5 May 2026: Banks are alarmed over jobs as the economy stalls

The Prime Minister faces a defining week as polls predict the Labour Party will be trounced in the local council elections in England and in the devolved assemblies in Wales and Scotland. It will not be enough for Sir Keir Starmer to glibly tell reporters that new governments always do badly in the first elections after they gain power, since the entire face of British politics has shifted in the past eighteen months.

Labour and the Conservatives have coincidentally lost popularity at the same time, a unique phenomenon in the post-war period, while more radical parties from both ends of the political spectrum have performed strongly. Both Reform UK and the Green Party are expected to gain outright control of several councils, while the SNP and Plaid Cymru have a real chance of gaining control of the Scottish and Welsh assemblies.

There is genuine concern in the markets that by this time next week, the Labour Party could face an election and a new leader, who may then have to find a new Chancellor of the Exchequer.

Were that to happen, it would likely cause further chaos in markets, which may already be roiled by renewed tension in the Middle East.

Lenders have warned of cautious consumer spending and reduced hiring, and have slashed their UK growth forecasts because of the war in Iran.

NatWest expects the economy to grow by just 0.4% this year, even lower than the IMF's prediction, as the outlook darkens amid the prolonged conflict that has disrupted oil and gas supplies from the Middle East.

They predict house prices will rise by just 0.7%, down from 3.4%.

Chief executive Paul Thwaite said spending on eating out has dropped as hard-pressed consumers increasingly look for bargains in shops.

There is no tier-one economic data due for release this week, allowing markets to focus entirely on the elections taking place on Thursday.

The Bank of England held interest rates at 3.75% last week, but there are fears of rate hikes later this year, which could send mortgage costs soaring. The Bank announced it was keeping the interest rate unchanged but warned that rates could rise later this year if the Middle East energy shock had a longer-lasting effect on the cost of living.

This theme was observed across the entire G7, with rates remaining steady in the U.S., Canada, the Eurozone, Japan, and the UK.

Andrew Bailey, the Bank's governor, said: "It would be a mistake to wait to see the second-round effects before acting, because it would be too late." This added weight to investors' belief that rates will be raised at the Bank’s June Meeting.

Sterling slipped modestly overall last week, ending the period slightly lower against the US dollar as safe-haven demand supported the USD and UK data failed to provide lasting momentum.

Over the week, GBP/USD fell by roughly 0.3%, trading near 1.3478 by Friday. The pound struggled to build on early-week gains and ultimately lost ground as global risk sentiment deteriorated.

There's a worrying trend splitting the US economy, according to analysts. Tech has boomed, while the rest of the US economy isn't performing as well. The situation calls for policy support to boost growth and prevent an economic "bust." That disconnect extends to the broader economic picture. Several market experts have pointed out that "new era" investment spending has accounted for around 28% of real GDP growth since 2022, up from around 15% in 2020 to 2021.

Meanwhile, the "old era" economy, which accounts for 87% of GDP, is growing at an "uncomfortably sluggish pace". It is estimated that real GDP growth, excluding the new era sector, has hovered around 1% over the last six quarters.

The dynamic known as "BustBooming" in the US economy began decades ago, though the trend has recently accelerated.

"While this relatively small part of the US economy is booming, the rest of the economy is busting," according to analysts at Citibank. "In some sense, similar to the US stock market, the US economy is increasingly suffering from a 'lack of breadth' problem”.

While most of the economy may already be in recession, the US is not expected to enter an official recession anytime soon. Still, the situation calls for rapid fiscal and monetary policy support to boost growth in struggling areas of the economy, he said, despite prominent market concerns about inflation.

The Fed Chairman “elect”, Kevin Warsh, faces several issues when his term begins, most likely on May 16th. Apart from pressure from above to cut interest rates, Warsh will need to contend with the rise of AI, which may become a bubble, and concerns voiced about the regulation of the Private Credit Market.

Jerome Powell chaired his final monetary policy meeting last week. His record as Federal Reserve chair contains two major chapters that will be debated for years: the fastest emergency response in the Fed’s modern history during COVID and an inflation mistake followed by a tightening cycle that somehow avoided a recession.

Both deserve serious analysis, but the achievement that stands above either of them is that Powell leaves behind a Federal Reserve whose independence is intact after years of sustained political attacks by US President Donald Trump. Whether that inheritance holds is now the most important question in Central Banking.

Powell’s monetary policy and economic achievements as Fed chair are impressive.

