UK markets moved into positive territory following a volatile week, with the FTSE 100 rising 2.05% to around 10,827 points at the time of writing.
The Institute for Fiscal Studies (IFS) has warned that the UK government faces a potential £35bn funding gap by 2030–31 if it wants to avoid real-terms cuts to public services, maintain planned health spending growth and increase defence spending to 3% of GDP.
The shortfall comprises an estimated £24bn needed to offset higher public-sector pay and inflationary pressures on departmental budgets, alongside £11bn required to meet the defence spending ambition. The IFS argues that Chancellor John Healey must address these pressures in the Budget on 28th October through credible tax increases, welfare cuts or savings elsewhere.
Borrowing further would risk undermining investor confidence, while unrealistic spending assumptions could damage the government’s fiscal credibility. Despite these concerns, the IFS forecasts approximately £20bn of headroom against the fiscal rule requiring the current budget to balance by 2029–30, a relatively optimistic assessment compared with other forecasts. Its projections assume resilient economic growth and stronger inflation-driven tax revenues, although the outlook remains uncertain.
Healey has rejected calls by senior Labour figures to raise capital gains tax to the same level as income tax, amid warnings that such an increase would hit Britain’s attractiveness to investors. Senior cabinet ministers had spooked some investors by supporting big increases in capital gains tax, but four people close to the matter said the Treasury had no intention of equalising it with income tax.
The Treasury could still opt for a smaller increase in capital gains tax, which is currently charged at 24% for higher-rate taxpayers on the profits of asset sales, compared with up to 45% for income tax. The call for a sharp rise in CGT was backed by key allies of Prime Minister Andy Burnham.
Artificial intelligence is driving growth in the UK, according to new IMF forecasts that show Britain’s outlook has improved more than almost any other major economy over the past six months.
In its latest World Economic Outlook, the fund said UK GDP was set to grow by 1.3% in 2026, an upgrade of 0.5 percentage points from its forecast in April, even though the energy shock unleashed by the Iran war has lasted longer than initially expected. The fund believes the UK is emerging as one of the winners of the technology boom, with growth supported by AI related investment and exports.
The only other G7 economy whose outlook has improved as much since April is Germany, where exporters are also benefiting from the global AI build-out. UK businesses are also proving better able to cope with energy and trade disruption than in the past. The IMF said that businesses around the world had diversified supply chains and become less reliant on oil or other inputs such as fertiliser.
The fund’s upgrade to the UK’s outlook reflects recent data showing that GDP grew by 0.5% in the second quarter of 2026, building on an expansion of 0.6% in the first quarter. The UK economy expanded by 0.5% quarter-on-quarter in Q2 2026, revised up from 0.4% in the previous estimate, following 0.6% growth in Q1. The Primary Drivers behind the positive figures was a robust surge in manufacturing and ongoing strength in digital and professional services.
On the expenditure side, growth was mainly driven by net trade, as exports climbed 2.8% while imports showed no growth. Household consumption also rose 0.3%, while gross fixed capital formation increased 0.9%. Government consumption fell 0.5%. On an annual basis, UK GDP expanded 1.4%, accelerating from a revised 0.8% growth in Q1.
Commodity markets
In commodity markets, Brent crude futures traded around $105 per barrel on Friday and are on course for a weekly gain, amid mounting supply concerns from the Middle East. The US Central Command confirmed that a Singapore-flagged container ship that sank in the Strait of Hormuz earlier this week was hit by an Iranian projectile, adding uncertainty over the recovery of physical oil flows and pushing tanker rates to record highs.
Rising tensions between Saudi Arabia and Iran-backed Houthi forces in Yemen further heightened supply risks. Meanwhile, the IEA agreed to proceed with the release of the remaining 100 million barrels of oil from a coordinated intervention launched in March, following lobbying efforts by US officials.
Elsewhere, EIA data revealed that US crude inventories dropped by 8.6 million barrels last week, marking their largest decline since February. Brent underperformed WTI this week as lower shipping costs for US crude boosted demand for American barrels.
Gold prices traded around $4,200 per ounce on Friday, extending gains from the previous sessions marginally as the recent sell-off in equities gave rise to safe-haven demand. The shift toward safer investments pushed bond yields sharply lower, easing pressure on non-yielding assets such as gold.
Meanwhile, market participants continued to evaluate the Federal Reserve’s monetary policy outlook, with stronger-than-expected US economic data reinforcing expectations of further interest rate increases. Markets are currently pricing in approximately a 72% probability that the federal Reserve will leave rates unchanged this month, while the likelihood of a rate hike in December has climbed to 92%.
Equity markets
US equity futures rose on Friday, as the Dow Jones, Nasdaq and S&P 500 looked to open 0.33%, 0.06% and 0.19% higher respectively, significantly reducing the impact of the sell-off seen earlier in the week. Hotter than expected inflation metrics in the US and renewed expectations of high borrowing costs pressured high-valuation tech and hardware shares globally.
On Wednesday US inflation jumped to 3.7% in September as the war in Iran drove a rebound in fuel prices, piling pressure on Americans ahead of November’s midterm elections. The annual consumer price index figure released on Wednesday was up from 3.4% in August and ahead of the 3.6% expected in a Bloomberg poll of economists. Core inflation rose to 2.6% from the previous months figure of 2.4%.
Treasury yields jumped following the data, with the two-year, which moves with interest rate expectations, rising 0.13% percentage points to 4.91%. The data from the Bureau of Labor Statistics marks the first time since May that US inflation has risen and underlines how the energy shock triggered by the war in the Middle East continues to reverberate across the world’s biggest economy.
Petrol and Diesel costs eased during the summer from the initial highs hit after the war broke out. However, they have bounced back in recent months as tensions flared, sending the price of diesel to record highs. US President Donald Trump has tried to contain the fallout as polls suggest that frustrated voters will lash out at his Republican Party in next month’s elections to decide control of Congress. The hot inflation data will also increase calls for the Federal Reserve to raise interest rates again after the central bank last month lifted borrowing costs for the first time in three years.
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