Economy grinds to a halt ahead of Budget
Meanwhile, the mid-cap FTSE 250 dropped 0.3pc, with Ocado weighing on the index after falling 18.6pc. The supermarket technology group tumbled after its biggest customer, US retailer Kroger, suggested it would take a “hard look” and its use of warehouse technology.
A global measure of stocks, the MSCI World index, is flat.
Scott Bessent, the US Treasury secretary, will travel to Madrid this weekend for negotiations with his Chinese counterparts over tariffs and national security issues related to the ownership of TikTok.
Mr Bessent is slated to meet Chinese vice premier He Lifeng in the Spanish capital to discuss national security and economic issues.
This will be the fourth round of discussions between US and Chinese counterparts after meetings in London, Geneva and Stockholm. The two governments have agreed to 90-day pauses on a series of increasing reciprocal tariffs, staving off an all-out trade war.
During the last round of discussions in Stockholm, Mr Bessent described his talks with the Chinese as “very fulsome.”
“We just need to de-risk with certain, strategic industries, whether it’s the rare earths, semiconductors, medicines, and we talked about what we could do together to get into balance within the relationship,” Mr Bessent said at the time.
China remains one of the biggest challenges for the Trump administration after it has struck deals over elevated tariff rates with other key trading partners, such as Britain, Japan and the European Union.
The US and China delegations are also expected to continue discussions about ownership of TikTok.
Congress has approved a US ban on the popular video-sharing platform unless its parent company, ByteDance, sold its controlling stake. Donald Trump said last month that he will keep extending the sale deadline until there’s a buyer.
US consumer sentiment has fallen for the second month in a row as consumers see risks from Donald Trump’s tariffs.
The University of Michigan’s consumer sentiment index fell to 55.4 this month, the lowest since May and down from 58.2 in August. Economists polled by Reuters had been expecting a reading of 58.0.
Joanne Hsu, who leads the research, said: “Consumers continue to note multiple vulnerabilities in the economy, with rising risks to business conditions, labour markets, and inflation.
“Likewise, consumers perceive risks to their pocketbooks as well; current and expected personal finances both eased about 8pc this month. Trade policy remains highly salient to consumers, with about 60pc of consumers providing unprompted comments about tariffs during interviews, little changed from last month.”
The survey’s measure of consumer expectations for inflation over the next year was unchanged at 4.8pc this month. Consumers’ expectation for inflation over the next five years rose to 3.9pc from 3.5pc last month.
Households have generally been downbeat about the economy over the course of 2025 on concerns that Donald Trump’s aggressive tariff measures will cause goods prices to rise and eat into their purchasing power.
Wall Street is coasting toward the finish of its best week in the last five on Friday as US stocks hang near their record levels.
The S&P 500 is flat this afternoon, while the Dow Jones is down 0.3pc. The Nasdaq is up 0.3pc.
Stocks have rallied with expectations that the Federal Reserve will cut its main interest rate for the first time this year at its meeting next week. Such a move would give the economy a kickstart, and mortgage rates have already dropped in anticipation of it.
Expectations for a cut have built as recent reports suggested the US job market could be hitting the precise balance that Wall Street has been betting on: slowing enough to convince the Fed that it needs help, but not so weak that it will mean a recession, all while inflation doesn’t take off.
Investors, “and I think the Fed, are convinced that we are not on the verge of a surge in inflation,” according to Scott Wren, at the Wells Fargo Investment Institute.
Russia’s central bank has cut its key interest rate amid growing fears of an economic slowdown after bloated spending on attacking Ukraine.
Russia’s economy is rapidly cooling, prompting warnings it could be headed for recession or stagnation, following two years of robust growth as Moscow ramped up military spending to fund its campaign.
“We do have a cooling off, that is, a slowdown in economic growth. This is natural after overheating,” governor Elvira Nabiullina said, announcing a cut in borrowing costs from 18 to 17pc.
The bank said Friday it expected the economy to expand by just one percent in 2025, down from above 4pc last year.
Russian government spending has jumped more than two-thirds since the start of the Ukraine war, with military expenditure accounting for almost 9pc of GDP, according to Russian president Vladimir Putin.