When the COVID-19 pandemic hit in March 2020, Powell moved faster than almost any Central Banker in history. Rates fell to near zero within days, emergency lending programmes were launched across multiple parts of the economy, and the Fed's balance sheet almost doubled, from around $4.5trn to $8.9trn. The Fed bought corporate bonds directly for the first time in its history.

This worked: the US avoided a full economic collapse, and Powell received rare bipartisan praise, including, briefly, from Trump, who had already spent two years attacking him.

Powell’s inflation record needs to be addressed, however. As the US economy reopened and fiscal stimulus flooded the system, prices rose sharply. Powell asserted it would be “transitory”.

Former Fed chairs Greenspan, Bernanke and Yellen, alongside former Treasury Secretaries Paulson, Geithner, Rubin and Lew, issued a joint statement criticising “an unprecedented attempt to use prosecutorial attacks to undermine the Federal Reserve’s independence”, as President Trump tried to force his will upon Powell.

The U.S. dollar finished last week slightly weaker overall, with the Dollar Index (DXY) posting a weekly decline despite a late-week rebound.

Across the week, the DXY slipped, pressured by: Suspected Japanese FX intervention, further Middle East tensions, and renewed U.S.–EU tariff threats.

Even though the dollar rebounded on Friday, it still closed the week lower at 98.22.

Spain should retain a seat on the European Central Bank's Executive Board, and even the Presidency was a possibility, outgoing Vice President Luis de Guindos said in a newspaper interview yesterday.

De Guindos, a former Spanish economy minister, steps down at the end of the month, succeeded by Croatia's Boris Vujcic, leaving Spain, one of the Eurozone's top four economies, without representation on the board.

However, three spots on the six-person board open up next year, including that of ECB President Christine Lagarde, and de Guindos's comments suggest Spain will fight for one of them.

"The Presidency would undoubtedly be the best outcome, but the most important thing is to have a seat on the Executive Board," de Guindos told Spanish newspaper El País.

"Spain is the fourth-largest economy in the euro area, and I am convinced it will secure a seat on the Board," he said. "It’s important to have one."

While all 21 Eurozone members can contest board seats, the bloc's four biggest economies, Germany, France, Italy and Spain, dominate the board, shutting out the vast majority of the remaining 17 nations.

ECB watchers consider former Bank of Spain Governor and Bank for International Settlements General Manager Pablo Hernandez de Cos a contender for the Presidency, but de Guindos stopped short of endorsing him.

"Pablo was a good governor, even though it’s true that it was Luis Linde and Fernando Restoy who oversaw the entire bank restructuring process," de Guindos said. Said.

Meanwhile, Bundesbank President Joachim Nagel said he supports higher borrowing costs in June, as long as there’s no significant improvement in the outlook for consumer prices.

While it was prudent not to tighten monetary policy last week to gain greater clarity on the fallout from the Iran war, this “vigilant wait-and-see approach should not be confused with hesitation,” Nagel told reporters in Frankfurt yesterday.

Referring to new ECB projections due next month, as well as further developments in the Middle East, he said that “if the inflation outlook does not improve markedly in those projections, this would argue for an interest-rate hike.”

Away from the “big four” economies, Portugal's Government has cut its 2026 economic growth forecast to 2% from 2.3%, citing severe storms in January and February and a jump in energy prices linked to the Iran conflict, it said in a macroeconomic outlook update sent to Brussels and published yesterday.

The Government now also expects a balanced budget, without a deficit or surplus, after earlier predicting a small surplus of 0.1%, down from 0.3% in 2025.

Despite cutting its 2026 growth estimate, the administration remains somewhat more upbeat than the Bank of Portugal, which lowered its forecast to 1.8% in April. The economy grew by 1.9% last year.

The economy stagnated in the first quarter compared with the previous three-month period, dragged down by a decline in net exports and affected by devastating storms in central Portugal.

The Finance Ministry expects the slowdown to be offset later this year by reconstruction efforts in storm-hit areas and EU-funded investment projects.

The euro weakened modestly last week, posting small declines against most major currencies, including a –0.85% drop versus the U.S. dollar.

The Common Currency traded with a slight bias towards weakness across the G10, losing ground against most major peers. The softness was broad but not dramatic, reflecting a calm yet mildly bearish week. It eventually closed at 1.1720, marginally above its previous week's close.

While the G7 Central Bank meetings mostly “cancelled each other out”, the ECB's hawkishness will likely lead to the Euro strengthening as tensions rise in the Gulf. This may lead to further rises in the price of oil.

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