UK economy in surprise growth

The FTSE 100 recorded more record highs this week, but equities paused for breath in Friday’s trading. The UK economy showed an unexpected return to growth in November, easing fears of a stalling recovery at the end of 2025. US inflation data reinforced expectations that the Federal Reserve will pause interest rate cuts at its January meeting and US investment banks reported solid 2025 results.

The FTSE 100 was up 1.2% over the week by mid-session on Friday, with the more UK-focused FTSE 250 trading 1.3% ahead.

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Donald Trump

US president Donald Trump dramatically escalated his confrontation with the Federal Reserve, triggering a new flashpoint over the independence of the world’s most powerful central bank. The clash intensified after the Department of Justice opened a criminal investigation into Federal Reserve chair Jerome Powell, linked to his congressional testimony on cost overruns at the Fed’s $2.5bn headquarters renovation – a move Powell said was a “pretext” designed to pressure the central bank into cutting interest rates more aggressively. Trump denied ordering the probe but renewed his attacks on Powell, accusing him of mismanaging the Fed and insisting borrowing costs were “far too high”, just days ahead of a key policy meeting. The episode marks the sharpest challenge yet to the Fed’s autonomy during Trump’s second term, drawing rare public pushback from Powell, warnings from lawmakers and economists, and renewed market unease over whether US monetary policy could be shaped by political intimidation rather than economic data.

The US‑Taiwan trade deal is a landmark agreement centred on semiconductors, designed to pull one of the world’s most critical industries firmly inside America’s borders while deepening Washington’s strategic partnership with Taipei. Under the deal, the US will cut tariffs on most Taiwanese exports from 20% to 15%, with zero tariffs on items such as generic pharmaceuticals and aircraft components, while Taiwanese semiconductor and technology companies will make at least $250bn of direct investment in the US, backed by a further $250bn in credit guarantees from Taiwan’s government. The agreement incentivises firms such as TSMC to expand chipmaking in states like Arizona by offering favourable tariff treatment to companies that build production on US soil, reflecting Washington’s push to reshore supply chains viewed as vital to national security. China has condemned it as a provocation that undermines the “one China” framework.

Iran is in the grip of its largest and most dangerous wave of unrest in years, after nationwide protests erupted in late December over the collapse of the rial, soaring inflation and deep‑seated anger at decades of political repression. What began as demonstrations over living costs has rapidly escalated into a broader challenge to the Islamic Republic itself, with protesters calling for the downfall of the clerical leadership and security forces responding with a brutal crackdown that human‑rights groups say has killed thousands and led to mass arrests. The authorities have imposed an almost total internet blackout, while shipping and military movements in the Gulf reflect fears that domestic turmoil could spill into a wider regional crisis. Donald Trump sharply escalated pressure on Tehran, openly encouraging Iranian protesters and threatening punitive action if the crackdown continues. This week he cancelled all meetings with Iranian officials, announced 25% tariffs on any country trading with Iran, and repeatedly warned that the US could use military force if security forces continued killing demonstrators. 

Economics 

The UK economy showed an unexpected return to growth in November, easing fears of a stalling recovery at the end of 2025. Gross domestic product rose by 0.3% on the month, beating forecasts of a 0.1% increase and reversing October’s 0.1% contraction. Growth was driven by a rebound in services and a sharp pickup in industrial output, helped by a recovery in car production after disruption earlier in the autumn, while construction remained a drag on activity. Despite the stronger monthly performance, the broader picture remained subdued, with GDP up just 0.1% in the three months to November, underlining the fragile pace of growth and reinforcing expectations that the economy ended the year on a weak footing.

UK retailers endured a “drab Christmas”, according to the British Retail Consortium, after sales growth slowed sharply in December as shoppers reined in spending and waited for post‑holiday discounts. The BRC‑KPMG Retail Sales Monitor showed total like‑for‑like retail sales up just 1.2% year on year, well below last December’s 3.2% increase and the weakest performance in several months, with non‑food sales slipping 0.3% while food sales rose 3.1%, largely reflecting higher prices. Retailers saw a late lift from Boxing Day and the start of January sales, but the trade body warned that households remain under pressure from the cost of living, leaving discretionary spending muted despite solid demand earlier in the year.

