6 October 2026: UK Private Sector growth is revised slightly higher

UK Chancellor John Healey faces an escalating balancing act as he prepares to deliver his first Autumn Budget on October 28th. Following a steep decline in the UK's fiscal headroom, economists and market analysts warn that the new administration's policy measures could quickly devolve into a high-stakes "numbers game" under strict fiscal rules.

The Chancellor is caught between Prime Minister Andy Burnham’s rapid-fire public spending promises and an increasingly hostile macroeconomic climate: a sharp rise in UK borrowing costs, exacerbated by global instability and the outbreak of the Iran war, has stripped away roughly £12 billion from the Treasury's fiscal buffer.

Accounting firm EY's economists estimate that Healey must identify at least £12 billion in new tax revenue just to cover existing domestic policies, such as the national bus fare cap and the removal of VAT from domestic energy bills, before funding further structural spending.

The S&P Global UK Composite PMI came in at 52.0 in September, revised slightly higher from the preliminary estimate of 51.7 but down from 52.5 in August, marking a three-month low.

The slowdown reflected softer growth in both the services sector (52.1 vs 52.5 previously) and manufacturing (51.9 vs 51.7), although the latter continued to expand marginally for an 11th consecutive month.

New business growth also slowed to a marginal pace, while backlogs continued to decline, extending a trend seen since May 2023.

On the price front, input costs for the private sector accelerated to their highest since June, largely due to higher energy and fuel costs, which raised transport costs and pushed output price inflation higher.

Employment fell a little further despite positive projections for business activity. Looking ahead, business optimism eased from August but remained above its second-quarter average.

Interest rates may remain unchanged for the rest of 2026, and the latest data shows this is the base-case expectation among economists. But it is not guaranteed: the risk of higher inflation later in the year still leaves a small chance of a hike.

A Reuters survey of economists (between August and September) found that nearly 90% expect the Base Rate to stay at 3.75% for the rest of the year, while only a small minority expect a hike to 4.00% by year-end. No one is considering a cut for at least nine months. This is the clearest signal: a consensus is for no change.

It was interesting to watch the TV news last evening and see the Conservative Party Conference relegated to third or fourth place. This was the clearest example of the Tories’ fall from grace since the election. Although Kemi Badenoch and her colleagues are not yet irrelevant, producers and programme planners clearly believe the once-dominant Party has little chance of forming a Government, even in the long term.

Sterling slipped modestly in FX markets yesterday, with the pound losing ground against the US dollar and declining slightly against the euro. The move reflected a firmer dollar and continued post‑September softness in GBP. The move was modest but continues the softening trend seen since late September.

The hawks are alive and well at the Federal Reserve. Dallas Fed President Lorie Logan has called for another half-percentage-point increase in the Fed Funds rate.

The Federal Open Market Committee raised the Fed Funds target range by a quarter of a percentage point, or 25 basis points, to a range between 3.75% and 4% at its September policy meeting. Logan supported that move but says it isn’t enough.

“The FOMC took an important first step at our September meeting by raising the target range for the federal funds rate 25 basis points. Still, I currently estimate the target range needs to rise an additional 50 basis points or even more to appropriately balance the outlook and risks for our dual mandate goals,” Logan, currently a voting member of the FOMC, said.

She stressed that delivering on the Fed’s dual mandate of maximum employment and stable prices doesn’t create a policy conflict. “In combination, a balanced labour market and inflation trending above target mean the stance of policy has been offside. In my view, the FOMC should set interest rates so we are on track to achieve both of our dual mandate goals, not just one,” she said.

Inflation has been above the Fed’s 2% target for at least five years, while job growth has been slowing for several reasons, including the adoption of AI in both the manufacturing and services sectors.

Meanwhile, Minneapolis Fed President Neel Kashkari said in a Reuters interview that he was marginally less hawkish, even as he anticipated another rate hike. He told reporters that further rate increases will likely be needed into 2027, while leaving the timing of the next move unresolved.

Kashkari said he was “open-minded” about the October 27–28 meeting and did not have “a strong view” on whether the Fed should hike then. His September projections called for one more 25bp increase in 2026 and another in 2027, keeping further tightening as his baseline even as the near-term timetable remains flexible.

Kashkari also signalled that risks to his current rate path may be skewed higher if economic resilience persists. If growth remains exceptionally strong and inflation proves stickier than expected, he said: “policy could need to go higher yet than I’m anticipating at this moment.” Kashkari added that with the labour market looking healthy and the economy performing well, “policy is probably not particularly restrictive right now.”

Every aspect of the Federal Reserve’s job requires balance: even its mandate of 2% inflation while striving for maximum employment requires a trade-off when setting interest rates.

