This week’s blog is written by portfolio manager Ian Jensen-Humphreys
As the summer holidays draw to a close, we can use this as an opportunity to take a step back from day-to-day noise and gauge the current economic and investing environment from a big-picture viewpoint.
Overall, it’s likely to be OK, if unexciting. Consensus expected GDP growth for the UK in 2025 and 2026 is forecast to be a shade over 1%, similar to the growth rate achieved in 2024. This is a bit underwhelming given median growth over the past 10 years of 1.8%, but it isn’t anywhere close to the GDP contraction we saw in either 2020 or 2009. The equivalent forecasts in the USA are for about 1.6% growth, compared to median growth of 2.8% over the past 10 years. This is the “slowdown” that has been widely discussed, but we are a long way off a recession at this point.
With regard to employment levels, these are also fine. The unemployment rate in the UK was 4.3% at the end of 2024, in line with the median for the past 10 years. It is forecast to increase slightly to 4.8% by the end of 2026, but it is worth noting that this forecast matches the lowest recorded year-end rate between 1990 and 2016. Similarly in America, the unemployment rate is expected to tick up to 4.3% from the 2024 year-end figure of 4.0%, very manageable in the grand scheme of things.
…Maybe a small one? Inflation spiked in the aftermath of the pandemic but has been drifting lower towards central bank target levels, however it stubbornly remains slightly higher than desired. UK CPI inflation was 2.5% in 2024 (vs a 2.0% target), it is forecast to rise to 3.3% by the end of 2025 before falling back to 2.5% at the end of 2026. In the USA the target is also 2.0%, whilst realised CPI inflation was 3.0% at the end of last year and is expected to decline only marginally this year and next year. This matters to the extent that it makes it harder for central banks to reduce policy rates in case growth starts to look materially weaker, but we are in a not-too-bad situation compared to the readings of 9.1% and 8.0% for the UK and USA respectively at the end of 2022.
Probably a larger day-to-day issue is that consumers’ experienced inflation has tended to be higher than that given by official measures, given that the latter incorporates product improvements. For example, a computer sold at £500 today is much more advanced than an equivalently priced one 10 years ago - this is treated as deflationary in the official statistics, even though the sale price of the computer might not have changed at all (because the older one would be much cheaper now if it was still on sale). This impact offsets higher inflation elsewhere (e.g. food and services) to somewhat depress the official inflation figure.
Yes. This has clearly been the case over the course of 2025, most notably the equity market swoon in March and April as President Trump started to reveal his tariff programme. That said, equity markets have recovered to make new all-time highs as the “sticker shock” has receded and the more extreme negative forecasts have (as yet) failed to materialise. This seems somewhat complacent to us at this stage.
A slower burning but potentially larger long-term issue is the renewed focus of bond investors on budget deficits and the subsequent impact on future government bond issuance. Most developed market governments seem incapable of reining in spending, and this is getting more attention. So far it hasn’t been too much of a problem (apart from the Truss/Kwarteng “mini-budget” in 2022) but it is definitely something to watch out for.
Fine, but a bit brittle. For the year to August 26, UK equities have gained nearly 16% including reinvested dividends, whilst global equities have returned nearly 6%. Bonds have been more muted but have still delivered positive returns between 1% and 5%. From a fundamental perspective, global equities have increased their earnings by 11% over the past 12 months (driven by AI-related US large tech companies), whilst UK corporate earnings have barely changed overall.
The brittleness becomes more apparent when you look under the hood. Bouts of volatility such as we saw in April, alongside narrow equity markets (only a few companies account for most of the market’s gains) give us some cause for concern. Also, valuations look expensive, especially for US equities and corporate bonds, where spreads are very tight. This suggests little margin for error.
Overall, when we ignore the daily noise and doom mongering, the environment seems OK, albeit with clear risks to which we need to be fully alert. We can see opportunities to grow portfolios and deliver returns to investors.
Ian is a portfolio manager of the Quilter Investors Cirilium and Creation Portfolios. Ian joined Quilter Investors in March 2020 from Seven Investment Management (7IM), where he was deputy chief investment officer. Ian also spent 15 years at Goldman Sachs in risk management and portfolio hedging strategies.
Ian is a CFA charterholder and has a degree in Physics from the University of Oxford.
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