30 December 2025: Defence spending still falls £800bn short

The level of defence spending, which was such a hot topic earlier in the year, has slipped from the government's collective agenda. Still, it is sure to return with a vengeance next year as Trump uses defence spending by both the UK and Europe as a tool to defend his record as President in mid-term elections due in November.

The UK government will need to generate more than £800 billion of new funding for defence projects by 2040 if it is to meet NATO-related targets, according to recent analysis.

NATO allies promised at a summit in June to spend 5 percent of their GDP annually on defence requirements and security-related spending by 2035. Of this, at least 3.5 percent of GDP will be based on the agreed definition of NATO defence expenditure.

The UK has promised to lift defence spending to 3.5 percent of GDP by the middle of the next decade.

Meeting the 5 percent target leaves it needing to mobilise an additional £804 billion by 2040 to fund projects currently without allocated funding.

Rachel Reeves has made unfunded commitments a “pet criticism” of the previous government, yet she has abrogated responsibility for defence spending, leaving such obligations to the Prime Minister.

The economically significant picture of high street sales on Boxing Day and over the weekend is blurred, with some media outlets reporting strong sales growth and others saying they have “fallen flat”.

As we await official retail sales data, speculation will remain rife about its impact on the Bank of England. The MPC is likely to remain split down the middle, with the hawks still concerned about latent inflation in the economy while the doves call for further rate cuts.

Independent member Catherine Mann may become a central figure in the drama, since, while making hawkish statements and voting for the rate to remain unchanged, she has said she is prepared to vote for a “jumbo” rate hike as and when the data allows.

The pound remained close to its recent high in subdued trading yesterday. It reached a high of 1.3512 and closed at 1.3504, suggesting it may end the year on a positive note.

The term "pivotal" has been used at just about every FOMC meeting this year. As the Fed and its Chairman tried to ignore President Trump’s mockery to ensure that inflation was defeated before embarking on a programme of rate cuts, the financial press speculated throughout the summer and autumn that this would be the meeting when rates would begin to be substantially lowered.

This attitude was encouraged by Wall Street CEOs, who continued to make statements about a coming recession. However, Jerome Powell and a majority of his colleagues held the line, noting that the pivotal moment lay in the future.

Now, Wall Street analysts are using the term "pivotal" to describe the year ahead when discussing the entirety of Fed operations. The annual “changing of the guard” will take place at the January meeting, with four regional Fed Presidents losing their voting rights and being replaced by a fresh group.

Minneapolis, Cleveland, Dallas, and Philadelphia will replace Boston, Chicago, Kansas City, and St. Louis. Kashkari, Hammack, Logan and Paulson have received plenty of airtime this year, so their views are well-known. Neel Kashkari will likely replace Austan Goolsbee as the most listened-to member, since he has the least entrenched view on monetary policy.

The Fed Governors, particularly Trump's picks, will continue to “wave the flag” for significantly looser policy.

A new Chairman is likely to be announced. He is expected to replace Stephen Miran as a Governor, before taking up his new role in May, when Jerome Powell steps down after an eventful eight-year term in which he faced several never-before-seen scenarios.

He is not a Greenspan or a Bernanke, although he never set out to be a “titan” of the industry. He is satisfied to steer the Central Bank in a calm yet forceful manner.

President Trump on Monday said he might sue Federal Reserve Chair Powell for what the president called “gross incompetence,” injecting new tension into the already strained relationship between the White House and the independent Federal Reserve.

Speaking at a news conference beside Israeli Prime Minister Benjamin Netanyahu at Mar-a-Lago, Trump said, “The guy is just incompetent.” Trump first brought up the Fed’s multibillion-dollar renovation project, which at times has become a proxy for Trump’s ongoing attacks on the Fed system.

“It’s gross incompetence against Powell,” Trump said, adding, “We’re going to probably bring a lawsuit against him.”

Trump threatened a “major lawsuit” against Powell over the summer, but he never followed through. It wasn’t clear what specific claims Trump was referring to on Monday, or how or when a suit could be brought. The White House did not respond to a request for more information.

Trump’s continued bluster has grown tiresome in both Washington and New York, where it is generally accepted that Powell will see out his last few months in relative calm as the Fed embarks on further rate cuts despite encouraging economic data in the past two months.

The dollar index traded in holiday mode, but was on the defensive for most of the day. It reached a low of 97.92 and closed at 98.01.

Isabel Schnabel has become the most listened to and influential member of the ECB’s Governing Council over recent months, making several hawkish statements about the future path of monetary policy.

However, her latest statement is a little less hawkish, as she told reporters yesterday that she has not called for a rate increase anytime soon, even though she still believes the next move will be a hike.

She said that rates will likely stay stable for quite some time. There are more inflationary than disinflationary forces at work, although I didn't say rates should be raised. No rate hikes are expected for the foreseeable future, and no one should expect one at present.

That indeed clarified her position, although the slightest whiff of inflation will likely prompt her to make further hawkish remarks.

She is considered an outsider to be the President of the ECB. If it is to be a German this time around, the timing would be ironic, with the country’s influence over the other twenty members of the EU probably at its lowest point since the Central Bank came into being.

Most German business associations expect job cuts in 2026 as the country's economic crisis persists, with the industry hit the hardest by global protectionism and weak exports, a survey by the German Economic Institute IW showed on Monday.

Of 46 business associations surveyed, 22 anticipate workforce reductions next year. Only nine expect to increase hiring, and 15 foresee stable employment levels.

The automotive, paper and textile industries are among those expecting production declines. They have been hurt by rising protectionism, weak exports, and high domestic costs, which have eroded Germany's price competitiveness, the survey found.

"Those who hoped for a swift and comprehensive end to the economic crisis will also be disappointed in 2026," said IW director Michael Huether. The economy is "stabilising at a lower level," he added.

Investment plans remain subdued. Just 11 associations expect increases while 14 anticipate cuts and 21 see stagnant investment at low levels, the survey showed.

Some bright spots emerged in sectors benefiting from increased defence spending, including aerospace and shipbuilding. Services also reported improved conditions compared to last year.

Business sentiment showed a modest improvement, with 19 associations expecting higher production than in 2025, compared with nine anticipating declines. This marks the first positive outlook in years. The survey failed to account for the effects of AI, although the region is increasingly falling behind China and the U.S. in the sector.

The euro was also in holiday mode yesterday, but it is still viewed in a positive light. It reached a high of 1.1789 as the resistance at 1,1800 put off buyers, and it closed at 1.1770.

Have a great day!