Introduction
Inflation and economic growth were the two key themes which politicians, global economists and central bankers grappled with in September.
There is an almost unprecedented interest in economic indicators in 2025, perhaps because of the unchartered economic territories Trump has pushed the world into. Not all of these indicators are reliable predictors of the future. So we must continue to fall back on the few investment truths we can rely on regardless of the situation: the calm and patient investor is rewarded over time regardless of periods of volatility, and a well diversified, global portfolio is essential to weathering market storms.
UK
Sticky inflation has dampened expectations that there will be another interest rate cut in 2025.
The Bank of England's Monetary Policy Committee held interest rates at 4% in it's September meeting, with a vote of 7-2 in favour of holding rates. The two votes against were supportive of a 0.25% cut.
Inflation held at 3.8% in August, and is expected to creep up towards 4% in September, double the Bank of England's target of 2%. The Bank's forecasts predict a gradual return to 2% by Q2 2027.
Set against inflation is concern for the overall health of the UK economy, and markets had priced in a further 0.25% rate cut for November which now seems less likely.
Wage growth slowed in August with the Office For National Statistics showing another fall of 8,000 payrolled employees in August, a drop of 127,000 payrolls in the year to August. Unemployment rates held steady at 4.7%.
The weaker job market has also resulted in slower earnings growth. Good news for the Bank of England who are trying to control inflation, but bad news for many parts of the economy and those households struggling to cope with rising costs.
There is some hope, not least within the Bank of England's forecast, that inflation will slowly cool after September. If Chancellor Rachel Reeves wants to introduce further pressure on household incomes through tax increases in November's budget, an economic environment of rising inflation, slow earnings growth and interest rate uncertainty is a terrible platform for delivering that message. After yet more political turmoil for Labour, and a Cabinet reshuffle, Reeves will seen to be vulnerable and the next cabinet member at risk of losing her job.
United States
The US economy is showing signs of cooling growth. EY are predicting GDP growth of 1.7% for 2025, 1.6% for 2026 and 1.4% for 2027.
The reasons for this are a combination of factors. Tariffs will have to be absorbed by businesses, which will dampen profits, or by consumers, leading to inflation. Both are negative for the economy. They expect the labour market to continue to slow, and inflation to tick up again, a similar situation to where the UK is now. There is also greater uncertainty around Fed policy, with their rate setting committee increasingly divided. There is some positive news. For now consumers are continuing to spend, with retail sales up month-on-month in August. Whether this continues into next year is the subject of much speculation for the reasons highlighted above.
The US government shut down, the first since 2018 which was the longest in history at 35 days, is another product of political division. It comes from a deadlock in the Senate related to spending on President Trump's Big Beautiful Act. Democrats have used their position to demand two specific healthcare protections for US citizens. Firstly, they want to ensure that the current subsidies for health insurance for low-income individuals do not expire. Secondly, they want to reverse Trump's cuts to Medicaid.
Republicans were unable to pass a Bill required to fund government without Democrat support as they had only 53 of the 60 votes required to pass it. Democrats have used this to force negotiations through a shut down.
Predictably, each side is blaming the other. Democrats clearly believe their demands will be viewed positively by the public. Republicans will hope the cost to taxpayers and reduced services will be more important to voters.
Analysts are expecting over 800,000 people, 40% of the federal workforce, to be put on unpaid leave as a result of the shutdown. Whilst the economy may suffer as a result of lower spending, markets seem relatively unphased to date as this will be seen as a short term blip. That may change if no progress is made over the forthcoming days and weeks. Trump has threatened workers with mass dismissals.
One person who remains in a job is Fed Governor Lisa Cook. The US Supreme Court has ruled that she can stay in situ until January when it will hear her case, following President Trump's attempt to dismiss her in August over as yet unproven allegations of mortgage fraud. She will vote on interest rates at least two more times before then.
Europe
The European Central Bank (ECB) released updated macroeconomic projections in September which showed real growth in the Eurozone to finish at 1.2% in 2025, dropping to 1% in 2026 before rising to 1.3% in 2027. This is a slightly improved forecast based on better H1 2025 data than expected. The ECB does not believe this improved data is entirely down to a front loading of trading activity prior to the imposition of tariffs but acknowledged the instability trade tariffs brought and predicted stagnation for Q3, before a return to growth in Q4.