That has helped Moscow avoid predictions Western sanctions would collapse its economy, but led to a spike in inflation.
The bank is now gradually trimming interest rates from a two-decade high of 21pc.
But inflation is still running above 8pc, more than twice the government’s official target and the bank has warned price rises may remain stubborn in the coming months.
Wall Street stocks are little changed this afternoon, a day after all of its three major indexes hit fresh records on hopes of a Federal Reserve interest rate cut next week.
The S&P 500 is flat, while the Nasdaq is up 0.1pc and the Dow Jones is down 0.2pc.
“The market’s taking a little bit of a breather” after Thursday’s highs, said Steve Sosnick of Interactive Brokers.
The new records on Thursday came after initial claims for unemployment benefits jumped too – reinforcing hopes that the Fed will lower rates at its meeting next week.
Markets generally expect a quarter of a percentage point rate cut next week, taking the benchmark lending rate to a range between 4pc and 4.25pc.
But Mr Sosnick is not convinced that the reduction will herald a new cycle of rate cuts given that inflation has been ticking up and remains notably above the Fed’s longer-run two percent target.
He expects the central bank to reiterate the idea that policymakers need to see some improvement on price hikes before slashing rates further.
The European Union could phase out Russian gas within six to 12 months by replacing it with US liquefied natural gas, US energy secretary Chris Wright has said.
The EU is negotiating legal proposals to phase out imports of Russian oil and gas by January 2028, with a ban on short-term contracts kicking in from next year.
“I think this [the phasing out of Russian gas] could easily be done within 12 months, maybe within six months,” Mr Wright told Reuters in Brussels.
“I definitely voiced the opinion [to the European Commission] we could do it faster. On the US side, we could do it faster, and I think it would be good if those dates were moved up even more. I don’t know that that’s going to happen, but that was dialogued,” he said, referring to a meeting with EU energy commissioner Dan Jorgensen.
Mr Jorgensen said on Thursday it was unacceptable the EU continued to import Russian energy – but that the 2028 phase out was ambitious and would ensure EU countries do not face energy price spikes or supply shortages.
The Telegraph has approached the European Commission for comment.
Donald Trump is to push the G7 group of industrialised nations to use seized Russian assets to fund Ukrainian defence.
Bloomberg has seen a US proposal that will urge the G7, which includes France, Germany and the UK, to establish a legal way to use the $300bn (£222bn) of Moscow’s immobilised assets currently in Europe.
The US will also continue to push for G7 countries to impose punitive tariffs on China and India until they stop buying Russian oil.
The National Institute and Economic Research (NIESR) has forecast that the UK economy will grow by 0.4pc in the third quarter.
Despite growth flatlining at 0pc in July the think tank said it expects the economy to expand in August and September. However, NIESR warned that increased uncertainty from both businesses and households posed a risk to its projections.
Fergus Jimenez-England, associate economist at NIESR, said: “Coming in slightly below our forecast, GDP showed no growth in July reflecting a stagnant month for services and a contraction in production.”
He added that the low growth forecasts and fiscal uncertainty “will do little to ease the fiscal challenges confronting the Chancellor this autumn”.
Ursula von der Leyen, the European Commission President, held talks with Europe’s biggest carmakers on Friday as they push for the EU to relax plans to ban the sale of new petrol and diesel cars by 2035.
The lobbying from European carmakers comes as they grapple with tough competition from Chinese rivals, such as BYD, and a sluggish shift towards electric vehicles (EVs).
Speaking before the talks, Sigrid de Vries, director of the European car lobby ACEA, said: “The regulation that is applicable to us is too rigid to produce success, and really we believe must be adapted to reality.”
The European Commission said Ms Von der Leyen spoke to business leaders from the automotive industry about emission standards, EU proposals on batteries and pushing businesses to buy EVs.
The value of goods exported to the EU rose 4.6pc in July to £15.2bn as a rise in car shipments helped to drive the increase in trade.
Despite increased trade tensions, as Donald Trump continues to impose tariffs on shipments, the latest figures from the ONS showed that exports of goods from the UK rose to £30.6bn in July, up 0.6pc from last month.