US inflation held steady in December, reinforcing the view that price pressures are proving stubbornly persistent. The consumer price index rose 0.3% on the month, leaving the annual rate unchanged at 2.7%, in line with expectations, while core inflation eased slightly to 2.6%. Higher costs for shelter, food and services offset falls in areas such as used cars, underscoring the uneven nature of the inflation slowdown. While the data showed inflation remains well below its 2022 peak, it also suggested progress towards the Federal Reserve’s 2% target has stalled, strengthening expectations that policymakers will hold interest rates steady at their January meeting rather than move quickly towards further cuts.

The US producer price index rose modestly in December, with prices for final demand increasing around 0.2–0.3% on the month, leaving annual producer inflation contained and largely in line with expectations. Higher costs for some goods and energy were offset by softer services prices, signalling that upstream inflation pressures remain far less intense than during the post‑pandemic surge. The data reinforced the view that the Federal Reserve will keep interest rates on hold in the near term.

The latest Federal Reserve Beige Book painted a picture of a US economy growing at a slight to modest pace, with most regions reporting steady activity through late November and December and a mildly improved outlook. Consumer spending picked up around the holidays but remained uneven, with higher‑income households continuing to spend freely while lower‑ and middle‑income consumers stayed cautious and price‑sensitive. Labour markets were broadly stable, with limited hiring and some reports of layoffs, while wage growth was modest and labour shortages persisted in skilled roles such as healthcare and engineering. Price pressures edged higher, moving from modest to moderate in some districts as firms passed on higher costs linked to tariffs, utilities and insurance, though many businesses said demand constraints limited their ability to raise prices further. 

Companies

US investment banks reported a robust fourth quarter, rounding off one of the strongest years for Wall Street since before the pandemic. Earnings were driven overwhelmingly by a resurgence in trading and investment banking activity, as buoyant equity markets, elevated volatility and a sharp rebound in mergers and acquisitions combined to lift revenues across the sector. Trading was the standout performer. Goldman Sachs posted a record $4.3bn in equities trading revenue, the highest ever recorded by a single bank in a quarter, while JPMorgan and Morgan Stanley also reported double‑digit gains in equities and fixed‑income trading as hedge fund activity and client positioning surged. Investment banking rebounded decisively. Global merger and acquisition (M&A) volumes jumped more than 40% in 2025, helping lift fourth‑quarter advisory fees, while initial public offering IPO pipelines improved into year‑end. Goldman led league tables for M&A, while Citigroup and JPMorgan also reported strong dealmaking income, reversing the slump seen earlier in the cycle. Looking ahead, banks struck a confident but measured tone. Executives and analysts see continued support from resilient US growth, a healthier deal pipeline and looser regulatory conditions, but flagged risks from inflation, politics and rate uncertainty. For now, the consensus view is that earnings momentum will carry into 2026, even if growth moderates from exceptional 2025 level.

BlackRock capped the year with a strong fourth quarter, reporting profits and inflows that underscored its dominance as the world’s largest asset manager amid buoyant markets. The group attracted a record $342bn of client inflows in the fourth quarter, lifting assets under management to about $14 trillion, as investors poured money into exchange‑traded funds (ETFs), private markets and cash products. Higher markets also boosted fee income, driving earnings ahead of expectations, while BlackRock said demand remained broad‑based across regions and asset classes. Management struck a confident note on the outlook, pointing to a strong pipeline and growing appetite for private assets and technology‑driven investment solutions, even as it warned that market volatility and interest‑rate uncertainty were likely to persist into 2026.

TSMC delivered a strong fourth quarter, reporting a 35% jump in profit as surging demand for advanced chips used in artificial intelligence more than offset a still‑uneven recovery in consumer electronics. Revenue rose to about $33.7bn, beating market expectations, with high‑performance computing – driven by customers such as Nvidia and Apple – continuing to dominate growth as the world’s largest contract chipmaker ramped up production of cutting‑edge processes. Management struck an upbeat tone on the outlook, forecasting further revenue growth in early 2026 and signalling confidence that AI‑related demand would remain a powerful structural tailwind, even as broader chip markets continue to normalise after a prolonged downturn.

