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19 Oct 2026 | 3 minutes to read
(All equity data is MSCI; all bond data uses ICE Bank of America indices unless otherwise stated; all data in sterling unless otherwise stated)
The UK’s economy may grow by +1.3% this year, according to the International Monetary Fund (IMF). Following a bleaker forecast of +0.8% in the summer, the upgrade comes despite trade disputes, war and inflation crimping growth. Whilst the government uses the Office for Budget Responsibility’s forecasts, not the IMF’s, the news is a welcome fillip for Chancellor Healey a week before his first Budget. Down the line, more growth might also embolden policymakers at the Bank of England to increase the UK’s base rate in November.
The IMF reckons the UK’s fiscal deficit – the net between government revenues and spending – could shrink to nearer 1.4% of GDP by 2031. That estimate is predicated on avoiding unfunded spending or tax cuts in the Budget. Not so America, where the IMF estimates an already yawning deficit may widen to 8.4% of GDP by 2031. Such a large gap may force the US to borrow trillions of dollars more to balance its books, probably by issuing more US treasuries, and may hasten a credit downgrading. The IMF forecasts the US economy will grow by +2.3% this year. Elsewhere, it upgraded growth forecasts for Taiwan, South Korea and Singapore, all supported by investment in Artificial Intelligence (AI).
Policymakers at the US Federal Reserve (Fed) will have their work cut out when setting interest rates next week after a slew of mixed data. Higher-than-forecast inflation, stronger retail sales, subdued jobless claims and AI uncertainty mean the way ahead is far from clear. The Fed’s preferred measure of inflation – the Personal Consumption Expenditures (PCE) index – won’t be released until after they meet.
Consumer Prices Index (CPI) inflation rose to 3.7% in the year-to September after a 0.6% monthly increase, up from 3.4% in August and slightly above expectations of 3.6%. Core inflation – which excludes volatile food and energy prices – increased 0.3% in September and 2.6% annually, also exceeding forecasts. Rising energy prices drove the headline monthly change, with a 9.1% surge in gasoline prices accounting for roughly half of it. Cost-of-living pressures are a central campaign issue ahead of the US midterm elections next month.
Signs that inflation may be seeping more broadly into the economy will be a concern for the Fed. Shelter costs rose 0.4% in September, and although food prices didn’t increase, they were still 2.5% higher than a year earlier. Producer price data, a measure of wholesale costs, also came in hot with a 1.3% rise in September, lifting the annual rate to 6.3%.
US retail sales grew 0.8% in September, comfortably ahead of the 0.4% increase anticipated – although there were signs that higher energy costs are crimping spending. Initial jobless claims remained low at 199,000. Collectively, the latest data indicates that the economy is robust enough, but inflation is difficult to subdue. The Beige Book report on economic activity corroborated as much.
Initially, markets priced a greater likelihood of another Fed rate hike in October, as Treasury yields pushed higher. But that fizzled out before the week was over, with concerns resurfacing around AI-related financing. Investors were seemingly weighing whether tighter financial conditions, supply bottlenecks and Chinese AI advancements could slow activity, reducing the need for higher interest rates. Fed Chair Kevin Warsh was nevertheless broadly optimistic about the US economy and AI’s productivity potential when questioned.
Strong exports, weak domestic demand. China’s economic imbalance was little altered by September’s data reporting annual export growth of 36.3%, outstripping forecasts of 25.5%. Electronics, semiconductors and automobile shipments were all strong. China’s exports to the US rose by 39.6% suggesting that shipments are perhaps being re-routed, or that tensions between the two powerhouses are easing. The data follows an extension to their trade truce until January.
China’s imports also rose by 31% year-over-year, beating expectations of 24.5%, largely driven by raw materials, minerals, and electronic components required for exports, rather than an improvement in domestic demand.
Trade between China and the European Union continues to cause tension. September’s exports to the EU rose by 25.3%, the largest monthly jump since February, forcing the EU’s trade deficit with China to around €1bn per day. Last week, European Trade Commissioner Maroš Šefčovič announced a deal with Chinese officials limiting the number of hybrid cars exported to the EU. The move would more than halve China’s market share to 3% but may not resolve the pair’s dispute. Vehicles assembled within the EU, namely Hungary, or in future Spain, are not subject to the quota. However, EU manufacturers producing vehicles in China will be subject to the restrictions.
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