24 August 2026: The July deficit tightens the fiscal outlook for the Budget

Retail sales fell back as expected in July after a June surge, when hot weather boosted demand for fans and air conditioners, and supermarkets offered promotions alongside the World Cup, official figures showed on Friday.

Retail sales volumes last month fell 0.5% from June, in line with the median forecast in a Reuters poll, while YoY sales growth slowed to 1.6% in July from a downwardly revised 3.8%, slightly below expectations for a fall to 2.2%. The biggest drag came from clothing and footwear sales, which fell the most since May 2025, down 2.7% MoM, after many stores began summer sales in June rather than July.

Consumer sentiment surveys suggest demand has remained robust, despite higher energy costs caused by the US/Israel war with Iran, boosting new Prime Minister Andy Burnham, who has tried to mollify voter anger about the cost of living since taking office in July. The Government’s decision to remove VAT from household electricity bills from October was likely to boost demand later in the year, and global energy prices looked less threatening than a few weeks ago.

The UK government ran a larger-than-expected £1.8bn deficit in July, underscoring the challenges facing Chancellor John Healey as he draws up his first budget.

City economists had expected zero shortfall for July, a month when Treasury receipts tend to be swollen by self-assessment income tax payments.

At £17.1bn, self-assessment tax paid in July was £1.7bn higher YoY. However, the Office for National Statistics said the government still ran the £1.8bn deficit, as “spending growth outpaced receipts”.

In the first four months of this financial year, the cumulative deficit was £56.7bn, lower than last year but still £2.3bn ahead of the figure forecast by the Office for Budget Responsibility.

Government borrowing was driven by higher spending on benefits, raising the likelihood of tax rises in this year’s autumn budget; spending on benefits, covering state pensions and welfare, rose by £2bn over the year to £30bn in July.

Sterling ended last week stronger overall, driven mainly by broad USD weakness, firmer UK activity data (notably PMIs), and persistent expectations of BoE rate hikes. GBP/USD posted its fourth straight weekly gain, touching its highest level since February, while performance against other majors was mixed.

The coming week is light on market-moving UK macro data. The ONS calendar is dominated by structural reports and social statistics releases, with no GDP, CPI, labour market, or retail sales prints scheduled. The only items with modest market relevance are CBI retail sentiment and real-time indicators.

Treasury Secretary Scott Bessent told CNBC last week that an accelerated buyback of government debt could exceed the announced $4 billion.

In a live interview, Bessent said his department would “make a market” in longer-dated securities, where yields have been surging. The Treasury announced on Wednesday that it would double its scheduled $2 billion in buybacks of longer-dated government debt, sending yields sharply lower.

“We’re going to increase the size of the buyback,” he said. “I would expect that it could now be more than $4 billion per issue.”

The remarks briefly eased yields, which had largely reversed their decline after Wednesday’s announcement. The 30-year bond was most recently trading around 5.235%. This maturity had recently been trading at levels not seen since before the global financial crisis in 2008.

President Trump hit back at Canada yesterday after its Prime Minister, Mark Carney, announced retaliatory tariffs on American goods, escalating a trade dispute that has strained relations between the two longtime allies.

“Canada wants the benefits of being a State, without being one!!!” Trump said in a post on Truth Social, renewing his repeated suggestion that Canada should become the 51st US state.

“They have also charged our great farmers, for many years, massive amounts of Tariffs. No more!!!” he added.

Trump’s comments came a day after Carney said Canada would impose new tariffs on US products, particularly steel and dairy goods, from September 8.

The move followed the collapse of trade negotiations between Ottawa and Washington, with Carney rejecting what he described as “uneconomic” and “unfair” terms proposed by the Trump administration.

New US tariffs of 50% on a range of Canadian goods took effect on Saturday, affecting approximately $20 billion of products, or about 5.5% of Canada’s exports to the United States. The affected goods include products ranging from hockey sticks to cement and alcohol.

Carney said the Canadian Government could not accept the terms presented by Washington and vowed to protect Canadian workers and businesses.

“We cannot accept what they’ve offered, and we will not give what they’ve asked,” Carney said on Saturday.

