13 August 2026: Defence spending is set for a boost under Burnham

The UK economy will barely grow next year if disruption to the Strait of Hormuz linked to the Iran war continues until the end of 2026, according to Treasury officials. Internal Treasury modelling suggests UK GDP could grow as slowly as 0.3% in 2027, Government sources have said.

Officials have said they routinely plan for all possible scenarios, with this growth projection linked to a more extreme situation.

This comes amid modest growth in the UK economy, although the Office for National Statistics is expected to reveal later today that GDP flatlined in June.

The conflict in the Middle East has driven energy prices higher since February and weighed on consumer sentiment.

Yesterday, modelling shown to the Prime Minister and Chancellor, first reported by Bloomberg, said the UK economy could grow by 0.9% this year even if there is no permanent peace deal between the US-Israeli forces and Iran.

This would be a significant miss against the 1.1% predicted by the OBR earlier this year. The OBR had earlier predicted 1.6% GDP growth in 2027.

The more extreme scenario also indicated that CPI inflation could peak at 4.3% in the first quarter of next year, with disruption in the Strait of Hormuz likely to keep oil and gas prices elevated.

The forecasts come ahead of further key economic data for Andy Burnham.

A consensus of economists has predicted that the ONS would reveal this morning that the economy was flat in June but grew by 0.4% in the second quarter of this year.

This would mean that growth has continued after a 0.6% rise in GDP in the first three months of 2026.

The inflation data will be carefully considered by the MPC, with three of its members already having voted for a rate increase at its most recent meeting.

John Healey’s move from Defence Secretary to the Treasury strengthens the case for higher UK defence spending. As a long-standing advocate for greater investment in national security, Healey arrives at the department responsible for turning spending ambitions into funded reality.

His frustration with Treasury caution was well documented; now, as Chancellor under Burnham, he has a direct role in shaping the outcome.

That matters for markets. Defence supplier stocks respond not simply to political rhetoric, but to credible budgets, funded procurement programmes and contracts that translate into revenue.

Given the current lack of funds in Government, it has become increasingly clear that Healey will need to be creative with budgets for other Departments to fund the Country’s commitments to defence.

This year’s unprecedented series of heatwaves is likely to have cost the UK economy more than £4bn in lost output by the end of July, according to new analysis by the think tank Verdant, which warns the annual cost could exceed £25bn by 2030 as British summers become characterised by high temperatures and a lack of rainfall.

Verdant estimated the economic cost of June’s hot weather at £2.36bn. Updating its assessment to include last month’s high temperatures, it now puts the hit to output at £4.4bn.

The think tank says the direct costs arise because workers across many industries become less productive during heatwaves, while infrastructure and equipment overheat and must be shut down. The largest effect is likely to have been felt in London and the south-east, where temperatures have been highest, it argues.

James Meadway, Verdant’s director, said: “The economic costs of climate change are already with us, and set to worsen in future years. Action by the Government to protect workers and businesses from the severe effects of extreme heat is well overdue, with the cost being borne by commerce and industry.”

The pound edged up by approximately 0.24% against the US dollar. Opening near 1.3509, it traded within a narrow daily range between 1.3502 and 1.3544, closing near 1.3539. The Euro was relatively flat against Sterling, reflecting muted volatility across European crosses ahead of key macroeconomic releases. Market movements have been fairly typical for August and have remained contained within tight ranges as traders balanced global interest rate outlooks against localised FX flows.

Yesterday’s release of inflation data, often a pivotal market moment, drew a collective ‘meh’ from investors.

Despite inflation’s global significance and its bearing on future US interest rates, the market remained largely unmoved. Federal Reserve Chairman Kevin Warsh noted that headline inflation eased modestly from 3.5 per cent to 3.4 per cent, in line with expectations.

Meanwhile, core inflation, which strips out the more volatile elements such as food and energy, registered 2.5 per cent. While this offered a slight sigh of relief, easing pressure on the Fed to raise rates in September, the S&P 500 remained flat, and the 10-year US Treasury yield actually increased.

This data release would have been welcomed by the neutrals and hawks on the FOMC, even if it did nothing to dampen the three dissenters' hawkish stance from the last meeting.

This market indifference signals that investors are less focused on backwards-looking data, especially as renewed geopolitical tensions push oil prices towards US$90 a barrel, suggesting inflation could rebound. Medium to long-term pressures, including rising US government debt and significant AI infrastructure spending, also weigh on sentiment.

Crucially, the most potent force currently propelling US markets is the extraordinary surge in corporate profits. Wall Street’s June quarter profit season saw S&P 500 earnings per share surge by 46.7 per cent, building on a 19 per cent climb in the March quarter. Even excluding specific investment gains, earnings still rose an impressive 25.7 per cent.

