Stock Market & Economic Commentary – September 2025

“An investment in knowledge pays the best interest” – Benjamin Franklin (1706-1790), Founding Father of the United States, signer of the Declaration of Independence, and the first postmaster general.

Summer’s over; school’s back

With the long holiday period well and truly over and the schools back in full swing, let’s take a look at economic developments over the summer months.

The good news is that economic activity has held up reasonably well in the face of sweeping US tariffs, and the world has so far largely avoided a retaliatory cycle. Despite the average tariff on US imports shooting up from 2.4% at the start of the year to 18.6%, the IMF nudged up its forecast for global growth in July to 3%, only marginally below last year’s 3.3% rate.

This doesn’t mean that the world has shrugged off the effects of tariffs. The impact of tariffs on growth and inflation takes many months to feed through the system. Six months on from Donald Trump’s “Liberation Day” announcement, we still don’t have a full picture of US tariff rates by country and product. The next key date is 10 November, when a pause in the application of the highest US tariffs on China ends. The jury is still out on how America’s tilt towards protectionism will affect the global economy in the coming years.

What is clear is that tariffs have hit prospects for US growth harder than for most other countries. Economists have slashed their forecasts for US growth since January and expect the economy to grow by 1.6% this year, just over half last year’s rate and the slowest pace of growth since the pandemic.

Hopes about the transformative effects of AI have ridden to the rescue, buoying sentiment and boosting US equities. That has fed through into a surge in investment in AI and data centres, which has bolstered US growth. Were it not for big tech, US activity would be faltering.

Two areas of concern are lacklustre levels of consumer confidence and a rapidly weakening jobs market. US inflation is drifting higher, partly because of the imposition of tariffs, adding to the squeeze.

What of China? The world’s second-largest economy saw a boost to demand from stockpiling ahead of the application of US tariffs. While trade with the US has fallen sharply, trade with other countries continues to grow. It is a measure of the resilience of China’s economy that the IMF has raised its forecast for GDP growth this year from 4% in April to 4.8% in July, close to last year’s 5% rate.

Momentum in the euro area is mildly positive. GDP forecasts for this year have been revised up since the spring. High frequency data points to a gentle increase in activity, and the ifo survey of German business confidence – one of Europe’s most important economic indicators – has risen steadily throughout this year.

The most obvious sign of increased confidence in Europe can be seen in stock markets. Euro area equities, including the UK, have performed better than the US, particularly in sterling terms. Higher spending on infrastructure and defence in Germany and an increased focus on growth-boosting reforms across the continent have helped boost sentiment. European and UK equities trade at lower earnings multiples than in the US, making them attractive to investors concerned about exposure to the US technology sector and broader volatility in the US economy and the dollar.

The UK has had a better year than many economists predicted, with the economy growing by 1.1% in the first half, making it the fastest-growing economy in the G7. But one-off factors such as tariff-related stockpiling and the end of the stamp duty holiday in April have flattered the GDP numbers. None of this looks like a recipe for sustained UK outperformance, and the pace of UK growth has already started to show signs of faltering.

The UK is an outlier in another less desirable area, with inflation rising to 3.8% in July and August higher than any other G7 economy. This has created a headache for the Bank of England (BoE), which is weighing the risk of above-target inflation against a weakening jobs market. Unemployment, at 4.7%, is at the highest level in over four years, while HMRC data show that the number of payrolled jobs has been on a downward trend since last autumn.

Higher inflation has contributed to an upward drift in the yield, or interest rates, on UK government bonds, a process that has been exacerbated by weakened demand for long-dated gilts from defined benefit pension schemes. Earlier this month, the yield on the 30-year gilts reached a 27-year high. Ten-year borrowing costs are higher than elsewhere in the G7.

This is adding to the difficulties facing UK chancellor Rachel Reeves, who is widely predicted to face a shortfall in tax revenues if she wishes to meet both her current spending plans and fiscal rules. The Autumn Budget will take place on 26 November, and it seems inevitable that speculation over tax rises will continue until then, with potentially harmful effects on consumer and business sentiment.

The UK is far from alone in facing difficulties over its budget. French prime minister Francois Bayrou lost a confidence vote earlier this month as he tried to find €44 billion in spending cuts, including, among other things, scrapping two public holidays.

