8 December 2025: The Bank of England is to stress-test private credit firms amid growing concerns

If Rachel Reeves is to achieve the goals she has set out for the economy, she will need significant help from UK consumers. The level of growth necessary to achieve the amount of tax income for her not to need to return to Parliament for a third time to increase taxes again is greater than has been achieved since well before the Pandemic. It will require a rise in both retail sales and consumer confidence, which is not just beyond the horizon, but many time zones away.

Around a decade ago, the Bank of England was infamously described as the UK economy’s “unreliable boyfriend”. Now that role has fallen to the British consumer, just as Rachel Reeves counts on a spending resurgence to make her numbers stack up.

The Chancellor of the Exchequer’s budget depends on higher tax revenues from workers and families in the coming years. Yet if earnings and spending don’t hold up, she risks a £40 billion black hole in the public finances.

Consumers have been notably parsimonious since the pandemic, choosing to save more of their money amid ongoing worries about the economy. Real consumption dropped by around 0.25% in both 2023 and 2024, the Office for Budget Responsibility said on the day of the budget.

However, the OBR expects consumption to have jumped 1% this year, with growth accelerating to 1.75% by 2029. It has this element of gross domestic product rising more strongly than others, as government stimulus and business investment fade.

“We have always been quite reliant on consumers, but they’re underperforming now, and that is hampering growth.”

In recent years, inflation-beating wage rises and falling borrowing costs have failed to convince people to open their wallets. Instead, households have set aside more than 10% of their disposable incomes. Retail sales volumes are still below pre-COVID levels, with shops and restaurants struggling to make ends meet.

Furthermore, those favourable tailwinds are starting to drop off. Wage growth is cooling, and unemployment is rising, as employers try to cope with the Labour government’s higher payroll taxes.

The Bank of England is concerned about the level of regulation necessary to monitor the rise in private credit and the firms that provide “off the grid” funding to riskier enterprises.

It will begin testing how private credit and equity firms would respond to a financial shock following warnings about their potential threat to the broader economy.

The Bank said it has launched a new exercise to stress-test the market's resilience.

Total assets in private credit and equity funds have increased from around £2.25 trillion to £8.23 trillion over the past decade.

They now play a significant role in financing UK companies, with funding supporting around two million jobs, according to the Bank. Private credit is a form of lending in which businesses do not go to banks but to a private company to negotiate a deal. Private equity typically refers to financing in return for a stake in a business.

We will have to wait until the end of the week for any meaningful data on the state of the economy to be published. That is when the month-on-month GDP data, as well as industrial and manufacturing output figures, will be released.

A 0.1% rise in GDP in November is predicted following a similar fall in October, while production will have seen a marginal turnaround.

Last week, the pound saw another significant rally as economists remain sceptical about another MPC rate cut later this month, while the FOMC is expected to cut this week.

It rallied to a high of 1.3385 and closed at 1.3333.

This week’s meeting of the rate-setting Federal Open Market Committee is not the foregone conclusion many analysts expect it to be, with a significant number of its members still not convinced that inflation has become sufficiently benign to allow them to vote for a cut in rates.

A new description of the state of the economy has emerged recently, which “tells the tale” of the two-paced nature of activity.

From corporate executives to Wall Street analysts to Federal Reserve officials, references to the “K-shaped economy” are rapidly proliferating.

So what does it mean? Simply put, the upper part of the K refers to higher-income Americans seeing their incomes and wealth rise, while the bottom part points to lower-income households struggling with weaker income gains and steep prices.

A big reason the term is popping up so often is that it helps explain an unusually muddy, convoluted period in the U.S. economy. Growth appears solid, yet hiring is sluggish, and the unemployment rate has ticked up. Overall, consumer spending is still rising, but Americans are less confident.

It also captures ongoing concerns about affordability, which is a much greater problem for middle- and lower-income households. Persistent inflation has received renewed political attention after voter anger over the cost of rents, groceries, and imported goods helped Democrats win several high-profile elections last month.

Those at the bottom are living with the cumulative impacts of price inflation. At the same time, those at the top are benefiting from the cumulative effect of asset inflation.

The term was actually popularised during the pandemic, after it cropped up on social media. Economists were discussing different letters to describe how the COVID-19 recession in 2020 could play out: Would it be a V-shaped recovery, meaning a sharp decline followed by a rapid bounce-back? Or would it be U-shaped, meaning a more gradual rebound? Or, worse, L-shaped: a recession followed by extended stagnation.

