Time to wrap up: here are today’s main stories.

Firstly, on the IMF’s annual meetings in Washington DC today:

The UK public finances…

And also:

The IMF has identified three risks to its forecast for 3.2% global growth in the next two years, my colleague Larry Elliott writes:

First, there’s a risk that central banks will be too slow in reducing borrowing costs, leading to slower growth and a reassessment by financial markets of their Goldilocks scenario for the global economy. Markets have bought heavily into the idea that central banks will get policy just right, engineering a return of inflation to targets without a recession. That may be true in the US, it looks less clearcut for the eurozone.

The second risk is that the war in the Middle East escalates and leads to a sharp increase in oil prices. So far, commodity markets have been relaxed about the heightened tension because they see no immediate danger of crude supplies being cut off, but that could rapidly change. Gourinchas said: “An escalation in regional conflicts, especially in the Middle East, could pose serious risks for commodity markets.” It is a warning worth heeding.

Finally, there’s the elephant in the room – the possibility that Donald Trump will return to the White House after next month’s US presidential election. While not mentioning the former president by name, the IMF estimates that a shift towards “undesirable” industrial and trade policies could reduce global GDP by 0.5 percentage points in 2026.

As far as the IMF is concerned, imposing trade barriers and subsidising domestic industry provides a sugar rush but the measures often lead to retaliation and fail to improve living standards in the longer term.

European Central Bank president Christine Lagarde has thrown her backing behind fair trade, in a pushback against the threat of more protectionism in the US.

In an interview with Bloomberg, Lagarde was reminded that Donald Trump recently said that ‘tariffs’ was his favourite word.

Lagarde, though, insists that the US has thrived thanks to free trade.

She says:

Fair trade is a key boost for growth, for employment, for innovation, for productivity.

It is something that we should not throw away.

Lagarde adds that the times in history when the US has thrived were periods of trade, not periods of “I’m going to retire behind my boundaries and play at home”.

The IMF has also warned that vulnerabilities are building up in the financial system, as markets may be underestimating the risks from conflict and upcoming elections.

In its latest Global Financial Stability Report, the Fund flags that there is a “widening disconnect” between “elevated economic uncertainty — stemming from ongoing military conflicts and the uncertain future policies of newly elected governments” and the low volatility in the financial markets.

In a warning note, the Fund reminds investors of the brief plunge in market values less than three months ago, saying:

Market turmoil in early August, though short-lived, served as a reminder of how quickly volatility can catch up to uncertainty, force the unwinding of leveraged trades, and trigger feedback loops between asset prices and deleveraging.

The IMF has also warned that it is very concerned about rising trade protectionism, at a time when a possible Donald Trump presidency looms over the global economy.

Chief economist Pierre-Olivier Gourinchas tells reporters in Washington DC that there has been a very sharp increase in the number of trade-distorting measures implemented by countries over the last five years, from 1,000 in 2019 to 3,000 today.

The IMF has calculated the impact of rising trade tensions, leading to a permanent increase in tariffs starting in mid-2025 and affecting a sizable swath of global trade.

This, it says, would cut 0.8% off global GDP in 2025, and another 1.3% in 2026.

Gourinchas says:

There is definitely a direction of travel here that we are very concerned about, because a lot of these trade-distorting measures could reflect decisions by countries that are self-centred and could be ultimately harmful not only to the global economy… but also hurful for the countries who implement them as well.

The impact on global trade also makes the residents of a country [implementing tariffs] poorer.

[Reminder, Trump has proposed a 10% across-the-board levy on all products imported into the U.S. from overseas.]

Bank of England governor Andrew Bailey is also in the US to attend the IMF’s Annual Meeting, and warning against complacency over the risk of financial crises.

Speaking at the Bloomberg Global Regulatory Forum in New York, Bailey channels mythological Greek Cassandra – whose warnings were accurate, but ignored.

Bailey explains:

As a previous financial crisis recedes over time, it is not unusual to believe that a new era has arrived. In such conditions, Cassandra like warnings that nothing basic has changed and there is a financial breaking point that can have severe economic consequences are ignored.

He also cites economics professor Hyman Minsky, who explained that the growth phase of a cycle in credit markets or business activity will end with a sudden, major collapse of asset values (A ‘Minsky moment’).

Bailey explains that memories of financial crises recede over time and can be replaced by happier thoughts of a new era arriving.

Warning against ‘the trap of complacency’, Bailey says:

I can observe this happening with the global financial crisis fifteen years or so on. I do get people telling me that ‘you have solved that one so we can relax’. But the work I set out above on theory and history is timeless. So, let’s not fall into the trap of complacency.

