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Data alarm sounds! Observation of Stagflation in the UK
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Hello everyone, today XM Foreign Exchange will bring you "[XM Foreign Exchange Platform]: Data Alarm Rolled! Observation of Stagflation in the UK". Hope it will be helpful to you! The original content is as follows:
The latest data from the UK Office for Statistics (ONS) put pressure on the Chancellor of the Exchequer - the countdown has entered the countdown since the November budget was released, and the situation presented by the data is not optimistic. The current labor market is cooling down and the stickiness of high inflation is difficult to eliminate. Coupled with the continued suppression of demand by the US trade war, under multiple pressures, the economic trend of the UK in the next few months has added uncertainty.
This data picture also laid the key foreshadowing for subsequent fiscal policy formulation, monetary authorities' decisions and the direction of the pound exchange rate.
This article talks about the economic problems facing the UK. It also introduces short-term causes, political background, government reflections, and ultimately leads to the points that traders need to observe and their impact on the pound trend.
Official data shows that due to the significant drag of manufacturing, the UK economy "continues to slow down" and the economic growth rate recorded zero growth in July. Data released by the UK's National Office for Statistics showed that the economy grew by 0.4% in June and negative growth of -0.1% in May.
In the April-June quarter this year, the growth rate of the UK's total economic output was 0.3%, a significant decline from the growth rate of 0.7% in the first quarter of 2025. The latest data sends a signal of concern: xmaccount.combined with the data released by ONS on August 20 that the UK consumer price index (CPI) in July rose 3.8% year-on-year, which was higher than expected and hit an 18-month high, making the UK once again the fastest price growth among the world's major developed economies. As the labor market cools down, coupled with high inflation and the U.S. trade war continues to curb demand, the pressure on the British economy will further increase in the next few months.
Declining industrial output has become a major drag, industry performance has differentiated
Talking about economic activities in July, Director of Economic Statistics, UK Office of StatisticsLiz McKeon said the decline in industrial output has offset the weak growth in the service and construction sectors, and the overall slowdown in economic growth has continued in the past three months, and although service growth has been maintained, industrial output has further declined.
Inside the service industry, medical, xmaccount.computer programming and office support services performed steadily; while the decline in industrial output is the core reason for the general weakness in all areas of manufacturing, which has resulted in a xmaccount.comprehensive drag.
The government's operation space is restricted by economic growth, and tax increases may intensify employment and inflationary pressures
When the Labor government came to power last summer, it listed promoting economic growth as its core priority, but the Chancellor of the Exchequer admitted this week that the current economy has fallen into "stagnation".
This year, the U.S. trade war has caused a significant drag on global economic activity, and since taking office, Rachel Reeves has also been accused of "taking the initiative to step on the brakes" for economic growth for making a lot of money from the private sector (which caused damage to investment and employment in the process).
Faced with a £40 billion budget tax increase, employers have chosen to lay off employees and pass on the rising costs to consumers. Currently, the UK inflation rate is close to twice the Bank of England’s 2% target, which casts a shadow on the advancement of future interest rate cuts. Data released by the Bank of England last week showed that the current rate of layoffs by employers has reached the fastest level since 2021.
Focus on the budget: a fiscal gap of £30-40 billion, tax targets have caused differences
All sectors are rapidly focusing on the next budget to be released on November 26. The market's concerns about the uncertainty of subsequent policy measures are continuing to suppress market sentiment.
Reeves faces pressure to increase taxes - it needs to fill the public fiscal gap, which is estimated to be between 30 billion and 40 billion pounds.
The Chancellor of the Exchequer once again explicitly ruled out the possibility of raising income tax, employee national insurance payments and value-added tax - she always emphasized that such measures will directly harm the interests of the "working class".
Potential tax targets may include high-income groups, and banks are worried that their profits will become "tax targets."
But the British Federation of Industry (CBI) CEO told the Guardian earlier this week that Reeves should currently break the promise of "no taxation on the working class."
Ren Newton-Smith believes that the additional tax on enterprises will further curb economic growth and employment, and indirectly harm the interests of the working class in the process.
