13 July 2026: The UK economy is set to stay in the slow lane

Bank of England Governor Andrew Bailey has warned of a “triple whammy” of AI threats, amid soaring valuations, growing cyber risks and automated trading models.

A twice-yearly assessment by the Bank highlighted the frenzy for AI stocks, including the recent market debut of SpaceX. That raised the risk of a damaging crash if the bubble burst, potentially plunging the economy into recession.

Bailey also pointed to the dangers posed by rapid advances in the technology itself, as cyber-attacks threaten banks' IT systems.

A third problem is how financial firms could use AI for trading, the Bank said, as Bailey confirmed: “There's a triple whammy.”

The Bank issued the alert as part of its Financial Stability Report, its regular assessment of risks to the UK financial system.

Bailey said that since the last report in December, the rise of so-called “frontier AI” models such as Mythos had been “the biggest thing that's changed”.

He said he was speaking to bank CEOs about how to address the risks, including potential vulnerabilities in the national payments system it operates.

“These models are a big step forward in terms of capabilities, and the threat issue is a really major step forward. We've all heard about it, but it is for real,” Bailey said.

The Bank has previously warned of the risk of an AI-related stock market bubble. But yesterday, it said that since the end of last year, valuations had become even more stretched. Although valuations are stretched, that does not mean that any significant correction in stock prices would signify a crash, since, as with many of the market’s actions, stock prices are driven by a “herd mentality”. Bailey is most concerned about any subsequent knock-on effect.

The economy is expected to remain stagnant for another month, with industries under pressure and geopolitical tensions hindering growth.

The Office for National Statistics will publish May’s Gross Domestic Product figures this Thursday.

Market analysts widely expect GDP to have either flatlined or declined marginally in May, following April's 0.1 percent slip. This marked a sharp pullback from 0.3 percent growth in March and 0.4 percent in February, the first contraction since last August.

The April decline was led by a fall in the dominant services industry, despite offsetting growth in construction and manufacturing. Surging fuel and energy costs squeezed businesses and households through April and May, though wholesale prices have recently eased.

Chancellor Rachel Reeves commented on the impact, stating it was "not a war we wanted or joined, but one that will have an impact at home".

The aerospace, defence, security and space sectors added £46.8 billion to the UK economy in 2025, a 65% increase over the past decade, according to new figures from the trade association ADS.

The data show the sectors generated almost £110 billion in turnover last year, up 62% since 2015, while employment grew by nearly 40% to 468,500, including 29,000 apprentices. Productivity across the combined sectors stood at £99,900 output per worker, ADS said, almost 25% higher than the UK average.

Exports grew by more than two-thirds over the decade to reach £50 billion, now accounting for 45% of sector turnover, and ADS said over 60%of the sector’s jobs are located outside London and the South East, with the largest regional employment in the South East, the South West and London.

Kevin Craven, CEO of ADS Group, said: “After a period of significant economic and geopolitical uncertainty, our industries have demonstrated remarkable resilience and continue to serve as the industrial foundation on which our nations rely. The contribution our sectors make to the economy, and to communities across the UK, continues to grow, supported by an expanding and highly skilled workforce.”

The pound rallied to a high of 1.3451 last week. It closed at 1.3401 as the market contemplated the likely divergence on monetary policy over the course of the third quarter, which is traditionally the “slowed” quarter of the year.

U.S. inflation increased this year and remained above the Federal Reserve's 2%, partly due to supply shocks in certain sectors, including energy, the Central Bank said in its semi-annual monetary policy report on Friday. The report spoke broadly about the factors driving monetary policy without delving into the specifics, a course that the new Fed Chair would actively prefer to steer.

Meanwhile, the labour market has been "broadly stable," productivity growth is strong, and U.S. GDP rose at a moderate pace in Q1. "Overall, economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East," the Fed said.

Again, the Central Bank repeated its "commitment to delivering price stability."

Factors contributing to the rise include prices from earlier tariff hikes, a surge in energy prices due to constrained oil supplies stemming from the conflict in the Middle East, and increased demand for high-tech products that support artificial intelligence applications.

Senator Elizabeth Warren, the top Democrat on the Senate Banking Committee, asked the Federal Reserve’s inspector general last week to review whether Michelle Bowman, the vice chair for bank supervision, violated the central bank’s rules by speaking at a private Bank of America dinner for the firm’s clients last month.

In a letter to Inspector General Michael Horowitz, Warren asked the watchdog to examine whether Bowman’s “attendance or comments violated any statutes, rules, regulations, policies, or procedures and whether the Fed’s existing framework governing such external events should be strengthened.”

Warren's concerns centre on Bowman having delivered a speech at an invite-only gathering organised by Bank of America during the Fed's “blackout period,” when FOMC members are banned from publicly stating their views on monetary policy.