To combat these risks, Bailey says, regulators need better surveillance tools – particularly to keep track of the non-bank sector, which he calls “very large, and growing” [these are companies who offer similar services to banks, but aren’t actually banks]

And he wraps up with five messages on how to ensure financial stability, starting with the importance of macro-prudential regulation (rather than just a list of potential problems].

System-wide matters and should not disappear amid laundry lists.

Second, we must heed Minsky’s warning that memories of financial crises past do recede. Message three is that we have seen a shift in financial intermediation towards non-banks – from money to finance if you like and this presents distinct challenges. Message four is that one of these challenges is the pressing need for new surveillance tools.

And message five is that there is also a need for central banks to reconsider their liquidity provision tools to non-banks while not undermining the singleness and uniqueness of money.

The IMF’s chief economist has warned that countries such as the UK are treading a “narrow path” as they try to bring debt levels down.

Pierre-Olivier Gourinchas has been asked about Rachel Reeves’s plans to change the UK’s fiscal rule, to allow more investment in the budget, and about the risks of making too dramatic a change in fiscal policies.

He tells the press pack in Washington that the IMF will evaluate the details of the budget once Rachel Reeves has given it, rather than giving judgement now.

But he then says that the “broader question” is relevant for many countries, not just UK, who are treading a “narrow path in terms of fiscal consolidation”.

Gourinchas explains that when countries have elevated debt levels, when interest rates are high, when growth is “OK but not great”, there is a risk that “things could escalate or get out of control quickly”.

He says:

So there is a need to bring debt levels down, stabilise then when they are not stabilised, and rebuild fiscal buffers.

That is true for many countries around the world.

Countries who don’t do that will later find themselves “the mercy of market pressures” that will force an uncontrolled adjustment, Gourinchas warns, adding:

At which point you have very few degrees of freedom. You don’t want to get in that position, and the effort to stabilise public debt has to be seen in that contect.

But….the other side of the narrow path is that if governments try to do too much too quickly on tax and spending they will have an adverse impact on growth.

There is a need for caution, Gourinchas argues, as many countries have essential spending, such as healthcare, investment or on the climate transition.

He says:

We need to protect the kind of spending that can be good for growth.

And he concludes by explaining that achieving this “pivot” is absolutely essential.

“We are in a world where there will be more shocks, and countries need to be prepared and need to have some room on the fiscal side to deal with that.

Newsflash: The International Monetary Fund believes that the global battle against inflation has largely been won.

Pierre-Olivier Gourinchas, the IMF’s chief economist, says the decline in inflation without a global recession is “a major achievement”.

Speaking as he presents the Fund’s World Economic Outlook, Gourinchas says:

After peaking at 9.4 percent year-on-year in the third quarter of 2022, we now project headline inflation will fall to 3.5 percent by the end of next year, slightly below the average during the two decades before the pandemic.

In most countries, inflation is now hovering close to central bank targets, paving the way for monetary easing across major central banks.

But…Gourinchas also fears that downside risks are increasing and now dominate the economic outlook:

An escalation in regional conflicts, especially in the Middle East, could pose serious risks for commodity markets. Shifts toward undesirable trade and industrial policies can significantly lower output relative to our baseline forecast.

Monetary policy could remain too tight for too long, and global financial conditions could tighten abruptly.

Newsflash: The International Monetary Fund has lifted its forecast for UK economic growth this year, as it unveils its new World Economic Outlook.

The IMF now predicts that UK GDP will rise by 1.1% this year, up from the 0.7% it forecast back in July.

That would make Britain the joint third fastest-growing economy in the G7 this year, in line with France and behind the US which expected to grow by 2.8% and Canada, which is forecast to grow by 1.3%. Italy lags behind with 0.7% growth, Japan with 0.3% and zero growth in Germany in 2024.

The Fund still expects the UK to growth by 1.5% next year, “as falling inflation and interest rates stimulate domestic demand”.

This upgraded outlook is a boost for Rachel Reeves, ahead of the budget next week.

The chancellor has welcomed it, saying:

“It’s welcome that the IMF have upgraded our growth forecast for this year, but I know there is more work to do.

“That is why the Budget next week will be about fixing the foundations to deliver change, so we can protect working people, fix the NHS and rebuild Britain.”

A Trump win next month could be bad news for the euro, especially if Republicans pull off a clean sweep on Capitol Hill.

