2 July 2026: The UK is facing a £ 5 billion black hole. Or is it £15 billion?

The print media is reporting this morning that the near £5 billion black hole in the country’s finances, resulting from the new investment in the defence budget, is, in fact, the entire £15 billion cost of the increase in defence spending.

This is due to the unfunded nature of a further £10.3 billion. The Government has yet to spell out how almost a third of the plan will be funded, with a decision on where that £4.7 billion will come from to be made at the Budget in the autumn. However, the Government has also provided scant detail about where the remaining £10.3 billion in cuts to Whitehall spending, which will fund the plan, will come from.

Departments across the Government must slash 1% off their spending on major projects to pay for the defence boost, while transport and energy spending will face larger cuts.

No 10 revealed that road-building projects in Derby and Lincolnshire are among those being sized up for cuts.

But the Prime Minister’s official spokesman was unable to provide a full list of the projects that will be scrapped to achieve the £10.3bn in savings.

Andy Burnham, who is likely to replace Sir Keir in No 10 in a matter of weeks, is already facing pressure from those in Government to find ways to make up the funding shortfall in the plan.

Defence Secretary Dan Jarvis said he had the “assurance that, as prime minister, Andy Burnham will make sure that we’ve got the investment coming into defence”.

But he acknowledged there would have to be “conversations” with Mr Burnham, vowing he would “fight hard for defence”.

Chancellor Rachel Reeves, meanwhile, appeared to warn Mr Burnham against further borrowing to pay for the increases in spending required by the Defence Investment Plan.

In a speech at the ECB’s annual get-together in Sintra, Portugal, Andrew Bailey, the Governor of the Bank of England, told delegates that the Bank is not in a position to consider cutting interest rates, despite oil prices falling back towards pre-Iran war levels.

"There was an expectation that we would cut rates this year. That's not unreasonable in the context of a softening economy.

That was off the table in March, and it's off the table at the moment.

Other panellists speaking alongside Bailey, including new Federal Reserve Chair Kevin Warsh, expressed opposition to providing "forward guidance" on policy plans.

Most economists polled by Reuters expect, by a slim margin, that the BoE will leave rates unchanged this year, while financial markets see a roughly 75% chance of a single quarter-point rate hike, down from three rate hikes shortly after the conflict broke out.

Bailey repeated his view, expressed after the BoE kept rates on hold last month, that the BoE did not need to rush into making policy decisions and could wait to see how a jump in oil prices - which is now receding - would ripple through Britain's economy.

Adding to the difficulty was the lack of a clear sense of how energy prices would develop, as futures prices for oil and gas failed to provide a reliable guide, Bailey said.

"One data point that we're wrestling with at the moment, and have wrestled with for years, is oil and gas futures prices. They are terrible indicators in history. The problem is that everything else is also a terrible indicator," Bailey said, when asked to name his least-favourite piece of data.

The pound has now come close to recouping the losses it has made over the past ten trading sessions. Yesterday, it rallied to a high of 1.3292 and closed at 1.3275.

U.S. manufacturing expanded for an eleventh straight month in June, but the growth eased to its lowest level in three months. The S&P Global PMI fell 1.2 points to 53.9 last month, falling short of the 55.7 forecast.

In a press release, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said that US manufacturers reported a further marked improvement in output and order book growth in June, according to S&P Global’s PMI data, extending the growth spurt since the outbreak of the war in the Middle East. Employment, however, fell sharply as firms sought to offset rising energy and raw material costs.

“Supply chain delays and upward price pressures continued to be widely reported, albeit moderating thanks to recent news of an improving situation in the Middle East. However, despite the recent drop in energy prices and a brighter outlook for shipping, business confidence has fallen sharply, in part reflecting concerns that an end to war-related inventory building could start to act as a drag on sales."

The S&P Global US Manufacturing PMI measures the activity level of purchasing managers in the manufacturing sector through a questionnaire of circa 600 manufacturers. The reported headline number is a weighted average of New Orders (30%), Output (25%), Employment (20%), Suppliers' Delivery Time (15%), and Stocks of Purchases (10%).

The S&P Manufacturing PMI is a diffusion index, meaning that a reading above 50 indicates expansion in the sector compared to the previous month, and a reading below 50 indicates contraction.

