29 December 2025: Starmer U-turns over farmers’ inheritance tax

The services and hospitality “rebellion” which began in the run-up to Christmas, leading to Labour MPs, including the Chancellor being banned from hostelries in the local constituencies, has spread with several telling the media that they are having difficulty getting a haircut locally now as well.

This novel way of showing displeasure with lawmakers is a graphic illustration of the frustration that is prevalent in the country as the economy continues to exhibit a lack of any real growth amid a continuing cost-of-living crisis.

The Prime Minister announced a significant watering down of the proposed inheritance tax measures announced in the 2024 Budget, and due to come into force in April. While this is welcome news for farmers, even though they will continue to campaign for the new measures to be abolished completely, voters will feel entitled to ask who is running the country, since several new policies have fallen victim to U-turns since Labour came to power.

The annual Boxing Day sales have begun with shoppers seeing significant reductions in “bricks and mortar” shops in order to attract shoppers looking for a bargain. The data for the volume of sales is anecdotal so far with some retailers saying they have seen increased footfall, while others, particularly in high streets as opposed to out-of-town retail parks, reporting a slow start.

Although there is a pall of gloom hanging over the country at this time, a survey issued just before the Holiday reported that the UK is set to become the fifth-largest economy in the world by the end of the next decade, overtaking Japan.

According to new research from the Centre for Economics and Business Research, the UK's GDP is expected to surge to $6.8 trillion by 2040. Compared to the UK, France and Germany are expected to experience slower economic growth, which could allow Britain to overtake them in the global rankings.

Germany will stay the world's fourth-largest economy, while Japan will fall to sixth place, behind the UK.

Meanwhile, the United States is expected to remain the largest economy through the next decade, while China will get closer with a GDP of about $48 trillion versus America's $53 trillion.

The pound continued its positive reaction to the Bank of England possibly considering leaving rates unchanged during Q1 '26, as inflation is still well above its target.

It rallied to a high of 1.3534 in thin holiday-affected markets and closed at 1.3503.

The Minutes of the latest FOMC meeting will be published on New Year's Eve, with the market looking for some good news to lead the world’s largest economy into a New Year.

Jerome Powell spent much of the past two years accused of being behind the curve, either too slow to fight inflation or too cautious to cut. The latest data now points in the opposite direction, showing that his steady path on interest rates has coincided with cooling price pressures and surprisingly resilient growth.

The Federal Reserve's recent shift into a measured easing cycle, capped by a December rate cut, is leading closer to a soft landing than many of its critics thought possible.

Instead of tipping the United States into recession, Powell's strategy has kept borrowing costs high enough to restrain inflation while allowing the economy to keep expanding. With growth running strong, markets stabilising, and risk assets from gold to bitcoin responding to a gentler rate path, the evidence now suggests that the chair's controversial calls were more prescient than reckless.

The economy surprised to the upside after the Bureau of Economic Analysis revised third-quarter GDP to 4.3%, while industrial production reached its strongest year-on-year pace in three years. Markets reacted favourably, yet consumers remain cautious: the Conference Board’s confidence index fell to 89.1. Despite the stronger growth prints, market pricing continues to assign a meaningful probability to rate cuts in 2026.

It is rare for there to be immediate change in consumer confidence that coincides with stronger growth data, as such events take time to permeate through into financial markets and retail sales.

Jerome Powell is now letting it be known that in the Fed’s opinion, the United States is heading into a housing crunch in 2026 that interest rate tweaks alone will not fix. His recent comments make clear that even as borrowing costs fall, the structural shortage of homes and the affordability squeeze will keep affecting the market in ways the Federal Reserve cannot simply patch over.

The announcement of Powell's replacement together with their appointment to the FOMC to replace Stephen Miran, whose term ends imminently, will be a significant driver of market sentiment through January. Whether it is Warsh or Hassett, shouldn’t change the outlook too much. Both will have to commit to lower rates to secure the nomination.

The dollar has experienced a long-drawn-out correction throughout the fourth quarter. Last week, it fell to a low of 97.75 and closed at 98.01.

While the data does not suggest a strong recovery by the Eurozone economy, there is a feel-good factor being actively encouraged by the European Council, which so far has no end. It is now common knowledge that the next move in interest rates will likely be a hike, even if that does not happen at all in 2026.

It is becoming ever more difficult to predict the levels of growth in G7 economies since politicians, Donald Trump in particular, continue to “pull rabbits out of hats”. The single most significant boost to the Eurozone economy will, or maybe would be, the end of the war in Ukraine.

Russia’s economy is on the floor, and the cost of the war is not leading to any improvement. Brussels will need to drive its policies towards Russia forward with some haste if it is to make any contribution to any ceasefire. Following a meeting in Florida this weekend between Trump and Ukrainian President Volodymyr Zelenskyy, there are still some serious negotiations to take place between the three main protagonists.

Bulgaria is about to take a big step by adopting the euro on January 1, a move leaders say could strengthen the economy and tie the country closer to Europe. But on the ground, the mood is mixed. Many Bulgarians worry about rising prices, losing a sense of national identity and the political forces shaping the debate, as disinformation and sharp divisions cloud what should be a milestone moment.

This is happening amid fresh domestic political turbulence and fears that Russia-aligned disinformation is deepening distrust of the new currency. The Balkan country of 6.5 million people will become the 21st country to join the eurozone on 1 January, as policymakers in Brussels and Sofia hope it will boost the economy of the EU’s poorest nation and cement its pro-Western trajectory.

Ursula von der Leyen, the president of the European Commission, has said that “thanks to the euro”, Bulgaria will have more trade, more investment and more “quality jobs and real incomes”.

On a recent visit to Sofia, the economy commissioner, Valdis Dombrovskis, said the move was key at a time of Russia’s war with Ukraine, rising geopolitical tensions and global economic uncertainty that “underline the importance of European unity”.

The single currency has experienced a strong end to the year and will likely end up close to its medium-term level of resistance. Last week it reached a high of 1.2808 but fell back to close at 1.1774.

Have a great day!