One conundrum the Central Bank, specifically the FOMC, must solve is the ripple effect of raising the Fed Funds rate on industries, which ultimately trickles back to consumers.

Torsten Slok, chief economist for global asset management giant Apollo, told clients over the weekend that the Kevin Warsh–led Fed faces a “doom loop” in which higher rates lead to higher rents. He told investors: “When rates are high, builders build less, and when fewer homes and apartments get built, rents go up, which pushes inflation higher and keeps rates high.

“Call this the ‘higher rates, higher rent doom loop.’”

President Trump plans to announce executive actions to lower high fuel costs weighing on Republicans ahead of the midterms, the White House said.

Trump plans to tout the moves during a campaign stop in Nebraska, where high diesel costs and the President’s step to increase foreign beef imports ahead of November have riled farmers and ranchers at the peak of harvest season across Republican-supporting and battleground states.

The announcement will follow weeks of chaotic messaging on high diesel prices, punctuated last Friday when Trump said he would not impose a diesel export ban after repeatedly saying he was considering it.

The dollar index continued to move into uncharted waters as G10 currencies, particularly the Euro, succumbed to widening interest rate differentials, even as a pullback in Treasury yields reduced expectations of further near-term Federal Reserve tightening.

European Central Bank policymaker José Luis Escrivá has expressed concern about rising global bond yields and elevated energy prices.

The Spanish Central Bank chief said interest rates have not reached levels that would constrain economic growth. Escrivá expressed concern that rising yields could put upward pressure on rates.

"We are still not in a restrictive territory," Escrivá said. "What I would start to worry about is the global upward trajectory of long-term rates."

He added that "this can add pressure to short-term interest rates."

Escrivá also highlighted concerns about energy prices. "In the current situation, high energy prices are worrisome if this persists and has second-round effects," he said.

Escrivá, a member of the ECB’s Governing Council, warned that sustained high energy prices could trigger second-round inflation effects.

The Euro has fallen to its lowest level against the dollar in 17 months as concerns mount over the health of France's public finances.

The single currency dropped as much as 0.9% against the dollar yesterday to 1.1160, its weakest level since May last year. It follows four straight weeks of declines against the dollar.

The common currency has come under pressure amid mounting worries about high debt levels and political gridlock in France ahead of next year's presidential election.

Sébastien Lecornu, the French Prime Minister, hopes to cut €54bn (£46bn) in public spending in his budget as he battles to reduce the deficit in Europe's second-largest economy.

However, he faces stiff opposition from politicians jockeying to replace Emmanuel Macron at the election in April 2027.

Marine Le Pen, leader of the hard-Right National Rally, is considered the frontrunner, but investors have questioned her commitment to spending cuts. She said a "golden rule" to restrain French deficits would be subject to a referendum.

That does not exactly inspire confidence, given a population that has thus far rejected calls to cut spending.

With Le Pen's star rising and a widely held view in the market that she will lack the political will to set France's fiscal balance sheet in order, it is little wonder pressure is mounting in France.

French government borrowing costs are now at their highest level since 2002, with the yield on 10-year government bonds within a whisker of 5pc, and the spread between French and German borrowing rates is at the highest level since the 2012 eurozone crisis.

Meanwhile, Spanish Prime Minister Pedro Sánchez called for snap elections on Monday, just days after his left-wing minority government failed to pass emergency measures to tackle the country’s worsening housing crisis. The election, set for Nov. 29, is likely to be risky, as Sánchez has never led his Spanish Socialist Workers’ Party to an outright parliamentary majority.

Last week, tens of thousands of Spaniards took to the streets to protest soaring rents and a lack of affordable housing. Symbolising the movement was 87-year-old María del Carmen Abascal, who was forcibly evicted from her home of seven decades after the investment firm that purchased her apartment increased her rent by 230%. Although Abascal’s legal team successfully challenged her eviction order, demonstrators have continued to demand stronger tenant protections.

On Friday, Sánchez tried to pass two housing measures to quell public anger. The first would have frozen evictions for vulnerable tenants until 2030, while the second would have allowed automatic rent renewals without rate increases or lease expirations. However, Spain’s conservative opposition voted down both proposals, arguing that federal intervention would lead to higher prices and fewer rental options.

This legislative defeat, coupled with corruption allegations against Sánchez’s inner circle and a recent immigration crisis, has exposed the weakness of Spain’s governing coalition.

Snap elections may therefore be Sánchez’s last chance to hold on to power.

Finally, the Chief Economist of the European Central Bank (ECB), Philip Lane, has noted that rising energy prices are causing a downward adjustment in consumption, which in turn will reduce inflationary pressures in the medium term and give the institution room to moderate the pace of monetary tightening.

Have a great day!