23 December 2025: How likely is AI to replace the human workforce?

The UK economy is officially in rut. GDP data which was published showed that the economy grew by just 0.1% in the three months to September. The Government and the Chancellor are deeply unpopular, with Rachel Reeves in the firing line over a series of extremely policy decisions which have alienated large numbers of voters. From farmers to publicans and restaurateurs, small businesses feel that they have been targeted by tax increases while the benefits bill and welfare payments grow unshackled.

The latest strike by junior doctors ended yesterday with the Health Minister, Wes Streeting saying that in the New Year he hopes that he can solve the issue as long as the BMA is realistic about its demands for pay increases. It is true that since the new Government came to power it has singled out public sector workers for inflation busting pay increases while the private sector has seen its taxes increased to record levels.

Tax and spend. That is what Rishi Sunak prophesied in the dying days of Conservative rule, and that is what this Government has as its central policy. Talk of fairness in the tax system have vanished, while Keir Starmer’s five policy pledges are now a distant memory:

Clean energy is still a goal, but the cost of renewable energy is considered too high for the current business environment and is proving to be a weight around the Cabinet’s neck.

The pledge to grow the economy through greater investment is being constantly tinkered with while debt is still at record levels.

It is true that NHS waiting lists have come down, but that was never going to be a difficult challenge. Real change through innovation and invention have been sacrificed on the altar of a series of minor investments, while junior doctors believe they have a genuine grievance.

More opportunity through better practical education, including an increase in apprenticeships is under threat from the rise of AI which Ministers appear to have been blind to, while other G7 have embraced innovation. The Worker's Rights Bill which has been driven through Parliament will drive a wedge through businesses' ability to be nimble and encourage innovation through new technologies.

Finally, there has been little change to the arrival of small boats and the pledge to make the streets a safer place.

As we approach the end of a difficult year, the Prime Minister appears to want to forge closer ties with the EU. That may well be the way to go, but it should be remembered that Labour’s dilly-dallying under Jeremy Corbyn ten years ago as much as anything to the decision to leave the EU. The Remainers did not get the representation they deserved.

Bank of England Governor Andrew Bailey has warned that artificial intelligence (AI) is likely to displace British workers in a way comparable to the disruption caused by the Industrial Revolution. Speaking on BBC radio, Bailey said the UK must be properly prepared for the scale of change AI could bring to the labour market. He stressed the importance of investment in education, training and skills to help workers adapt.

"The really important element there is that we have training, education, skills in place, and that we positively encourage and foster that so that people can move into jobs that use AI."

The financial markets are experiencing the lack of liquidity that is always prevalent at this time of year. The pound rallied to a high of 1.3477 and closed at 1.3457. There has been resistance at 1.3480 throughout the majority of the third quarter, although with rates still having further south to travel, it is doubtful that investors will want to enter the New Year with a positive attitude towards Sterling.

The Fed has been in the spotlight for the entire year as its chairman comes to the end of his term in office. Jerome Powell has gone from hero under President Biden as he steered the economy through several setbacks, including the Pandemic, to zero under President Trump, who sees Powell as the epitome of all that is wrong with the economy.

Trump wants rates to be cut irrespective of the level of inflation, something else that he blames the Central Bank for. He has shoehorned his own supporters onto the rate setting Federal Open Market Committee, although he still doesn’t command the votes to have it do his bidding.

Powell has simply “got in with the job” of steering the Fed and the economy through a typically tough time when it is experiencing contrary signals.

Inflation remains uncomfortably high, and throughout the middle two quarters it was impossible to loosen monetary policy due to the unknown outcome of the imposition of Tariffs on U.S. imports of raw materials and finished goods, particularly as Trump used their threat as a weapon to bring his rivals to the negotiating table.

Making his first trade deal with the UK proved to be a master stroke, as he held up Starmer’s acquiescence as an example to the rest of the G7 and beyond. He will have been disappointed that the EU seems to have weathered the “worst of the storm”, which leads several commentators to believe that he will want to “make a splash” as he has the mid-term elections to face in 2026.

