are eligible for sickness benefits worth around £5,000 a year.
It came as a separate report from BCA Research warned that Britain’s sickness crisis was leaving businesses across the country with staff shortages. The shortfall has become so great that it is driving up wages and inflation and forcing the BoE to keep interest rates higher for longer.
The latest CBI (Confederation of British Industry) survey shows business confidence in the UK’s services sector has significantly declined. Alpesh Paleja, deputy chief economist at the CBI, said the survey “painted a grim picture of the services sector.” The negative outlook has persisted for eight months among consumer services firms, while those serving other businesses reported declining activity for four months.
The BRC (British Retail Consortium) reported that food price inflation in the UK has reached 4.2%, the highest level in 18 months.
The latest job market report from Adzuna shows vacancies tumbled in July as hiring appetite weakens. Some sectors saw significant drops in vacancies. The number of healthcare roles dropped for the third consecutive month, down 8.87% year on year, while the number of hospitality roles dropped 8.43% in the same period.
From April 2026, a nationwide revaluation process will take place on business rates in England and businesses are facing an “unavoidable double hit” to their property tax payments.
Amid reports that Reeves is reportedly examining proposals for applying NI (National Insurance) to rental income in the hope of raising £2bn, property experts have warned that higher taxes on landlords’ rental incomes will have ‘severe’ unintended consequences for the rental sector and the broader housing market. Tom Bill, head of UK residential research at Knight Frank, said that while the move “won’t lose the government many votes”, it will “invariably end up hurting tenants”. Bill explained that “With landlords already selling up ahead of the Renters’ Rights Bill and tougher green regulations, another disincentive would reduce supply further and put upwards pressure on rents. Those that stay may pass on the extra costs in other ways. Governments need to fully appreciate that when you tax an activity, you get less of it”.
Savills estimate up to one million additional homes will be required to accommodate growing rental demand by 2031, particularly from young families, across England and Wales.
The OBR has expressed concern over the quality of ONS (Office for National Statistics) data could impact the Treasury’s ability to assess the economy ahead of the Budget, warning that these problems may lead to “significant uncertainty” in forecasts, risking missteps in tax and spending decisions. The ONS has delayed key data releases, including retail sales figures, due to quality concerns, while questions have been raised over its official measure of employment in the UK amid a collapse in response rates.
The Government’s Office for Value for Money, a quango tasked with saving money is forecast to have cost taxpayers £1.6m before it is closed down in October. The Treasury says the body, which was set up to assess government spending and identify inefficiencies, has been responsible for £14bn of efficiencies. The unit was criticised in January when a Treasury Select Committee report said that it risked wasting taxpayer funds, describing it as an understaffed and “poorly defined organisation.”
Employment lawyers have warned that Labour’s proposed Employment Rights Bill will impose an additional £80m annual cost on businesses, labelling the legislation “the most expensive and complex” in a generation, including banning the use of NDA’s (Non-Disclosure Agreements).
USA
The Federal Reserve is indicating a high probability of a rate cut at their 17 September meeting, with an 88% chance priced in by the markets.
In an unprecedented move, President Trump wants to remove Federal Reserve Board Governor Lisa Cook from her position. Trump says there is sufficient reason to believe Cook made “false statements” on one or more mortgage agreements. The Justice Department is investigating the matter. Cook has refused to resign. A court hearing on Friday ended without a judge ruling.
US GDP growth was upgraded to 3.3% in the second quarter of the year with a collapse in imports, down over 30%.
A federal appeals court ruled that most of President Trump’s global tariffs are illegal. Friday’s ruling is the Trump administration’s second straight loss in the make-or-break case known as V.O.S. Selections v. Trump. Trump attacked the appeals court as “highly partisan” and asserted that the Supreme Court will rule in his favour.
The EU
Eurozone confidence data suggests a cautiously optimistic outlook for third-quarter growth despite the headline index falling after the poorly negotiated trade deal with the US.
EY reported that the German autos sector has slashed jobs after a perfect storm of industry and economic challenges including US trade policy, Chinese competition and demand, and a sluggish domestic economy have been weighing on Germany’s auto sector. Over the period, Germany’s autos industry, one of the European country’s largest sectors, has seen job cuts of close to 7% of the workforce, or around 51,500 positions.
The state of Germany’s overall economy has also been a headwind for the autos sector, with the country’s annual gross domestic product declining in both 2023 and 2024. This year also appears to be off to a slow start with Europe’s largest economy recording 0.3% growth in the first quarter followed by a 0.3% decline in the second quarter.
In the Netherlands, Dutch Prime Minister Dick Schoof and his cabinet survived a no-confidence vote. Attention now shifts to campaigning for the 29 October snap elections amid deep political divisions with heated debates exposing rifts among the 15 parties in parliament.
Others
Australian consumer price inflation surged by 2.8% in the year to July, marking the fastest annual rise in a year. The RBA (Reserve Bank of Australia) cut rates by 0.25% earlier this month but this inflation surprise will complicate its next move. Markets are now leaning toward a possible rate rise in November.
New Zealand’s retail sales rose 0.5% in the second quarter, beating forecasts and suggesting the economy may be more resilient than expected. In contrast, the latest ANZ survey suggests New Zealand businesses remain under pressure, with little sign of a quick rebound. Only 1% of businesses reported stronger activity than a year ago, down from 6% last month, marking the weakest result since March. Hiring also declined.
In Other News
New data from the WHO and UNICEF showed that between 2015 and 2024, humanity recorded one of the fastest expansions of basic welfare of all time with 961 million people gaining safe drinking water, 1.2 billion gained safe sanitation, and 1.5 billion gained access to basic hygiene services, while the number of unserved fell by nearly 900 million. Coverage has risen to 74%, 58% and 80% respectively, while open defecation has dropped by 429 million people. Together, these figures represent an historic advance in human health.
Quote
Daniel Hannan, writer, journalist and politician “You cannot spend your way out of recession or borrow your way out of debt”
Tony
The most concise, thorough and bottom line analysis Thank you
Thank you, Norman.
I hope you are well.
Tony