13/12/2025 by Tony Redondo
The UK economy shrank 0.1% in October, it’s second consecutive month of decline as the economy put the brakes on amid consistent speculation about possible tax rises in Rachel Reeves’ second Autumn Budget on 26 November. The ONS (Office for National Statistics) data dealt another blow to the Chancellor’s growth agenda as new data showed production output shrank 0.5%, whilst construction contracted 0.3% and the all-important services sector, which makes up over 80% of the economy, did not grow at all. Economists were expecting growth of 0.1% in October. On an annual basis, the economy grew 1.1% in the year to October, well below the expected 1.4%. The rolling three-month measure of growth was -0.1% in October, again weaker than the expected 0% flat. The UK economy contracted by 0.1% in September after a cyber-attack on Jaguar Land Rover triggered a collapse in the manufacturing sector. The prospect of the UK economy shrinking over the last three months of the year, in a technical recession is now a distinct possibility.
Lindsay James, investment strategist at Quilter, said the fall highlights “the continuing trend of the past three months that have seen the already fragile levels of growth evaporate and completely go into reverse” and added, “Much of this can be put down to the Budget and the deterioration in consumer confidence, spending and business planning. Business and consumers were braced for tax hikes, and the endless speculation and leaks have once again put a brake on the UK economy, just as it did last year.”
UK economy contracts in 3 months to October but AI experts busy
The BoE (Bank of England) meets on Thursday under mounting pressure to provide the ailing economy a boost with another interest rate cut. The markets have priced in a 90% chance of the BoE cutting rates by 0.25% to 3.75%. Philip Shaw, chief economist at Investec, said the continued weakness in the economy will “put further pressure on the MPC to lower interest rates by a further 25 basis points at its final meeting of the year next week. The UK is not currently a place that consumers or businesses want to spend money.”
Billionaire Labour-backer John Caudwell, the founder of Phones 4u, says the ‘business unfriendly’ Budget hit growth and the Labour government “really need to change the tune of what they’re doing” to kickstart growth and appeal to businesses. Caudwell was a vocal backer of the Labour party in the 2024 election, citing the “failures” of the Conservative Party under the three prime ministers since 2019 and the “transformation” of Labour under Sir Keir Starmer. But, speaking to BBC Radio 4 on Friday, the billionaire said Rachel Reeves’ first Autumn Budget was “wealthy people unfriendly” and had driven “a lot of wealthy people out of the UK”. Caudwell also took aim at the Employment Rights Bill, which was a part of the Labour manifesto. “I guess there was always a hope that it may not transpire,” he said. “That is going to make Britain less competitive.” Despite his discontent with the government’s policies, Caudwell added: “I still support Labour because they’re in power, they’re going to stay in power, and we desperately need them to succeed, but they really need to change the tune of what they’re doing.”
Currency Exchange Rates Update
The post-Budget relief rally for the Pound came to a grinding halt this week with the Pound losing nearly 0.5% against the Euro.
Andrew Wishart, an economist at Berenberg, said, “We now expect four more interest rate cuts to take the policy rate from 4% today to 3% by July 2026, suggesting formidable headwinds with the BoE likely to be the most aggressive interest rate dove at a time other G10 central banks seem to have completed their interest rate cutting cycles. This would put notable downside pressure on UK bond yields relative to its peers, sucking the Pound lower. Unless there is a growth turnaround, 2026 could be very challenging year for the Pound.”
HSBC brokers give verdict on Bank of England rate cut chance update – The Mirror
Another factor that could add to the downward pressure on the Pound is political, specifically if Keir Starmer were to be replaced by former Deputy PM Angela Rayner according to JP Mogan analysts as the markets are likely to react negatively to any further slide to the left by the Labour government citing the decision by the Labour Together organisation, which helped run Starmer’s leadership campaign to begin to canvas members on potential leadership candidates. Polling of Labour members suggests that Rayner would be a strong contender in any contest, with one recent survey showing Starmer would lose head-to-head races against several high-profile figures, including Rayner and Burnham.
Against the US Dollar, the Pound rose by 0.36% after the US Federal Reserve cut interest rates by 0.25% for the third time in a row to a range of 3.5% to 3.75% on Wednesday to their lowest level in three years on mounting concerns over a weakening US labour market outweighed persistently high inflation.