William Bain, head of trade policy, at the British Chamber of Commerce, said: “The performance of our trade in goods with the EU continued its recent upward trend but the UK-EU reset negotiations need to deliver quickly. Firms are clamouring for cuts to red tape and lower compliance costs.
“There is also a warning in the data as services exports cooled off in July reflecting business concerns about wider economic headwinds. The government needs to focus on the fundamentals to boost UK trade.”
The boss of Barclays has told Rachel Reeves to limit pay rises for public sector workers, amid growing concern over a rebound in inflation.
CS Venkatakrishnan, Barclays chief executive, urged the Chancellor to “curb expenditure at the government level” as he called for “public sector” wages to be suppressed.
Speaking to the Financial Times, Mr Venkatakrishnan said: “We need to find a way to curb wage inflation.”
The demand comes amid fears that further public sector pay rises risk driving up inflation, with the latest official figures revealing inflation rose to 3.8pc in the year to July. This marked its highest level since January 2024.
Economists at Goldman Sachs have said it is “very likely” that the Chancellor will extend the current tax thresholds to 2030 as she looks for ways to plug the black hole in public finances in the autumn Budget.
Often dubbed a “stealth tax”, an extension of tax thresholds means millions more households could be dragged into higher tax brackets. By freezing thresholds for a further two years the Government gets to keep a larger share of workers’ rising wages.
James Moberely, from Goldman Sachs, said: “We continue to think that an extension of existing tax threshold freezes for a further two years until April 2030 is very likely. This would raise around £10bn, according to the IFS.”
He added that the government could raise “significant additional sums” by making changes to pensions and property taxation.
Goldman Sachs expects global headwinds to put pressure on the Chancellor’s fiscal position.
Mr Moberley said it is likely that changes in US trade policy will weigh on growth forecasts from the Office for Budget Responsibility (OBR).
Any reductions to the productivity projections from the OBR will lead to even tougher fiscal conditions for the Chancellor.
The average monthly mortgage repayment has risen to above £1,000 for the first time, putting growing pressure on family finances.
Homeowners’ average bill hit £1,002.27 in August, according to direct debit data published by the Office for National Statistics.
That is up from less than £950 a year ago and compares with average payments of below £680 per month five years ago, when interest rates were at rock bottom in the pandemic.
The latest rise comes despite the Bank of England cutting its base rate from 5.25pc to 4pc over the past 12 months.
Average bills faced by homeowners have continued to increase as the cheap fixed-rate loans in the pandemic expire, forcing families to refinance onto more expensive mortgages.
In July, the average new mortgage came with an interest rate of 4.28pc, according to the Bank of England. That is down from the peak of 5.34pc in late 2023, but is still well over the 1.72pc typically paid in July 2020 – meaning anyone who took a popular five-year fix in the first summer of the pandemic can now expect to see their interest rate more than double.
It also means the Bank’s rate-setting Monetary Policy Committee, which meets again to decide interest rates next week, must try to work out how much impact its latest rate cuts are having at a time when the past four years-worth of rate increases are still feeding through to push up the cost of mortgages for borrowers.
Donald Trump’s energy secretary has criticised British ministers for “strangling” North Sea oil and gas with windfall taxes and drilling bans.
Chris Wright took aim at the UK’s approach to net zero, which he said was driving up energy prices and destroying British industry.
Mr Wright spoke out on a visit to Brussels to sign energy deals with EU leaders – a trip that precedes the US president’s state visit to the UK next week by just a few days – and ignored the diplomatic sensitivity that normally precedes such trips.
Households’ long term inflation expectations have climbed to their highest level since 2019 as consumers remain sensitive to price rises.
Figures from the Bank of England’s most recent inflation attitudes survey show that households across the UK expect prices to rise 3.6pc over the next 12 months, the highest since August 2023.
Expectations about long term inflation have reached their highest level since 2019. British households now expect inflation to come in at 3.8pc in five years time, up from 3.6pc in May.
It comes as a blow to the Bank of England which has been grappling to bring inflation under control. The most recent figures from the ONS show that inflation for the 12 months to July stood at 3.8pc.