Persimmon’s trading update shows new home completions climbed 12% in 2025 to 11,905, driving underlying profit before tax to the top end of City forecasts – with guidance of £415m–£440m – and margins expected at the lower end of its 14.2%–14.5% range. The average selling price rose around 4%-5% to c.£278,000–£301,000, while forward sales grew modestly by 2%, supported by a strengthened outlet network (277 active sites) and expanding land pipeline. Net cash stood at approximately £116m after returning £192m to shareholders and spending on land and building-safety remediation. Despite mortgage rate relief and marketing momentum, management cautioned that market improvement in 2026 may be limited, citing fewer bulk sales and ongoing affordability pressures, but remains confident in achieving current market expectations for completions and profit. 

Taylor Wimpey said it delivered a robust performance in a difficult housing market, as higher prices and land sales helped offset subdued buyer demand. The housebuilder completed 11,229 homes in 2025, up on the previous year, boosted by average selling prices rising to £374,000 for private homes, while revenues increased to around £3.8bn and operating profit is expected to edge up to about £420m, broadly in line with expectations. However, the group warned that the squeeze on affordability – particularly for first‑time buyers – continues to weigh on demand, pushing its year‑end order book down to £1.86bn. Management said planning reforms were improving land supply and reiterated confidence in the medium‑term outlook, but cautioned that overall sector output is likely to remain constrained until market conditions improve.

Vistry said it delivered a stronger second half and full‑year profit growth, despite continuing weakness in the private housing market, as improved margins offset softer volumes. The housebuilder expects adjusted profit before tax of about £270m for 2025, broadly in line with market expectations, even as revenues were flat at roughly £4.2bn and completions fell 9% to around 15,700 homes. The group pointed to better site mix, cost control and increased affordable housing activity, with operating margins rising sharply in the second half to produce a full‑year margin of 8.4%. Vistry also highlighted falling net debt and fresh funding support from Homes England, saying its partnership-led model and land acquisitions in a subdued market position it well for a pick‑up in affordable housing volumes and a more second‑half‑weighted recovery in 2026. 

Pearson reported a solid trading update, saying it delivered full-year performance in line with guidance as growth accelerated into the end of the year, underpinning confidence for 2026. Underlying group sales rose 4% for 2025, with fourth-quarter growth picking up to 8%, while adjusted operating profit is expected to come in at £610m–£615m, up about 6% year on year. The education group pointed to strong execution across all divisions, continued momentum in enterprise learning and assessments, and progress in applying artificial intelligence through new partnerships with Microsoft and IBM. While Pearson flagged the loss of a US student assessment contract in New Jersey as a short-term headwind for the first half, management said strong cash generation and strategic delivery had left the business well positioned for further growth in the year ahead. 

Whitbread delivered a better-than-expected third-quarter update, highlighting steady UK performance and strong momentum in Germany. UK revenue per available room (RevPAR) rose about 3%, while Germany posted a 7% surge, underscoring continued demand resilience in its Premier Inn business. The cost impact from proposed changes to business rates in the recent UK Budget is now expected to be around £35m in FY27, down from the earlier estimate of £40m–£50m. Management also expects greater cost efficiencies of £75m–£80m in FY26 across labour, technology and procurement, up from £65m–£70m previously. Both forecasts are positive signs for margins. Coupled with resilient demand, the outlook for Whitbread remains bright.

Hays reported a challenging second quarter, with group net fees down 10% year-on-year on a like‑for‑like basis as weaker hiring markets continued to weigh on both permanent and temporary recruitment. Permanent fees fell 14%, reflecting subdued client confidence, while temporary and contracting declined 8%, hit by lower average hours worked in Germany, its largest market. Despite the softer trading, the recruiter said strong consultant productivity and tight cost control largely offset the revenue decline, allowing it to maintain expectations for first-half pre‑exceptional operating profit of about £20m, in line with consensus. Management struck a cautious tone on demand but highlighted ongoing progress on structural cost savings and operational discipline, positioning the group to benefit when hiring activity eventually recovers.