Citi are forecasting that the dollar is set for a bullish turn in 2026.
This week, the key economic data releases include:
Monday China Industrial Production & Retail Sales
Canada CPI Inflation
Tuesday UK Unemployment & Wages
EU PMI
Germany ZEW Business Confidence
Wednesday UK CPI Inflation
Germany IFO Business Sentiment
EU CPI Inflation
Thursday UK Bank of England Interest Rate Decision
Sweden Riksbank Interest Rate Decision
Norway Norges Bank Interest Rate Decision
EU ECB Interest Rate Decision
US CPI Inflation
Friday Japan Bank of Japan Interest Rate Decision
UK Retail Sales
EU Consumer Confidence
US Consumer Confidence & Existing Home Sales
What’s in the news?
The UK’s property tax burden is the fourth heaviest in the OECD’s (Organisation for Economic Co-operation and Development) list of 38 countries and it is more than double the average across the list of advanced economies. The UK’s property taxes as a percentage of GDP came behind just Israel, South Korea and the US.
The OECD data shows that the sum raised in taxes on personal income and capital gains in the UK was equivalent to more than 10% of GDP, putting the country behind only Italy and Canada in the G7 and this before the effect of the ‘fiscal drag’ on incomes after the Chancellor announced a three-year freeze on income tax thresholds in this November’s Budget. Denmark had the highest tax burden as a share of GDP in 2024, at 45.2%, followed by France at 43.5%, ahead of the UK’s overall tax burden of 34.4% of GDP.
Tax – Cosmos Currency Exchange
Analysis by Search Acumen shows the number of UK properties owned by overseas investors has fallen dramatically since 2015. The value of property assets held by overseas companies is at an all-time high, jumping 40% in three years, but the volume of purchases has dramatically slowed with 3,171 properties registered in 2024, just over half the number registered in 2019. Jersey overtook the British Virgin Islands as the top country to hold UK wealth through overseas companies, holding £57bn worth of UK property assets or 25% of all properties registered under overseas company ownership, followed by the British Virgin Islands at 21%, Guernsey at 13% and the Isle of Man at 11%.
UK
Reform UK has become the biggest political party in the UK after an extraordinary plunge in Labour’s membership since the election. Leaked figures suggest Keir Starmer’s party has lost around 100,000 activists in the wake of his historic win with membership down to below 250,000. Reform’s website shows it has around 270,000 members. At the end of December 2019, just after Jeremy Corbyn’s disastrous election defeat, there were 532,046 Labour members.
Good news
HSBC in its latest Financing for Growth report says UK SMEs are ‘getting on with it’ as growth ambitions rise despite ongoing uncertainty. The report shows that 86% of growth-oriented businesses expect to invest significantly over the next year, with technology, productivity gains and new equipment topping the agenda. Ian Coulson, head of commercial brokerage at HSBC UK, said, “What the report really shows is that businesses aren’t waiting for perfect conditions – they’re getting on with it. Brokers are an important part of that journey, helping clients make sense of their options and find the right financial support at the right moment.”
Airbus is set to announce the rescue of 2,750 UK engineering jobs through a deal with Boeing. The agreement will see Airbus take on 1,550 roles in Belfast and 1,200 in Prestwick following Boeing’s acquisition of Spirit AeroSystems. The deal alleviates uncertainty for aerospace workers after Boeing’s $4.7bn acquisition plans. Airbus aims to expand its Belfast wing facility, while Boeing retains 2,000 staff not transferred. Airbus’s UK workforce will rise to 14,000, reinforcing the UK’s aerospace expertise.
Not so good news
The Left-leaning think tank, the IPPR (Institute for Public Policy Research) shows the cost of servicing UK debt has increased by over £7bn since the 2024 election and more than other major economy as the markets doubt the Chancellor’s ability to balance the books by bringing down borrowing and cutting spending after the government struggled to pass welfare reforms earlier this year. The report is a further blow to Ms Reeves, who has consistently blamed global factors, including Donald Trump’s trade tariffs for pushing up the cost of borrowing in the UK.