The Wall Street Journal reported that Bowman spoke at the invitation-only dinner on the evening of June 17, just hours after the Federal Open Market Committee said it was leaving interest rates unchanged.

U.S. credit card spending has dropped by the biggest margin in two years, highlighting Americans’ financial strain from ongoing inflation, record interest rates and a “K-shaped” economy.

Total outstanding consumer debt dropped by roughly $ 182 million in May, the Federal Reserve’s recently released Consumer Credit Report showed. This marks the first decrease in consumer borrowing since late 2024.

The overall decline was driven by a $5.3 billion drop in revolving credit, largely credit card debt, marking the largest decline since 2024.

Economists viewed the downtick as a defensive move by households.

Consumers have grappled with five years of high inflation, while credit card annual percentage rates have remained near record highs, making it increasingly expensive to carry a credit card balance.

Analysts also warned that the data points to a deeper issue. Financial institutions like Bank of America warn of an intensifying “K-shaped” economic divide, with a growing disparity between the rich and the poor.

Wealthier households continue to spend comfortably, supported by strong asset appreciation. That includes the value of their homes and stock portfolios. Meanwhile, lower- and middle-income Americans are feeling the pain of record inflation in home prices, rent and food.

Recent house price data showed that although volumes have fallen, this is due to sky-high valuations from realtors who see the upper parts of the “K” being ever more comfortably off.

The US Dollar Index (DXY) posted a small but clear gain last week, ending the week around 100.94, up roughly 0.1% from its open near 100.86. The move was modest, but it extended the dollar’s broader year‑to‑date strength.

As hostilities between the United States and Iran intensify once again, pushing energy prices higher, ECB Governing Council member and Bank of Greece Governor Yannis Stournaras acknowledged on Friday that the Eurozone's fight against elevated inflation is "back to square one."

The ECB has effected its first rate hike in roughly three years at its June meeting, but fading ceasefire expectations are now fuelling renewed market speculation about further tightening.

Speaking at an event in Greece at the weekend, Stournaras said, "Hostilities have started again. We are back to square one." He expressed strong alarm, adding, "This shows how unstable and volatile the situation in the Middle East is, and consequently highlights the uncertainty surrounding inflation forecasts and the challenges that policy must confront."

The backdrop to his remarks is the rapidly shifting landscape in the Middle East in recent weeks. Energy prices surged after the U.S. and Israel launched attacks on Iran in late February. The ECB pivoted decisively toward curbing inflation by raising its policy rate by 0.25 percentage points at its June 11 Governing Council meeting.

After that meeting, crude oil prices temporarily stabilised when the U.S. and Iran signed a provisional agreement to end hostilities, fuelling a widespread view that the urgency for additional rate hikes had diminished. Multiple sources told Reuters that the unexpectedly sharp drop in energy prices had eased pressure on the ECB to hike again at its next meeting later this month.

Across multiple authoritative sources, Europe faces a convergence of energy shocks, geopolitical instability, trade tensions, and structural weaknesses, all of which are reshaping its growth outlook and policy choices.

The war in the Middle East has triggered a fresh energy shock, raising oil and gas prices and tightening financial conditions. The blockade of the Strait of Hormuz has further disrupted supply chains and pushed eurozone inflation above ECB targets.

Meanwhile, Europe’s geoeconomic risk indicators hit an all‑time high in March 2026, reflecting elevated defence, trade, and market volatility pressures.

The IMF projects eurozone growth at 0.9% in 2026 (well below pre‑war expectations), while EU growth is expected at 1.3%. The IMF warns Europe could come close to recession if the energy shock persists and financial conditions tighten further.

Private investment and consumption are already showing signs of weakening. Europe’s economy is not on the brink of collapse, but it is stagnating, and the downside risks are rising.

A far‑right victory in France would be uniquely consequential because France is a founding EU member, a nuclear power, and one of the bloc’s main political engines.

Nationalism, Euroscepticism, and scepticism toward NATO, the U.S. and the EU characterise RN’s ideology. A cohabitation government (Macron + Le Pen/Bardella) would create fragmented or inconsistent foreign policies, weakening France’s ability to lead within the EU.

Legislative gridlock would narrow France’s margins for manoeuvre, reducing its influence in Brussels, which Macron has worked tirelessly to achieve.

RN has an unstable relationship with the Kremlin and a history of admiration for Russia as a defender of “traditional European values, Although Bardella has recently signalled support for Ukraine, analysts warn this may be tactical hedging, not a stable long‑term position.

RN is anti‑American and sceptical of NATO’s command structure. Even limited shifts could weaken European defence cohesion.

The euro weakened modestly in markets last week, losing ground against both the US dollar and the British pound, with price action driven by stronger UK political stability, firmer expectations of Bank of England rate hikes, and a generally stronger USD tone.

The common currency fell to lows of 1.1391versus the dollar and 1.1753 versus the pound. Closing at 1.1415 and 1.1740, respectively.

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