Introduction
With the US mid-term elections imminent, and parts of Europe rioting on the streets, the UK looked a relatively peaceful place for John Healey to deliver his first budget.
However, the promise to maintain Rachel Reeves fiscal rules and the need to appease global bond markets means that reality has bitten. The more adventurous ideas that Andy Burnham has floated still some way off converting into meaningful action.
UK
The new Chancellor delivered his first Autumn Statement into the headwinds of war in Ukraine, conflict in the Middle East, inflation and energy price volatility. At an IMF/World Bank meeting mid-October, Healey vowed to stay the course and stick to Rachel Reeves’ fiscal rules. He delivered a budget consisting of a large number of small changes, and avoided tackling spending cuts, especially to to welfare, which have been pushed into the new year.
The government's stability rule requires it to balance the current budget, meaning day-to-day spending against revenue, by 2029/30. This has rarely been achieved in the past 25 years. The latest OBR projection of headroom at £15bn by 2029/30 is probably sufficient to avoid immediate panic but it doesn’t leave much room for maneuver. The Chancellor announced that he expects it to rise back to £22bn in 2030/31.
The OBR growth projections were mixed. It expects Growth Domestic Product (GDP) to expand by 1.2% this year, an improvement on its March outlook. However next year it forecasts just 1% growth. That's a significant downgrade from earlier expectations of 1.6%. The outlook looks better from 2028 onwards with the remaining years' forecasts upgraded from previous estimates and the average GDP growth rate from 2026 to 2030 remains unchanged at 1.5%.
The OBR also increased its forecasts for inflation to 3.1% this year and 3.4% in 2027. In March, inflation had been expected to be 2.3% in 2026, and then fall to the Bank of England’s target of 2% thereafter.
Those projections anticipate a difficult 12 months ahead followed by a gradually improving economic outlook as global political stability returns and the energy crisis abates. That assumption has been flawed before.
More promising was the news that the OBR forecasts that by 2030-31 borrowing as a share of GDP will be 1.6% versus 1.9% 12 months ago, and debt as a share of GDP will be 95% versus 96% 12 months ago.
There were two notable changes to tax reliefs in the budget.
The first was another 2% increase in tax on income from savings and property from April 2027. This is on top of the same increase announced by Rachel Reeves last year. From 2027 to 2028, the savings and property basic rate will be 24%, the higher rate will be 44%, and the additional rate will be 49%. This has attracted vitriol from landlords and cash savers. The reversal of the decision to reduce Cash ISA allowances will soften the blow for cash savers a little, as it will stay at £20,000.
The second was a cut to the threshold for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) in Capital Gains Tax (CGT) from £1m to £500,000. Whilst the Chancellor claimed that three quarters of claimants would be unaffected by this, it will be a significant cut for some owners looking to exit.
The offset to this is a new ‘Founders’ Relief’, which will apply to founders and early stage investors in UK companies. The relief will apply a 10% rate of CGT to qualifying disposals of shares, up to a lifetime limit of £10 million of gains per individual on qualifying disposals made on or after 6 April 2027. The tax relief available is significant, but exactly who will qualify and how will be a major source of controversy as the proposed qualifying rules look extremely difficult to meet.
Bond and equity markets were relatively calm following the Autumn Statement. The economic forecast for the months ahead is fairly bleak with inflated energy prices likely to hit households hard. In addition, the spending review, which will most probably see controversial cuts to welfare spending, will land difficult news very early in the new year, following on from the Milburn Review due this autumn. It would be a difficult time for Andy Burnham to call a snap election. However, until he does, the Prime Minister remains handcuffed to Sir Keir Starmer's manifesto pledges, and unable to really deliver on any of the more expansive policies he has put forward.
United States
Shares in Alphabet, which owns Google, fell 12.6% on 29 October, its worst one-day drop ever, wiping out about $500 billion of value, after weaker-than-expected results. It was the second-worst one-day loss in US stockmarket history, behind Nvidia’s $589 billion drop in late January 2025. AI continues to be a threat and an opportunity in the heavily tech oriented US stockmarkets.
The Fed held rates at 3.75%–4.00% following the hike in September. Whilst global politics continues to concern the central bank, domestic spending and the job market remain resilient despite an unexpected small increase in unemployment in September.
It is clear that the mid-term elections have increased pressure on President Trump to deliver some instant economic improvements for the American public. He was out campaigning throughout October, and whilst his approval rating increased slightly at the end of the month, that came from all time low rating across both of his terms earlier in October.
His rhetoric around voter fraud ramped up in recent weeks, alongside threats of litigation and that questionable promise to give every adult American $5,000 if the Republicans won.
Trump's decision to agree a deal with Putin to suspend sanctions and permit Russia to supply diesel to global markets in early October shows his need for immediate results. A quick reduction in fuel prices was deemed to be more important than maintaining pressure on Russia to end their war in the Ukraine, given his failure to resolve the conflict in the Middle East. Neither Russia nor Ukraine seemed to immediately acknowledge Trump's claim of imminent peace negotiations, although a humanitarian ceasefire has been operating recently in the city of Oleshky and there are discussions around peace talks in Abu Dhabi for mid-November. There is inevitable skepticism around whether this will bring the war to an end.
There was positive news as GDP for quarter three 2026 exceeded predictions with an annualised rate of 3.4%, up from 2.2% for quarter two. Consumer spending remains resilient despite inflation, growing 3.8% in the third quarter which is the fastest pace since the fourth quarter of 2024, and accounts for two-thirds of the nation’s economic output.