The strongest growth in the U.S. services sector in nearly two years powered a sharp acceleration in overall business activity in August, offsetting a slowdown in the manufacturing sector, which was restrained by reduced stock-building and supply disruptions from the U.S.-led war with Iran.

The Purchasing Managers' Index surveys published by S&P Global on Friday suggest that, with the third quarter nearly two-thirds complete, overall U.S. economic growth is on track to double the second quarter's 1.5% annualised expansion rate.

S&P Global said its flash services Purchasing Managers' Index rose to 56.8, the highest since December 2024, from 54.6 in July, and drove the Composite Output Index up to 56.0, the highest since April 2022, from 54.5 last month. Strong services growth more than offset an easing in S&P's manufacturing PMI to a five-month low of 53.2 from 53.9 in July.

The USD had a broadly weak week, falling against most G10 currencies. Lower long-term U.S. yields, Treasury buyback plans, and markets looking past the Fed’s hawkish July minutes drove the decline. Commodity currencies (AUD, NZD, CAD) and European FX outperformed the dollar, while USD/JPY briefly fell after joint U.S.–Japan signalling on yen strength.

The coming week’s U.S. data is heavy and market-moving, centred on housing, consumer confidence, durable goods, GDP (Q2, 2nd estimate), and, most importantly, PCE inflation, the Fed’s preferred gauge—jobless claims and Michigan sentiment close out the week.

The Eurozone economy gained further momentum in August, with the flash Composite PMI rising to its highest level since last November and signalling solid third-quarter GDP growth. Manufacturing led the upturn, particularly in Germany, while services growth was supported by rising demand outside the two largest economies.

Hiring rallied for the first time this year, and price pressures eased, though inflation remains high enough to sustain a hawkish bias among policymakers.

The headline S&P Global Flash Eurozone Composite PMI Output Index edged up to 52.1 in August from 52.0 in July, its highest since last November.

The sustained solid rise in business activity in August puts the Eurozone on course for a robust increase in third-quarter GDP of around 0.3%.

The number of banknotes in circulation in the EU is rising despite widespread smartphone payments, new data shows, with wildfires ripping through parts of Europe fuelling demand for an emergency stash of cash.

While cash plays second fiddle to contactless payments in many cities across Europe, the amount in circulation is actually going up, Philip Lane, the European Central Bank’s Chief Economist, told the MacGill summer school conference in Ireland.

Experts say the rise in cash is linked to anxiety over wars and the impact of cyber-attacks on online and contactless payment systems.

“The total stock of banknotes is continuing to grow. In transactions, the number of notes is coming down, but in terms of the stock it is increasing,” Lane said.

Christine Lagarde, President of the European Central Bank, could take over the Presidency of the World Economic Forum in 2027, a Swiss newspaper reported yesterday.

At a board meeting near Geneva this week, Lagarde was reportedly described as a "putative candidate" to lead the organisation behind the annual Davos gathering of political and business leaders. According to sources cited by the newspaper, she also said she was "ready to serve".

The WEF's board is currently co-chaired by Roche vice-chairman André Hoffmann and BlackRock CEO Larry Fink, who are navigating a leadership transition after founder Klaus Schwab stepped down last year.

The paper said the board did not determine exactly when Lagarde should take over the presidency, adding that the only point of agreement was that Fink and Hoffmann should still chair the annual Davos meeting in January 2027.

Lagarde’s future is also ‘muddied’ by her determination to be involved in the French Presidential election next year, although she has ruled out running as a candidate.

The Euro had a strong week, rising about 1% against the USD and reaching its highest level in roughly three months, supported by strong Eurozone PMI data and broad USD weakness linked to the U.S. Treasury buyback plans. Against other majors, performance was mixed: EUR gained modestly against CHF and JPY, but fell against AUD and NZD and was slightly weaker against GBP.

The coming Eurozone data week is busy and macro-relevant, dominated by German Ifo, multiple GDP updates, PPI, confidence surveys, and flash CPI for France and Spain. Thursday’s ECB Monetary Policy Accounts add policy significance.

Have a great day!