The UK’s exports to the US remain lower than before Donald Trump’s ‘liberation day’ announcement.
The latest figures from the ONS show that exports to the US climbed £800m to £4.7bn in July, however this still remains below the £6.1bn recorded in March this year.
A rise in shipments of chemicals and materials drove July’s increase in US exports, according to data from the statistics body.
The most recent trade figures also revealed that the UK’s goods and services trade deficit had widened in the three months to July. The country’s trade deficit grew £40m during the period and now stands at £10.3bn.
The pound has fallen in value after figures from the ONS showed that economic growth had flatlined in July.
The sterling fell 0.3pc to $1.354 against the US dollar as traders reacted to the latest GDP data. The lack of growth during July underscores the challenging outlook for the UK economy.
Barret Kupelian, chief economist at PwC, said: “Looking ahead, we may see a replay of last autumn’s script: private-sector firms paring back spending in the run-up to the Autumn Budget, creating a headwind for headline growth into year-end. This isn’t a cliff edge, but it is a gear change, at least for now.”
Manufacturing output has fallen to its lowest level since January as several sectors report sharp falls in production.
Chemicals, pharmaceuticals and computers, electronic and optical equipment were among the areas which reported some of the largest contractions in output during the month.
However, the decline in manufacturing output from the ONS figures stands in stark contrast to recent improvements in PMI figures for the industry.
Although the UK’s PMI figures stand below the level of 50 that is meant to separate expansion from contraction, it climbed to a six month high of 48 in July.
Sandra Horsfield, from Investec, said: “In any case, today’s figures are a case in point that ‘soft’ survey data and ‘hard’ official numbers do not always tell quite the same story.”
She added: “One overarching question is to what extent there is still lingering payback within the official data for previous front-running of production for export to the US.”
Sir Mel Stride, the shadow Chancellor, has warned that the UK is facing slowing economic growth as Rachel Reeves prepares for her autumn Budget.
Sir Mel said: “Growth is slowing with none in the latest month while the Government remains distracted from the problems the country is facing.”
“While the Government lurch from one scandal to another, borrowing costs recently hit a 27-year high – a damning vote of no confidence in Labour that makes painful tax rises all but certain.
“It is little wonder that Starmer has stripped Reeves of control over the budget. But sidelining her is not enough – he must also reject her failed economic approach that has left Britain poorer.”
Ms Reeves will unveil her autumn Budget on November 26. The Chancellor is widely expected to raise taxes in a bid to plug a black hole in public finances.
Sluggish consumer spending is continuing to act as a barrier to economic growth as households remain cautious due to a cooling market and inflationary pressures.
Matt Swannell, chief economic advisor to the EY Item Club, said: “The economy is expected to continue growing at sub-trend rates next year, with our pessimism largely based on the strength of domestic headwinds.”
“Household finances are likely to be squeezed by elevated inflation and slowing pay growth, which will weigh on consumer spending power.”
Growth for consumer facing services flatlined in July, according to figures from the ONS, as households tightened their purse strings.
Yael Selfin, the chief economist at KPMG UK, said: “The outlook for consumer spending remains weak despite households maintaining relatively healthy balance sheets, as a weakening labour market and higher costs constrain discretionary spending.”
Economists have warned that the flatlining of the UK economy in July is a sign that growth will slow in the last six months of the year. Forecasts of a slump come after the British economy grew 1pc in the first half of 2025.
Yael Selfin, chief economist at KPMG UK, said the weak start to the third quarter was “a sign of things to come”.
She added: “Economic activity is expected to slow in the second half of the year as the temporary factors which pushed up growth in the first half of 2025 begin to fade.”
Economists at Deutsche Bank warned that “some correction in GDP growth remains likely” as the factors which boosted the economy during the start of the year unwind.
The Bank said a reversal in exports, a softening in public sector spending and fiscal tightening would all put pressure on economic growth in the second half of the year.
Concerns about tariffs and global economic uncertainty are weighing on Britain’s economy, economists have warned.
The UK became one of the first countries to secure a trade deal with the US over the summer. Despite securing a 10pc tariff rate on exports to the US, global trade uncertainty is still impacting some sectors of the economy.