Unless U.S. inflation drops meaningfully this month, the balance of evidence favours a September Fed hike. The latest data and policymaker commentary indicate that inflation remains above target, labour-market weakness has complicated the picture, and markets are pricing a hike as the base case rather than an outlier.

Several FOMC members have disregarded the latest employment data, saying the jobs market is where they expected it to be. Chicago Fed President Austan Goolsbee, who does not have a vote this year, recently said that inflation is the single most concerning issue for the economy.

Iranian authorities have pushed back against U.S. President Donald Trump’s repeated claims that Washington has “total control” over the Strait of Hormuz.

Yesterday, Iran’s Persian Gulf Strait Authority said in a post on X that “Claims and repeated posts by U.S. officials that the Strait of Hormuz is no longer blocked do not change the reality: the Strait of Hormuz remains blocked and will not be reopened until Iran’s conditions are accepted.”

Earlier, Trump had said in a Truth Social post that “The U.S.A. has total control over the Strait of Hormuz and I think we will keep it!”

While both sides continue to make opposing claims, data from the trade intelligence firm Kpler show that ship traffic through the Strait of Hormuz is near a 3-month low.

The constant stream of rhetoric is harming Trump's case. Having already failed in his first mission in Iran, aimed at regime change, he has managed only to replace the ‘old guard’ with a more radical group who bear the scars of U.S. actions in the early part of the war.

Yesterday, the U.S. Dollar Index traded near 99.9, holding virtually flat to slightly higher after the release of the U.S. July inflation report. Despite the tame inflation numbers, the greenback held onto its recent recovery from multi-month lows around 99.5. Support was driven by elevated wholesale energy and oil prices and geopolitical tensions over the Strait of Hormuz, which kept safe-haven interest intact.

It seems that every official and member of the ECB’s Governing Council has taken ‘August off’, given the current lack of comment emanating from Frankfurt, Paris and Rome. This has given several commentators the confidence to present their theories as facts without fear of immediate contradiction.

Eurostat’s Business Cycle Clock indicates that the eurozone economy remained in a slowdown phase in Q2 2026, with no signs of recession or stagflation.

The slowdown, which began in November 2025, persisted amid weaker economic activity, worsening geopolitical conditions and rising tensions in commodity and energy markets. Eurostat warned that these factors could reignite inflationary pressure. The Business Cycle Coincident Indicator remained above recession levels, while the Growth Cycle Coincident Indicator continued to signal slower growth.

Reforms, reforms, reforms. Time and again, the European Union, in its various forms, the European Commission, the Council of the European Union, and the Eurogroup, have called on National Governments to adopt a decisive policy agenda in the name of competitiveness and resilience to external pressures.

The call for structural reforms stems from the crises the Eurozone experienced in the early 2000s, and it has never ceased; Italy, which remains under pressure, is well aware.

Now, experts at the European Central Bank are seeking to contribute to the debate: “Can structural reforms unleash private investment?” asks a recently published working paper. The answer, apparently, is yes.

The research is based on the fact that the anecdotal evidence directly linking structural reforms to private investment “remains surprisingly scarce.” Hence the studies. The ECB’s analysis reveals that “major labour market reforms generally increase the level of real private investment by 5% cumulatively within six years, while major product market reforms have an impact of 3%.”

It would be useful if the ECB gave National Governments a hint about the direction it would like reforms to take. After all, they are currently barely able to gather credible data on their own job markets.

The exceptionally warm weather has led to huge swathes of countryside in France and Spain being burned, but spare a thought for the Italian cheesemakers.

Summer heatwaves are putting the squeeze on Italy’s cheese reserves, with a major impact on a culturally iconic economy that predates da Vinci, Michelangelo and Dante.

The weather is affecting “cheese banks” in Emilia-Romagna, where hundreds of thousands of Parmigiano Reggiano wheels are stored as collateral for farm loans. The heat is driving up warehouse energy bills to keep them refrigerated and thinning the milk supply needed to make them.

All of this affects a billion-dollar economy that boasts more than a thousand years of tradition, strict regulation and artisanal skill. Each wheel of cheese represents months of painstaking labour, patience and maturation.

According to Euronews, Credito Emiliano has taken young, unmatured wheels of cheese as collateral for more than 70 years. Subsidiary Magazzini Generali delle Tagliate matures cheese in Reggio Emilia and Modena and holds more than 500,000 wheels valued at more than 400 million Euros.

The Euro traded in a relatively tight band with a slight downward bias against major currencies yesterday, as forex markets consolidated ahead of key data releases that will influence next month’s Central Bank meetings.

Have a great day!