Goldman Sachs analysts have predicted today that the the euro could fall as much as 10% in a scenario in which Donald Trump imposes widespread tariffs and cuts domestic taxes after winning November’s election.

The euro is currently trading at $1.0827, so a 10% drop implies it would fall below parity against the dollar, as it last did two years ago.

European policymakers have been shaken by Trump’s proposal of a 10% tariff on all imported goods, which would hurt Europe’s exporters.

Trump has also been promising tax cuts, which would be potentially inflationary – leading to higher interest rates.

In a new research note, Goldman’s Michael Cahill writes:

Tariffs have a direct influence on exchange rates, so we expect that to be the focus for FX markets in different election scenarios.

More specifically, we expect the strongest Dollar response to come from a Republican sweep, which would open the door to larger tariff increases in combination with domestic tax cuts.

Cahill predicts a smaller dollar rally if the election results in a divided Republican government, adding:

A Democratic sweep or divided Democratic government would likely result in some initial Dollar downside as markets reprice the prospect of more dramatic changes in tariffs.

Next week’s UK budget is also influencing the pound.

If Rachel Reeves tightens public spending more than expected (despite protests from colleagues), then growth would be weaker… and the Bank of England more likely to lower interest rates.

There are reports today that the chancellor is considering increasing taxes paid by online giants such as Amazon.com Inc. That would help fund new support for the high street.

Bloomberg reports:

Britain’s finance minister is looking at ways to change the existing system of business rates — under which tax bills are based on the value of a firm’s physical premises — so that e-commerce companies such as Amazon pay more, according to people familiar with the matter, who requested anonymity discussing plans that haven’t been finalized.

She’s examining the move alongside a move to reduce bills on shops, leisure and hospitality, the people said.

The pound has dropped to a two-month low against the US dollar this morning.

Sterling traded as low as $1.2967 this morning, its lowest level since 19 August, as the so-called ‘Trump Trade’ ripples through markets.

Neil Wilson, analyst at Finalto, says:

Markets think that a Trump win is a) increasingly likely and b) going to be bad for bonds. Markets are also positioning for broad dollar strength - DXY’s rip higher corresponds to the surge in Trump’s odds.

Moreover, a Trump win ought to mean tighter Fed policy, or at least that is the thinking.

Expectations that UK interest rates will be cut several times in the months ahead have also weighed on the pound. A quarter-point rate cut in November is currently seen as a 98% chance.

Jitters in the financial markets are pushing down prices of bonds and shares this morning, and nudging up the cost of government borrowing.

In London, the FTSE 100 share index has droppped by 58 points, or 0.7%, to 8261 points, the lowest since last Wednesday. European markets are also in the red, with Spain’s IBEX and Italy’s FTSE MIB both down around 1%.

Wall Street is set for a lower open in three hours:

Bond yields (the rate of return) are rising, as bond prices fall, adding to losses yesterday.

This has pushed the yield on 10-year US Treasury bills up to 4.2%, the highest since late July.

UK gilt yields have risen to a one-week high.

With the US elections just two weeks away, the possibility of a Donald Trump win is moving markets, argues Stephen Innes, managing partner at SPI Asset Management, who says:

The “Trump Trade” is back in the driver’s seat, steering everything from bonds to the currency market, with election risks now gripping investor sentiment like never before.

The latest data from prediction platforms like Polymarket, Kalshi, and PredictIt now show Trump’s odds of reclaiming the Oval Office shooting past 60%, with talk of a Red Sweep gaining traction. And this isn’t just making headlines—it’s moving markets.

The dollar is getting a nice tailwind, rising against everything in its path, while Treasury yields, well, they’re doing their best to keep pace, pushing above 4.20% as the market tries to make sense of what a Trump 2.0 presidency could mean for policy shifts, fiscal spending, and inflation.

A Trump victory is likely to lead to a larger budget deficit, corporate tax cuts, and a friendlier regulatory environment, Innes adds. That could lead to faster growth but also lead to higher inflation and interest rates – with Trump also bringing further trade protectionism.

Kit Juckes, chief foreign exchange strategist at Société Générale, cites uncertainty over the US election, and concerns that interest rates may not be cut as quickly as expected, saying:

There was trouble in bond-land yesterday. US supply, political uncertainty, fear of extended fiscal accommodation and concern that the rate -cutting cycle will be shallower than expected sent US yields back to levels last seen in July.

Juckes adds that there is a clear contrast between a US economy fuelled by fiscal largesse (or fiscal irresponsibility?) and pressure for more austerity in Europe (including the UK).