Inequality was somewhat reversed in the aftermath of the pandemic, when businesses offered significant wage increases for blue-collar workers as the economy reopened and demand surged.

In 2023 and 2024, inflation-adjusted wages for the bottom quarter of workers rose at an annual rate of 3.9%, outpacing the 3.1% gains for the top quarter, according to research by the Federal Reserve Bank of Minneapolis.

There was a two-year period where the bottom was catching up. This meant that talk of the K-shape went away. This year, however, inflation-adjusted wage growth has weakened as hiring has fallen, with the drop more pronounced for lower-income Americans. Their wage growth has plunged to an annual rate of just 1.5%.

Corporate executives are paying attention and, in some cases, explicitly adjusting their businesses to account for it. They are seeking ways to sell more high-priced items to the wealthy, while also reducing package sizes and taking other steps to target struggling consumers.

Henrique Braun, chief operating officer at Coca-Cola, said in late October that the company is pursuing both “affordability” and “pressurisation.” It is generating more of its earnings from higher-end products, while also introducing mini cans for those looking to spend less.

“We continue to see divergence in spending between the income groups,” Braun said. “The pressure on middle- and low-end-income consumers is still there.”

The dollar is being affected by the possibility of a rate cut this week, as Fed “Chairman designate” Kevin Hassett has called for a 25-basis-point cut in the Fed Funds rate. The index fell to a low of 98.77 last week and closed at 98.98.

Questions are being asked about the jump in German factory orders last month. Was the 87% leap the beginning of a recovery, or a “one-off” created by several smaller “one-offs”?

Orders surged in October, supporting the prospect that Europe’s biggest economy eked out growth in the final quarter of the year. Demand increased 1.5% from the previous month, revised significantly higher to 2%, Destatis said Friday. The result was much more than the 0.3% median estimate in a Bloomberg survey.

Large-scale orders drove the improvement, in particular an 87% jump in the transport category that includes aircraft, ships, trains and military vehicles, the statistics office said.

The numbers contrast with a more mixed picture of late. While factory orders and industrial output offered hope for stabilisation in September, S&P Global’s gauge of manufacturing activity in November fell further below the 50 threshold separating expansion from contraction.

German industrial production data for October are due later today. A separate reading for France showed a slight uptick for the month, though manufacturing dipped 0.1%. In Spain, industry numbers were stronger than anticipated, expanding 0.7%.

A revival in the sector is seen as crucial to overcoming the weakness that led to gross domestic product contracting in 2023 and 2024. Germany’s problems stem from steeper US tariffs, rising competition from China, and longer-standing issues such as excessive red tape.

According to a newspaper report, the European Central Bank (ECB) has refused to back plans to help Ukraine using frozen Russian assets. The bank reportedly declined to guarantee the loan for Ukraine's reparations, citing possible violations of EU treaties. Belgium also continues to express doubts about the legal certainty of accessing the assets.

“Despite the sceptical stance of the European Central Bank (ECB) and strong opposition from the Belgian government, Ursula von der Leyen has decided to continue pursuing the plan to use frozen Russian assets. She has proposed a mechanism of reparation loans that can be approved by a qualified majority of member states, thus circumventing potential vetoes. As an alternative, the Commission President proposed issuing common debt to finance the loan to Ukraine, with the EU budget as collateral. However, this would require the unanimous approval of all 27 member states.”

It is tough to see an alternative to von der Leyen’s proposal, as the French President of the Central Bank and the German President of the European Commission now appear to be on a collision course.

German newspapers favour von der Leyen’s proposal “Europe should stop dithering and finally make use of the frozen Russian funds”, demanded the Frankfurter Allgemeine Zeitung:

It went on, “Chancellor Merz is right: it’s about much more than just financing. Mobilising these billions will send an unmistakable signal to Putin that Europeans are resolute and united in defending their freedom. Those who are not already defending it in Ukraine but prefer to argue about liability risks may soon have to fight on their own soil. Putin has now openly threatened to wage more than just a hybrid war against Europe. And who would want to have to count on Trump then?”

The single currency is strengthening almost by default. The currency accounts for 68% of the dollar index, so when the Greenback is struggling, the Euro gains ground. It rose to a high of 1.1682 last week and closed at 1.1644.

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