Sanjay Raja, chief UK economist at Deutsche Bank said that “as the US trade war catches up with the UK, global headwinds will gather pace, weakening the UK’s external backdrop”.
Britain’s pharmaceutical sector and electronics manufacturers have been hit by a slowdown in July, figures from the ONS show.
Paul Dales, chief UK economist at Capital Economics, said that tax hikes and “the weak overseas environment probably contributed to the 1.3pc month-on-month fall in manufacturing output in July”.
A slowdown in Britain’s manufacturing sector weighed heavily on the UK economy in July as a rapid increase in output came to a halt.
A sharp rise in manufacturing activity in the first half of the year came as businesses sought to ramp up production ahead of Donald Trump’s tariffs. However, a slowdown has now hit the industry as the manufacturing sector contracted 1.3pc during July.
Barret Kupelian, chief economist at PwC, said: “July’s data, however, confirms our suspicions that the post-Liberation Day growth spurt across ex-US advanced economies is losing steam.
“The slowdown is most evident in the production sector of the economy, which is directly affected by tariffs, where output grew between February and May and contracted in June and July.”
Sanjay Raja, chief UK economist at Deutsche Bank, warned the manufacturing sector “will remain weak for some more time, as we course correct after a stronger start to the year”.
He added that growing trade tensions were likely to impact Britain’s economic growth.
The sluggish economic growth adds to concerns that the Office for Budget Responsibility (OBR) will revise down its forecasts for the British economy, leading to even tougher fiscal conditions for the Chancellor.
Fergus Jimenez-England, an associate economist at the National Institute of Economic and Social Research, said: “Economic activity in the third quarter will be constrained by fiscal uncertainty weighing on household and business sentiments. Growth at this pace will do little to ease the fiscal challenges confronting the Chancellor this Autumn.”
Ms Reeves is largely expected to unveil tax hikes in this year’s autumn Budget as she attempts to plug a black hole in public finances. However, businesses and lobby groups have warned that further tax raids could damage Britain’s economic growth.
A spokesperson for the Treasury said: “We know there’s more to do to boost growth, because, whilst our economy isn’t broken, it does feel stuck.
“That’s the result of years of underinvestment, which we’re determined to reverse through our Plan for Change.”
Business groups have urged the Chancellor to avoid raising business taxes in the upcoming autumn Budget following the slowdown in economic growth.
The Confederation of British Industry (CBI) warned additional costs will cause companies to hold off on recruitment and investment decisions.
Ben Jones, lead economist at the CBI, said: “Speculation about new business taxes is casting a long shadow. Amid rising cost pressures, firms are already holding back on hiring and investment and are wary of weeks more Budget uncertainty.
“The government cannot tax its way to growth and continue to raid corporate coffers. With the Autumn Budget fast approaching, the Chancellor must deliver a decisive, pro-growth package by committing to serious tax reform.”
Fears from business groups of a fresh tax hike comes after Rachel Reeves unveiled an increase in employers’ national insurance contributions in her maiden autumn Budget. Many companies cut jobs or froze hiring following the £25bn tax raid.
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Stuart Morrison, research manager at the British Chambers of Commerce said: “While our latest economic forecast suggests growth of 1.3pc this year, that’s largely down to stronger-than-expected activity in Q1, before the impact of national insurance and tariffs.
“The Government has acknowledged it has asked a lot of business in the past year. Our message is now clear – there must be no more taxes on business in the autumn Budget.”
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Thanks for joining me.
On Wall Street, the three major indexes hit record closing highs. The Dow Jones Industrial Average rose 1.4pc, to 46,108.00, the S&P 500 rose 0.9pc, to 6,587.47, and the Nasdaq composite rose 0.7pc, to 22,043.08.
In the bond market, the yield on 10-year US Treasury notes, which influence borrowing rates around the world, fell to 4.030pc from 4.058pc late on Wednesday.
In Asia, shares tracked the record-setting run on Wall Street. In Japan, the Nikkei 225 rose for the third day in a row as it gained 0.9pc. Hong Kong’s Hang Seng added 1.5pc and South Korea’s Kospi gained 1.3pc.
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