Stephen Miran joined the Fed Board in September 2025 to fill an unexpired term that officially runs through January 31, 2026, and has quickly emerged as one of the most dovish voices on policy.

He has repeatedly argued that inflation data, particularly around the government shutdown, may be overstating underlying price pressures, that the neutral rate has shifted lower, and that policy should continue adjusting down to avoid increasing recession risks. Jerome Powell has never dealt in “maybe’s” relying on solid economic data to drive policy forward.

While he previously dissented in favour of larger rate cuts, Miran now says the case for a 50bp cut has lessened somewhat given moves already made, stressing the need to stay data-dependent as the Fed approaches neutral.

Looking ahead, Miran has indicated he expects to remain on the Board beyond January if no successor is confirmed, but his longer-term future hinges on whether he is re-nominated and approved for a full term.

As with many decisions taken by the Fed as much to leave rates unchanged as to cut, it depends on who you ask to decide if they are fulfilling their dual mandate.

Powell will be gone by the end of the Second Quarter of 2026 and is said to already be working on a memoir of his time at the Fed. His replacement is still unclear, despite the several teasers that have been offered by President Trump.

The dollar index lost ground yesterday and will likely begin the New Year on the Blackfoot, although there are several levels of support that are unlikely to be broken without some seriously negative news before year-end.

Yesterday it fell to a low of 98.20 and closed at 98.26.

If the ECB ever stops praising itself for lowering the rate of inflation through the past eighteen months, it will see that its benign neglect of economic growth may lead to a lost five years when the economy has barely moved forward at all.

Germany is struggling to make any headway and the programme of public investment introduced by Chancellor Friedrich Merz appears to have lost its lustre, although it is still expected to drive the German Economy into positive territory throughout 2026.

The German Economic Minister painted a sombre picture of the German economy yesterday. Katherina Reiche said that, for the first time since the founding of the Federal Republic, Germany could no longer guarantee that the next generation would be better off than the current one.

Reiche attributed the slowdown to weakening exports, persistently high energy prices, and demographic pressures.

To revive growth, she argued, Germans would need to work more, encouraged by raising the retirement age and incentives to increase weekly working hours. Measures such as tax breaks or expanded childcare provision could encourage more people to move from part-time to full-time employment, she said.

Reiche also criticised the practice of sending skilled workers into early retirement while companies complain of labour shortages, saying all sides would need to compromise.

The comments come amid broader concern over Germany’s economic direction following years of weak growth and industrial decline. Decisions by governments led by both the centre-right CDU and the Social Democrats, such as the phase-out of nuclear power and the rapid break with cheap Russian gas supplies, have contributed to higher energy costs for industry.

The picture of the French economy looks a little brighter according to the Banque de France. Following a turbulent year when Prime Ministers have come and gone like London buses, the French economy is expected to grow steadily in the coming years, according to updated forecasts from the Central Bank. Of course, there is only so much that the Bank can do to influence its economy, since its decision making is mostly hobbled by the ECB.

Looking further ahead, the Bank of France projects the Eurozone’s second-largest economy will expand by 1.0% in both 2026 and 2027, before reaching 1.1% growth in 2028.

Isabel Schnabel, the ECB undoubted hawk, told reporters yesterday that no increases are expected in the foreseeable future. This was seen as an effort to clarify her position. She has made two very separate comments recently which have given the markets pause for thought as we enter 2026.

First, she “threw her hat in the ring” to be considered to replace Christine Lagarde as President of the ECB when Lagarde’s term ends in 2027 and then made it very clear that she believes that the next move in official interest rates would be a hike. The fact that she gave no time frame for such a move caused a stir and saw the Euro gain ground, particularly since the Fed is still in “rate cutting mode".

The Euro continues to be well-supported in thin holiday affected markets. Yesterday, it rose to a high of 1.1769 and closed at 1.1759.

Have a great day!