Britain’s farmers are urging the government not to hit them with inheritance tax on their agricultural land.

The National Farmers’ Union (NFU) has written a letter to Prime Minister Sir Keir Starmer calling on him to deliver a renewed agriculture budget and confirm the continuation of Agricultural Property Relief (APR).

They remind Keir Starmer that he told them in 2023 that rural communities were in his DNA, as he grew up in a rural community.

The NFU are concerned by reports that Rachel Reeves could target Agriculture Property Relief (APR), which allows land or pasture that is used to grow crops or to rear animals to be free of inheritance tax, in the budget.

NFU President Tom Bradshaw says that reports that the government is considering cutting the agriculture budget, and possibly reviewing APR are incredibly concerning.

“We are asking for a renewed multi-year annual agriculture budget of £5.6bn, not because it would be nice to have, but because it is an essential investment to deliver the government’s environmental goals, increase growth and support the economic stability of farm businesses.

The loss of APR could mean family farms, who are vital to producing food for the country, providing jobs and looking after our countryside, having to be sold to cover the costs. Changes would amount to a “Family Farm Tax”. It would also have a devastating impact on tenant farmers and new entrants.

There is a small glimmer of good news amid the gloom in this morning’s public finances for the chancellor.

The ONS has cut its estimate of public sector net borrowing in the first five months of the financial year by £1.1 billion to £63.0bn.

That, though, didn’t prevent borrowing running at £6.7bn above the forecast from the fiscal watchdog (the Office for Budget Responsibility).

Philip Shaw of Investec told clients:

Although the latest set of data represents a relative positive surprise, it does not shift the dial on the wider fiscal picture. At the halfway point in the financial year, borrowing is tracking some £1.1bn per month above the OBR’s projections in March and although the deficit is on course to undershoot last year’s £121.9bn, its forecast of £87.2bn for this year looks unachievable.

Moreover it will certainly not alter the stance of the forthcoming Budget on Wednesday next week when Chancellor Rachel Reeves is set to unveil higher taxes. Our Budget and Spending Review preview will be published later this week.

Inheritance Tax has brought £4.3bn into the government’s coffers since April, which is £400m more than in the same period in the previous financial year, new data from HMRC shows.

Rachel Reeves may attempt to raise more from IHT, which raised almost £7.5bn in the last financial year, in the budget.

Nicholas Hyett, investment manager at Wealth Club, says:

“Inheritance tax is an absolute cash cow for His Majesty’s Revenue and Customs, which is why it remains in the spotlight ahead of next weeks’ Autumn Budget. No one knows what changes will be announced, but most agree there will be some attempt to milk more revenue from estates.

The great thing about inheritance tax from the government’s point of view is that it’s complicated, with a whole host of rules that could be tweaked to boost the tax take. Tweaks could include changes to Business Relief, including on AIM shares, making pensions subject to inheritance tax and extending the time period needed to make gifts inheritance tax free.

A group of MPs are urging Rachel Reeves to impose a wealth tax on Britain’s rich in next week’s budget rather than announce spending cuts that would hit the most poor hardest.

In a letter to the chancellor, the MPs – including the former Labour leader Jeremy Corbyn and his then shadow chancellor, John McDonnell – say she could raise £24bn a year from a 2% tax on wealth above £10m and lay the foundations for a fairer, more sustainable economy.

The letter, organised by the campaign group Green New Deal Rising, says in contrast to the general trend, taxes on the very richest are only slightly more onerous than they were in the mid-1960s.

“This is deeply unfair and immoral: in an age of climate and economic crises, where public funds are desperately needed, it is necessary that we redress this imbalance. The transformative potential of taxes on extreme wealth is clear, and appetite for them is growing.”

Cara Pacitti, senior economist at the Resolution Foundation, says:

“Six months into the financial year, Britain is borrowing £6.7bn more than expected at the time of the Budget in March. This reflects central government spending which is £11.5bn higher than anticipated, largely due to public sector pay rises and higher running costs.

“Today’s data highlights the scale of the public finances challenges facing the Chancellor as she grapples with overspending today, the need to avoid austerity in the future, and having to fund extra public service spending through tax rises.”

The Resolution Foundation explain that this morning’s data shows that central government spending is already £11.5bn above the OBR’s March forecast

Most of that comes from spending on good and services, typical higher pay and running costs, which they say “tallies with the £22 billion ‘black hole’ identified by the Treasury back in July.”

