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7 Oct 2025 | 3 minutes to read
The US Congress failed to agree funding for the next fiscal year causing a federal government shutdown. For policymakers, including rate-setters at the US Federal Reserve, it delays the collection and dissemination of critical market data – for example, non-farm payroll labour statistics due last week. Private economic forecasting also relies on federal data. The political fallout is bitter as Republicans need Democrat support to pass a budget. Some federal employees are working, while others have been furloughed – both without pay. However, as a shutdown crimps GDP by an estimated 0.15% per week, it would have to last for some time to truly damage the economy. The shutdown is different to the perennial issue of raising the US debt ceiling, which is not a problem. That refers to the US Treasury’s ability to issue debt to borrow money in the bond markets to pay government bills. Congress raised the limit by $5trn to approximately $41trn in July. So, Congress remains gridlocked for now – but public rancour may soon force a resolution. The shutdown entered a second week as a further attempt to pass a bill that would restart funding was rejected on Monday of this week. Clearly, the longer the shutdown lasts the more disquiet it is likely to lead to.
At the ruling Labour party’s Liverpool conference last week, the message was clear: fiscal discipline remains front and centre ahead of November’s Autumn Budget. Chancellor Reeves reaffirmed her commitment to economic stability, rejecting unfunded giveaways and warning of tough trade-offs ahead. She also spoke of those trade-offs being made all the more difficult by ‘harsh global headwinds’, seemingly laying the groundwork in case she is forced to announce potentially significant tax hikes next month. While there was inevitably little further insight into what might be included within the budget, Reeves did publicly back the proposal to reduce official Office for Budget Responsibility (OBR) growth forecasts from twice a year to once.
Such a move on the part of the UK’s fiscal watchdog is backed by the International Monetary Fund (IMF) and should at least afford all participants in the economy a greater period of stability than has been the case of late.
For his part, the Prime Minster set out a vision for national renewal, economic growth and public service reform, repositioning economic growth as Labour’s ‘defining mission’. However, with the Chancellor due to have received the OBR’s initial assessment of the size of the gap in the public finances last Friday, it is the rate of growth – and in particular productivity gains (or lack thereof) – hitherto in this parliament which will be all important. While the rhetoric around fiscal discipline may reassure UK gilt investors for the time being, the scale of tax rises or spending cuts required to plug the fiscal gap is clearly under intense scrutiny ahead of the 26 November.
Last week, Beijing unveiled its latest fiscal measure to spur growth in the second half of 2025. The National Development and Reform Commission (NDRC) announced a ¥500bn package to be used as equity finance for investment projects, notably artificial intelligence and the ‘low-altitude economy’ (utilising drones for goods transportation, for example). Historically, similar measures have seen a boost in loan demand. Forecasts suggest that the latest measure could generate loan demand of c. ¥2.4trn, supporting consumption and boosting economic growth.
Policymakers’ willingness to develop stimulus packages for the world’s second largest economy has driven recent investor optimism, sending Chinese equity markets sharply higher of late. Over the third quarter of 2025, the Shanghai Stock Exchange posted a gain of c.15.5% in sterling terms. Sentiment has also been on the rise after the IMF raised its annual growth forecast for China to 4.8% in July, up from 4% predicted earlier in the year. The latest Manufacturing and Services Purchasing Managers’ Indices (PMIs) - forward looking indicators of activity - also continue to indicate future economic expansion.
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