The British Federation of Industry hopes to promote xmaccount.commercial tax reform and lower the VAT threshold and other measures - the private sector is currently under increasing tax pressure.
Newton-Smith added: "The situation is different now than when Labour drafted the campaign declaration. The facts have changed and policy solutions should be adjusted accordingly."
Government Confrontation: The Ministry of Finance emphasizes progress, and the shadow minister criticizes policy failures
According to data from the Office of National Statistics, a spokesperson for the Ministry of Finance said: "We know, pushMore efforts are needed to grow – although our economy has not collapsed, it has indeed fallen into a state of stagnation, the result of years of underinvestment and we are determined to turn this around with a ‘change plan’. ”
At the same time, we are making progress: the UK's economic growth rate ranks first in the G7 this year; since the election, interest rates have been cut five times, and the actual wage growth rate has exceeded the previous government period. To build an economic system that serves the working class and allows the working class to get rewards, we still need more action.
For this reason, we are cutting unnecessary administrative red tape, reforming the planning system to promote infrastructure in the UK, and investing billions of pounds into affordable housing, the Sezwell C nuclear power plant and local transport projects across the country. ”
Shadow Finance Minister Mel Stryde responded: “When the government is struggling with scandals after scandal, the cost of borrowing (referring to the long-day treasury yield) has recently risen to a 27-year high – a signal of strong distrust in Labour and also means that a significant tax increase is almost a foregone conclusion. "
"It is no surprise that Stamer (Labor leader) deprived Reeves of control of the budget. But just marginalizing her is not enough - he must also abandon her failed economic strategy, which has put Britain in a poorer situation. ”
Policy response and industry warning: business barriers are planned to be relaxed, retail industry is worried about closure risks
As part of its initiative to promote economic growth, the Chancellor of the Chancellor has responded and plans to relax some business barriers.
The UK Treasury is considering xmaccount.comprehensive reform of the tax rate reduction rules for small businesses to eliminate the so-called "cliff-like" punishment faced by xmaccount.companies when opening a second business premises (i.e., the punishment mechanism for a sharp jump in tax rates after the scale of operations is expanded).
The UK Retail Association issued another warning on Friday that if such business premises are included in the proposed higher xmaccount.commercial tax rate range, the 400 largest stores in the UK may face the risk of closure.
The association said that these stores have been under tremendous pressure from soaring employment costs and tax costs—100 have been 0 such large stores went bankrupt as a result.
Observation points on the British monetary authorities and their impact on the pound
Although the Bank of England cut interest rates by 25 basis points to 4.0% in August 2025, the September interest rate meeting maintained interest rates unchanged with an 8:1 majority, highlighting concerns about inflation stickiness. The current market expects interest rate cuts may be cut again before the end of 2025, but the specific time depends on inflation data (such as whether the September CPI rose to 4% as expected) and economic performance.
Inflation path assessment: If core inflation (especially service industry inflation) falls less than expected, the central bank may postpone interest rate cuts or even restart interest rate hikes to support the pound; on the contrary, if the risk of economic contraction intensifies (such as negative growth in Q3GDP for two consecutive quarters), the expectation of interest rate cuts will be strengthened and suppress the pound.
With the Federal ReservePolicy differentiation: If the Fed takes the lead in cutting interest rates while the Bank of England maintains high interest rates, narrowing interest rates may attract capital inflows and boost the pound in the short term; but if the weak British economy forces the central bank to cut interest rates simultaneously, the pound may depreciate due to worsening growth expectations.
The current monthly line of the pound against the US dollar is in an upward channel. In the context of the United States, it may open a channel for interest rate cuts. If the UK does not solve the problems of domestic economic growth and inflation, it may face the situation of appreciation against the United States but depreciation of cross-trade currencies.
The above content is all about "[XM Forex Platform]: Data Alarm Rolling! UK Stagflation Observation". It was carefully xmaccount.compiled and edited by the XM Forex editor. I hope it will be helpful to your trading! Thanks for the support!
Due to the author's limited ability and time constraints, some content in the article still needs to be discussed and studied in depth. Therefore, in the future, the author will conduct extended research and discussion on the following issues:
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