Housebuilding is at its lowest level since the GFC (Great Financial Crash) of 2008 with the exception of the pandemic according to the latest S&P and CIPS construction sector PMI (Purchasing Managers Index) data. Kelly Boorman, national head of construction at leading audit, tax and consulting firm RSM UK, says, “Housebuilding sank to levels only seen in the pandemic and financial crisis, demonstrating the frustration felt by housebuilders and lack of demand for new homes. Uncertainty remains for housebuilders around the impact of the budget, with the new mansion tax coming in 2028, and additional 2% property income tax also on the horizon. These changes will impact property portfolios for landlords, and rental prices for tenants, making it potentially harder for young people to get a foot on the first rung on the property ladder, with no further incentives offered for help to buy. The new mansion tax will hit properties valued from £2m upwards, which will stimulate the market at the higher end, as people are encouraged to downsize to below the tax threshold before the change comes in. This could also boost housebuilding volumes at the lower end of the market, although we still expect house prices to be impacted, and these are forecast to be flat until 2028.”
RICS (Royal Institution of Chartered Surveyors) reported that new home buyer inquiries hit a two-year low in November with sales and new instructions also declining amid pre-Budget uncertainty. Analysts suggest activity may pick up in early 2026, supported by potential interest rate cuts and stronger income growth, though prime markets could remain subdued.
Nielsen, a global consumer intelligence company, says that UK retailers suffered one of their weakest Black Friday performances on record this year as squeezed households cut back on non-essentials despite broader and deeper discounting.
SMMT (Society of Motor Manufacturers and Traders Ltd) reported that UK new light commercial vehicle registrations fell -22.2% in November, extending an -11.4% decline year-to-date. All major segments saw losses, with large vans down -19.7% and pick-ups falling -34.8% following fiscal changes treating double-cab models as cars. BEVs grew 25.3% to 2,909 units, achieving a 12.3% share, though still below the 16% ZEV mandate.
A review commissioned by the Government will reportedly acknowledge the harm to family farms by Rachel Reeves’s inheritance tax raid. Baroness Batters, the former president of the NFU (National Farmers’ Union), will reportedly acknowledge the impact of the policy on the profitability of farms in her independent review later this month.
USA
The FED raised its forecast for US GDP for 2026 by 0.5% to 2.3% and expects inflation to hold above its 2% target until 2028. In addition to cutting US interest rates last Wednesday, the Fed also announced it will resume buying Treasury securities, following up on an announcement at the October meeting that it would halt its balance sheet runoff this month. The move comes amid concerns about pressures in overnight funding markets.
The Dow Jones Industrial Average rose to a fresh record on Friday as investors continued to exit technology stocks and move into value areas of the market.
The Trump White House has elevated the role of fossil fuels to a cornerstone of US national security, arguing in a new strategy document that increasing domestic oil and gas production is vital to keep the country and its allies safe.
The amount of new solar capacity added in the US in the third quarter of this year increased by 49% from the previous quarter according to a new report by the Solar Energy Industry Association and Wood Mackenzie. Solar made up 58% of all new electricity-generating capacity added to the grid in the first nine months of the Trump administration, much of it in Republican states.
The EU
Next Thursday, the ECB (European Central Bank) is expected to hold EU interest rates unchanged at 2%. The ECB will also provide updated projections for growth and inflation for 2026 and 2027.
ECB President Christine Lagarde has already hinted that the ECB will likely present a more optimistic outlook for economic growth, suggesting the possibility of upward revisions.
French President Emmanuel Macron says the EU faces “a question of life or death” over its severe trade deficit with China with projections of a stronger Chinese export sector expected to lower the eurozone’s GDP by 0.5% by 2029, according to a recent Goldman Sachs estimate. Macron floated tariffs against Beijing but getting other EU countries onboard could prove difficult. Jamie Dimon, JPMorgan CEO says “Europe has a real problem”. This despite recent data showing Europe’s Industrial Rebound with German October factory orders rising to 1.5% in October, five times the level forecast by analysts and the September reading was revised up from 1.1% to 2.0%. French industrial production rose by 0.2% against a forecast decline of 0.1% and Spanish output gained 0.7%, beating the 0.5% consensus.
The Eurozone also reported the economy grew by 0.3% quarter-on-quarter in Q3, surpassing estimates of 0.2%. Employment also grew by a comfortable 0.2%, exceeding estimates of 0.1%.