The Eurozone does have inflation reasonably under control, more so than most. Whilst inflation has crept up to 2.2%, it is broadly in line with the 2% target and may drop below 2% next year. As a result the ECB kept interest rates unchanged for now.
Manufacturing appears to be slowing in the Eurozone, with the Purchasing Managers' Index showing a contraction to 49.8 in September, down from 50.7 in September. Export orders, in particular, were down.
The ECB, like the Fed and the Bank of England, are in a delicate position. They all have one eye on inflation and the other on slowing economic growth. A collective pause in further cuts in September was probably the most sensible decision for all, but it won't stop speculation about what will happen later in the year.
France have yet another Prime Minister who will now try and produce a compromise, deficit reduction budget to appease all parties.
Far East
China's manufacturing activity contracted for the sixth successive month in September. Whilst the official PMI moved to 49.8 from 49.4 in August, it is yet to creep into expansion territory which is above 0.5%. Domestic demand has proven insufficient to prop up orders whilst tariff uncertainties continue to dampen exports.
Stephen Innes of SPI Asset Management commented that factories were continuing to ship goods but price competition was driving down margins. “Factories are moving more goods, but they’re being forced to do it at thinner margins, like street vendors selling more bowls of noodles at half price just to keep the crowd coming.” he said.
Chinese policymakers announced $70bn of finance to support investment projects in an attempt to bolster its slowing economy. It is likely to be used as seed capital for projects including artificial intelligence, infrastructure, transportation and logistics.
There is some concern that this latest stimulus shows a lack of confidence from Beijing in their ability to hit their 5% growth target.
Core inflation, a persistent issue this year for Japan, held at 2.5% in Tokyo in September. The Bank of Japan meet again at the end of October with speculation rife that another 0.25% rate hike could happen then or in January. The Bank of Japan made its first increase in rates for years in January, lifting rates to 0.5%.
Emerging Markets
Some emerging market economies such as Kenya, Sri Lanka, Panama and Colombia are trying to cut costs by moving away from from the dollar for their borrowing, and towards currencies such as the Chinese renminbi and Swiss franc.
This is a reaction to the increasing costs of debt globally, and coincides with a vision espoused by China, India and Russia of a new economic order which would reduce reliance on the US dollar.
India's troubles continue as foreign investors withdrew a further $2.7bn from Indian equities in September, putting India on course for a record amount of foreign withdrawals in 2025, with $17.6 billion lost from January to September. Tariffs have hurt India, as has the imposition of a $100,000 fee for each new H-1B work visa which has hit India's offshore tech industry hard, as well as the US businesses who use it. Some lacklustre corporate results have compounded the problem.
Argentina was boosted by the promise of financial support from the US following a troubling period of significant foreign exchange pressure. The support includes the ongoing negotiation of a $20 billion swap line with Argentina’s central bank and the potential purchase of secondary or primary government debt.
Ecuador, another emerging market with strong links to the US, announced its plans to rewrite and modernise Ecuador’s constitution through a series of referendum votes. The was one of President Daniel Noboa’s re-election pledges along with a market-friendly, but protest-inducing, policy to remove fuel subsidies.
Conclusion
September was a month where central bankers took the stage and most announced no change to interest rates.
Central banks now walk a tightrope between controlling inflation and promoting economic growth, which has been made all the more difficult by the swirling winds of Trump's tariffs and geopolitical unrest.
Political embarrassment and unrest continues to beseech European governments, notably France and the UK, which makes tough financial decisions all the more difficult as they head towards budget announcements.
And finally...
Your brain processes negative words faster than positive words.
This is called the “negativity bias”, and it’s why criticism can sting more deeply and linger longer than praise.
From an evolutionary perspective, it helped humans survive by paying closer attention to potential dangers.
Sources:
https://moneyweek.com/economy/live/uk-inflation-cpi-august-report
https://global.morningstar.com/en-gb/economy/will-bank-england-cut-uk-interest-rates-again-2025
https://www.ey.com/en_us/insights/strategy/macroeconomics/us-economic-outlook
https://www.ecb.europa.eu/press/projections/html/ecb.projections202509_ecbstaff~c0da697d54.en.html
https://apnews.com/article/china-manufacturing-economy-pmi-tariffs-ff446efcd48e45125c854185aae0212a
https://www.gramercy.com/2025/09/em-weekly-september-27-2025/