UK borrowing would have been even higher last month, without Rachel Reeves’s unpopular decision to means-test pensioners’ winter fuel payments, and the end of the extra Pensioner Cost of Living Payment given in 2022 and 2023.

Net social benefits paid by central government decreased by £2.0bn in September to £25.7bn.

The ONS says:

The usual increase caused by the annual uprating of inflation-linked benefits was more than offset by reduced spending on Winter Fuel Payments, partly because of the absence of one-off cost-of-living payments, which were included in September 2023 and partly because of the change in eligibility.

Winter Fuel Payments are recorded (on an accruals basis) each September when the eligibility of claimants is determined, although the cash will not be paid until November.

Darren Jones, chief secretary to the Treasury, says the government was right to agree public sector pay deals last summer, even though they pushed up government spending (see earlier post):

“We have inherited a £22 billion black hole in the country’s public finances, including no plan to fund pay deals for millions of public sector workers. Strikes cost at least £3 billion last year, so it was the right thing to do to end those damaging disputes.

Resolving this blackhole at the Budget next week will require difficult decisions to fix the foundations of our economy and begin delivering on the promise of change.”

As a share of the economy, the UK’s national debt is the highest since the early 1960s.

The Office for National Statistics reports that public sector net debt excluding public sector banks was provisionally estimated at 98.5% of gross domestic product (GDP) at the end of last month.

That’s an increase of 4.0 percentage points more than at the end of September 2023.

However, it’s a little lower than in August, when the debt/GDP ratio was 98.8%. And that has beren revised down from an initial estimate of 100%.

Jeremy Hunt’s cuts to national insurance hit the government’s tax take last month, today’s public finances report shows.

The ONS says that compulsory social contributions decreased by £0.9bn to £13.9bn in September, “largely because of the reductions in the main rates of National Insurance in early 2024”.

So far this financial year (since April), compulsory social contributions are down by £5.2bn to £82.1bn.

Hunt cut 2p off national insurance from January, and followed this up with a second 2p cut in April, which brought the main rate of national insurance contributions (Nics) paid by workers down to 8%.

In April, The Treasury says that the average worker on £35,400 will save more than £900 a year as a result of the cuts in January and April.

Having promised not to raise taxes on ‘working people’, Reeves can’t really reverse Hunt’s cuts to. But, she has strongly hinted that she could raise employer national insurance contributions.

Public sector pay rises also added to government spending – and thus borrowing – last month.

Today’s public finances report says:

Central government departmental spending on goods and services increased by £2.6bn to £35.9bn, as pay rises and inflation increased running costs

Shortly after taking office, the Labour government settled pay claims with junior doctors, and with train drivers, to end industrial action that had been hurting the economy.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Britain’s government borrowing rose faster than official forecasts expected in September, in a timely reminder of the challenges facing Rachel Reeves as she prepares to deliver the budget next week.

The UK borrowed £16.6bn last month to cover the difference between public sector spending and income. That’s £2.1bn more than in September 2023 and the third highest September borrowing since monthly records began in January 1993.

Significantly, it’s also £1.5bn higher than the £15.1bn borrowing forecast by the Office for Budget Responsibility (OBR) for September, a sign that higher borrowing is adding to the chancellor’s challenge of raising money for public services without breaking pledges not to raise certain taxes.

However, it’s a little lower than the £17.5bn which City economists had forecast.

So far this financial year, the UK has borrowed £79.6bn, which is £1.2bn more than at the same point in the last financial year

That is £6.7bn more than the £73bn forecast by the Office for Budget Responsibility for this period. We’ll get the OBR’s new forecasts in just over a week’s time, after Reeves delivers the budget.

The latest public finances show that central government’s receipts were £80.7bn in September, £3.3bn more than in September 2023.

But that was overtaken by higher spending; central government’s total expenditure was £93.7bn in September, £5.5bn more than in September 2023.

Reeves is heading to Washington DC later this week for the annual meetings of the International Monetary Fund and World Bank, where finance ministers, central bank governors, thinktank chiefs and charity bosses will discuss the state of the global economy and its ability to generate a higher standard of living.

We’ll hear from the IMF, and from Bank of England governor Andrew Bailey, later today.

The agenda

• 7am BST: UK public finances for September

• 7am BST: European Union car sales for September

• 2pm BST: IMF to publish World Economic Outlook

• 2.25pm BST: Bank of England governor Andrew Bailey gives a keynote address at the Bloomberg Global Regulatory Forum

• 3.15pm BST: IMF to publish Global Financial Stability Report