Weak growth, deficit and the risk of inflation: where is the United Kingdom headed?

The British government is facing a difficult decision. It is being forced to face a large fiscal deficit, while its economy shows signs of high inflation and weak growth. This is the backdrop for the presentation of its upcoming budget, which will have to involve some "unpopular measures" if it wants to control the deficit, explains Alberto Matellán, General Manager at La Financière Responsable, who sees similarities with other European countries, such as France. 

"It's complex because we have to prioritize deficit or growth," says Matellán, who nevertheless warns that it is important to control public spending because "we have already seen scares in UK bonds". In statements made Wednesday, before the budget was presented, the general consensus amongst analysts was that they expected them to be "serious and credible" but "without major surprises" or excessive restrictive bias.

The possible reaction on the stock markets will depend on the credibility of this budget and the ability of the British government to lead the economy. If it is not rigorous when it comes to spending control, it could trigger a sell off; but if it is too ambitious in this regard, it could damage executive confidence due to political erosion.

Some analysts have considered the possibility that a potential budget tightening could lead to rate cuts by the Bank of England, but Matellán does not see this scenario as likely, because it would only be possible through "extreme" and unpopular cuts, which would severely hinder economic growth, something that Downing Street is unlikely to implement.

Spain is currently growing, but will do so less in the coming years.

Having increased its GDP by 3.5% in 2024, Spain will see growth of 2.9% this year, before slowing down to 2.2% in 2026 and 1.8% in 2027, according to the OECD's updated forecast. These estimates are "generally speaking" in line with those issued by the MAPFRE Group and its research service, MAPFRE Economics.

Matellán explains that, "give or take a tenth," small variations in these estimates do not change the market, and in any case point to a trend that investors are already aware of: a gradual slowdown that is not particularly severe and will not lead to a recession, and which is natural due to the dynamics of the global economy as well as the Spanish one.

On the other side of the Atlantic, the latest private ADP report on employment in the United States has resulted in a worse-than-expected figure, which, along with other signs of hesitation in the US economy, has increased the odds given by analysts for a rate cut at the Fed's December meeting. However, the manager at La Financière Responsable calls for caution: this indicator is particularly volatile, as the market reacts very quickly to these publications, but the Federal Reserve takes much more data into consideration and inflation in the US remains a cause for concern.

The peace agreement between Russia and Ukraine seems to be edging closer, and with it the future reconstruction of the invaded country. Could this be an opportunity to invest in infrastructure firms? Again, Matellán sees it as "premature" because these companies are very cyclical, and a potential cessation of the war does not in itself change the economic trends. We would need to wait for more data in this regard to increase exposure in companies such as steelmakers.

Finally, JP Morgan has warned in its latest report about the risks for 2026, such as trade disputes; however, Matellán points out that, despite these, the positive factors that have driven the stock markets so far (results, relaxed monetary policies, high liquidity, etc.) are still present, meaning the initial scenario for the next fiscal year is not inherently negative.