Federal Reserve Chairman Kevin Warsh said yesterday that inflation risks have eased over the past few weeks, but declined to comment on the likelihood of interest-rate hikes, the latest sign that he will be more tight-lipped than his predecessor.

At the European Central Bank conference in Sintra, his first appearance as Fed Chairman, Warsh said inflation risks “have come down”, although he argued there’s more work to be done.

“If there were people in households, the business sector, the financial markets, who thought that this Central Bank was going to be comfortable with an inflation objective above 2%, I guess they’d be disappointed,” Warsh said. “We will deliver price stability in the U.S.”

An aggressive anti-inflation approach would imply interest-rate hikes, not cuts, marking a sharp reversal from last year, when Warsh lambasted the Federal Reserve for failing to cut rates further after three quarter-point cuts.

However, the economic landscape has shifted drastically since then.

The number of planned job cuts by U.S. employers fell to 45,849 in June 2025, according to the latest report from Challenger, Gray & Christmas. This marks a decline from the previous month and offers a cautiously positive signal for the labour market, though underlying trends suggest the recovery remains uneven.

The June figure marks a notable drop from May’s total of 63.8k, reversing a two-month upward trend. The data, which tracks announced layoffs by U.S. companies, is closely watched by economists as a leading indicator of labour market health. The decline was driven by fewer announcements of large-scale reductions in the technology and retail sectors, which had dominated layoff reports earlier in the year.

AI is reshaping the U.S. labour market in three major ways: rapid task-level transformation, rising displacement in specific sectors, and a structural shift in hiring patterns. The data shows a labour market being reorganised, not simply reduced, by automation, augmentation, and changing demand for skills.

The dollar index returned to positive territory yesterday after three sessions of declines late last week. It reached a high of 101.59 and closed at 101.42.

The Eurozone’s core Harmonised Index of Consumer Prices (HICP) recorded a monthly increase of 0.2% in June, a slight deceleration from the 0.3% rise observed in May. The data, released by Eurostat, offers a fresh snapshot of underlying price pressures in the region, providing key input for the ECB’s monetary policy deliberations.

The core HICP strips out volatile components such as energy, food, alcohol, and tobacco. This makes it a closely watched gauge among policymakers and economists for assessing persistent inflation trends and “second-round effects”. The June figure, while showing moderation, still indicates that price pressures remain in the service sector and other core components of the economy.

However, this modest monthly decline suggests that the disinflation process is ongoing but uneven. The ECB has been navigating a path between curbing inflation and avoiding an unnecessary recession. The slight easing in the core rate may support a more cautious approach to further interest rate adjustments in the coming months.

Market participants and analysts will scrutinise this data point in the context of the ECB’s next policy meeting. The Central Bank has maintained a data-dependent stance, and a slowing core inflation rate could reduce the urgency of further rate hikes. However, the ECB will also weigh this against the broader economic outlook, including wage growth and service-sector inflation, which have remained stickier.

For investors, the data suggests that the peak of the current cycle may be approaching. Bond yields in the Eurozone showed a muted reaction to the release, suggesting the figure was largely in line with market expectations. The Euro also saw limited movement, indicating the data does not significantly alter traders’ expectations for the near-term policy outlook.

In less than three weeks, risks to Eurozone inflation and growth have become less pronounced, ECB president Christine Lagarde said yesterday.

On June 11, the ECB became the first in the Group of Seven to raise interest rates after four months of energy-cost increases following the outbreak of the war in Iran.

But since then, consideration of a peace accord between the US and Iran has sent oil prices sharply lower, and the more benign backdrop is already showing up in price data. The latest report showed inflation easing more than anticipated.

Referring to “the speed at which things change,” Lagarde said that risks are now “more broadly balanced.”

The Irish economy remains close to ECB Chief Economist Philip Lane’s heart since he used to govern the Central Bank in Dublin.

Yesterday, he warned of second-round effects of the rise in inflation, even as the rate of price increases moderated to 3.3%.

“The second-round effect is likely to take some time,” Lane told Bloomberg Television.

The fear is that higher energy prices will push up food and other prices in the coming months, further pressuring households here.

The Euro is now trading in a narrower range following the release of the latest comments from Central Banks, in which the likelihood of a rate hike in the U.S. is now considered higher than in the Eurozone.

The common currency fell to a low of 1.1361 and closed at 1.1377.

Have a great day!