Europe
On 29th October the European Central Bank (ECB) held its deposit rate at 2.5%, as expected, after a 0.25% hike in September. Christine Lagarde said policymakers discussed a hike but rejected it, because there is little sign of energy prices feeding into wages or inflation expectations. The ECB also said financing conditions had tightened since its last meeting, an implicit reference to the surge in sovereign yields.
Inflation climbed to 3.8%, its highest rate since September2023. As a result money markets were pricing in 67% probability of a rate hike in December following the announcement, according to LSEG data.
Christine Lagarde announced in October that she will leave the ECB on 7th February 2027, almost nine months before her term was due to end, having led the Bank since July 2019. She explained her decision to leave early as a desire for more freedom to express political opinions.
“The reason I’m anticipating the end of my term by leaving in February 2027 instead of October is, as I have said to colleagues, members of staff and governors, is because I want to have the freedom of speech, the freedom of expression and the freedom to engage on matters that are not monetary policy matters" she said, confirming that she wished to contribute more to political debate.
She will now leave ahead of the French presidential election, in which polling suggests far-right candidate Marine Le Pen is a frontrunner.
Quarter three GDP grew by 0.4% according to Eurostat flash data, slowing from 0.6% in quarter two. Spain grew 0.6%, Germany grew 0.2%, France contracted 0.1% and Italy stagnated. Ireland led with 5.5% growth.
The eurozone has the same energy-driven inflation problem as the US, but with weaker growth, an ECB closer to the end of its tightening, and a French political and fiscal problem on top. The riots in France, which have spread to Italy and other parts of Europe, have pushed the French bond yields up and put the Euro under pressure.
The flash estimates from the HCOB Composite Purchasing Managers' Index (PMI) in the Eurozone suggest a decline to 51.9 in October's flash estimate, down from from 53.1 in September.
Far East
According to National Bureau of Statistics data, China’s manufacturing activity contracted in October, with the official PMI falling to 49.3 from 50.1 in September, and dipping below the expansion threshold. Services and construction also weakened, with the non‑manufacturing PMI at 49.7. This marked a reversal from a modest recovery in the previous three months and signals a loss of momentum at the start of quarter four.
This suggests that the stimulus initiatives Chinese policymakers' have already introduced this year have yet to make an big enough impact, and more may be required if they are to meet their 4.5-5% growth target.
To add to China's woes, Bloomberg reported that Chinese stockmarkets had lost around $2.4tn since May. Much of this is down to AI, as both a lack of profits and bans on Chinese technology from western countries including the US, means that China's weak domestic demand is unlikely to prop AI businesses up alone.
The Bank of Japan’s 'Outlook for Economic Activity and Prices (October 2026)', suggested Japanese GDP would continue growing moderately but at a decelerated rate in this financial year.
September's inflation data showed annual inflation at 2.1% in September 2026, the highest since December 2025, with core inflation also at 2.1%. The Bank of Japan's forecasts believe this trend will continue. It expects CPI (all items less fresh food) to rise well above 2% year-on-year, driven by wage–price spirals, crude oil price increases, semiconductor cost pressures, and yen depreciation. The Bank may hike rates again in December or January.
Emerging Markets
Whilst emerging markets overall have proven more reliant than many expected to interest rate hikes and energy price inflation, they are still vulnerable to some key strategic risks.
The AI boom has benefitted some emerging economies, with South Korea and Taiwan examples of economies who have seen huge volatility, both positive and negative due to their exposure to chip stocks, and some dramatic losses in 2026. These two countries attract the headlines but Malaysia has also benefitted through chip assembly and data-centre investment, Thailand and Vietnam through intermediate-goods exports, and India and Indonesia through data-centre construction. They remain vulnerable if the AI bubble bursts resulting in weaker exports and investment.
If Brent crude persists at $100 a barrel or more then economies who rely heavily on imported oil will continue to suffer and with the knock on inflation to food prices, the incoming El Nino could have an compounding effect. Commodity exporters such as Malaysia, Colombia and Brazil are protected to some extent, as higher prices do also increase their export earnings.
Summary
The central banks took a back seat to politics recently, but they might not do so for long. Goldman Sachs raised interest rate forecasts for 13 economies during October.
The UK budget has been and gone and whilst there are concerns over how President Trump could react to a bad result in the mid-term elections, we will know the outcome soon enough.
It will not be long before war, inflation and the AI bubble will once again be the main geo-political talking points.
And finally...
The highest denomination of banknote printed by the Bank of England is known as the 'Titan' due to its titanic value. It is worth £10 million, and as you can imagine it is not a note which is in public circulation.
The reason it is exists is to back the value of every Scottish and Northern Irish bank notes issued by their local banks.
This is done to provide security if a local issuing bank were to fail, and to connect those banknotes to the currency of England and Wales. For every pound an authorised Scottish or Northern Irish commercial bank prints and issues in the form of its own notes, it must deposit the equivalent in pound sterling with the Bank of England.
The Bank of England prints £100 million notes internally, rather than at its normal commercial printers, for security reasons, and locks them away in a vault. It also prints £1 million notes, known as 'Giants'.
Sources
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https://corporate.vanguard.com/content/corporatesite/us/en/corp/vemo/vemo-japan.html