In a major win for Prime Minister Sébastien Lecornu that may stave off political chaos, the French parliament approved a social security budget, albeit without addressing the country’s spiralling debt problem. The battle over French pensions has forced three prime ministerial resignations this year. President Emmanuel Macron wants to raise the retirement age to 64, the EU average, but the move is staggeringly unpopular despite France’s deficit being the worst in western Europe. Lecornu agreed to delay the reform until 2027, after the next presidential election. The prime minister, who has already resigned and been reappointed once, leads a fragile minority government, and faces another major hurdle with the state budget this month. The social security budget must still pass the upper chamber.
The Economist named Portugal as the country “Economy of the Year 2025”. A strong mix of robust GDP growth, economic stability and dynamic corporate expansion secured the top position in this year’s ranking of the world’s 36 wealthiest economies. A thriving local ecosystem, foreign investment and a highly skilled workforce also played a central role in this outstanding performance.
The Danish postal service will send Christmas cards for the last time this year as it stops letter deliveries at the end of this month after 400 years. Postvæsenet (now PostNord Danmark) was founded in December 1624, and at its peak, carried nearly 1.5 billion letters, but volumes have dropped and prices have risen as communication becomes increasingly digital. Last year just 110 million letters were sent. The service will continue to carry parcels, but letter delivery will be handled by a private company.
Others
The BoC (Bank of Canada) left interest rates unchanged at 2.25% last week following a strong domestic jobs report showing 53,600 jobs were added in November, exceeding estimates for a negative 2,500 figure. The unemployment rate fell from 7% to 6.5%. GDP blew apart expectations at 2.6% y/y on an annualised basis, but weak undercurrents were revealed as domestic private activity remained quite weak, business investment was flat, consumer spending declined, and imports fell.
The RBA (Reserve Bank of Australia) also held interest rates unchanged at 3.6% last week despite a drop in November employment, but with a better reading in the unemployment rate. The number of employed persons fell by 21,300 but the unemployment rate fell to 4.3%, beating the 4.4% forecast.
Amazon committed to investing over $35 billion in India’s cloud and artificial intelligence space by 2030 on top of the nearly $40 billion already invested in the country. In a press release, Amazon said the new funds will target AI-driven digitization, export growth and job creation, aligning with India’s national priorities to build up its local AI environment. By 2030, Amazon said the plan is expected to generate an additional 1 million direct, indirect, induced and seasonal jobs in India, quadruple exports to $80 billion and deliver AI benefits to 15 million small businesses.
China’s trade surplus in goods surpassed $1tn for the first time, highlighting a boom in the country’s exports despite a 29% drop in November in exports to the US, despite the trade truce. So far this year, China’s exports to the US have declined 18.9% year on year, while imports have dropped 13.2%. China’s factory activity shrank for an eighth month in November, an official manufacturing survey showed, with new orders staying in contraction. A private survey focused on exporters showed manufacturing activity unexpectedly fell into contraction.
China’s leaders made boosting demand at home their top economic priority in 2026, a reminder of Beijing’s domestic challenges even as its export engine roars ahead.
The head of the IMF (International Monetary Fund) this week urged Chinese authorities to address economic imbalances, adding to criticism that Beijing weakens its currency to benefit its exporters. The EU Chamber of Commerce noted recently that the renminbi had fallen to its lowest in a decade against the euro, despite trade patterns that should have helped it appreciate, while Goldman Sachs said in a note to clients that the currency was around 25% undervalued and its strengthening was among the bank’s “highest conviction views.”
Stranger than fiction
Scientists are using AI to create heat-resistant enzymes that could help plants cope with climate change. Google DeepMind’s AlphaFold can determine the 3D shape of proteins from their molecular sequence. A crucial enzyme in photosynthesis seems to degrade in heat, hurting yields in hot weather. But a similar enzyme is found in heat-resistant algae that live in volcanic springs. Researchers used AlphaFold to establish why one enzyme survived heat and the other didn’t, and created hybrid versions, one of which could survive up to 65°C (149°F). The team plans to engineer plants to produce the hybrid enzymes.
Hundreds of Porsches in Russia stopped working when a satellite-based anti-theft system collapsed unexpectedly. The issue affected every post-2013 model, and left them “bricked,” Autoblog reported with “No crank, no lights on the dash, nothing.”
Quote
Satya Nadella, CEO of Microsoft, “IQ without EQ, it’s just a waste of IQ.”