Japan, Italy, and Canada have also seen their borrowing costs rise this year. A notable exception is the world’s largest and most liquid debt market, that of US Treasuries, where ten-year bond yields have declined slightly since the start of the year.

As well as tariffs, the other big US policy announcement this year has been the passage of Mr Trump’s budget bill. It includes $4.1 trillion in tax cuts over the next ten years but, with only limited spending cuts, is set to add $3.3 trillion to federal deficits.

Mr Trump has continued to criticise Fed chairman Jerome Powell and last month attempted to fire Fed policymaker Lisa Cook. This has raised concerns that the independence of the US central bank, seen as a key safeguard against political interference and inflation, may be at risk.

Against a backdrop of growing worries about government debt and higher inflation, investors have sought out supposed safe-haven assets. The dollar price of gold hit a fresh high and has risen by 35% this year, although in inflation-adjusted and sterling terms is only back to the peak of 30 years ago. The US dollar has been a casualty of recent developments and has fallen by about 9% this year.

The world economy has managed to avoid some of the negative outcomes that seemed quite likely earlier in the year, but we are not out of the woods. The full impact of tariffs is still to be felt, and US growth, like the US stock market, is heavily dependent on tech.

Concerns around government indebtedness and geopolitical risk are here to stay. The tectonic plates of public opinion are shifting in Europe, with Reform UK 11 points ahead in polls in the UK, Rassemblement National six points ahead in France, and Alternative für Deutschland one point behind the CDU in Germany.

UK Debt

In 1928, the banker Gaspard Farrer anonymously established the National Fund, a charity dedicated to paying off the national debt.

In June this year, Britain finally smashed open the piggy bank, with £586 million in funds being used to buy government bonds. It offset less than one day’s borrowing requirements.

June might have been a particularly poor month to choose, with chancellor Rachel Reeves overseeing £20.7 billion of public sector net borrowing – the second highest level since records began, with only the chaos of the 2020s pandemic exceeding it. However, it is still a potent illustration of the sheer scale of Britain’s indebtedness.

The UK is facing a difficult economic environment, with inflation proving much stickier than in other major economies and government borrowing costs surging to levels not seen in decades. Together, these pressures have created significant headwinds for growth and raised questions about the sustainability of the UK’s debts.

UK inflation accelerated to 3.8% in July and August, the highest level since January 2024, while Eurozone inflation held steady at just 2%. This marks the widest gap between the UK and its European peers in nearly two years. Prices have been pushed higher by strong (mainly public sector) wage growth, higher energy and housing costs, and sharp rises in transport and food. Services inflation remains particularly stubborn, climbing to 5% compared to 3.2% in the Eurozone.

Part of this stickiness reflects structural challenges. Post-Brexit labour shortages continue to put pressure on wages. Government policy has contributed as well, with increases in employer National Insurance contributions and a higher minimum wage feeding directly into costs for businesses. This has left the BoE in a difficult position. Although it cut rates from 4.25% to 4% in August, the persistence of inflation limits its ability to loosen policy further without risking another surge in prices.

Bond markets are sending a warning

For over a decade, the UK government could borrow almost for free. The interest bill on the national debt was low, even as the debt pile ballooned. Why? Because yields were near zero. In 2020, the UK could borrow for 30 years at 0.6% – and even less for shorter-term bonds. But those days are gone.

Thanks to this big spending, big borrowing government, UK bond yields have risen sharply, with 30-year gilt yields hitting 5.7% this month – the highest in the G7 and the highest for Britain since 1998. For context, that is a full 80 basis points above equivalent US Treasuries, underlining investor concerns about the UK’s fiscal position. Borrowing costs in the UK are even higher than in both Italy & Greece, two countries that nearly went bust in the global financial crisis.

Put simply, this means it is now more expensive for the UK government to borrow money than for most other major economies, because investors see lending to Britain as riskier. At nearly 10% of all government spending, debt interest of over £110 billion is now one of the biggest single items, eclipsing both the education and defence budgets.

Several forces are at work here. Globally, demand for capital is being reshaped by two big themes: record investment in AI infrastructure and sharply rising defence spending. These global capital demands are driving interest rates higher everywhere. However, the UK is particularly exposed because it runs one of the largest budget deficits in the developed world, at over 5% of GDP, and relies heavily on foreign investors to fund it.

The UK’s total public sector net debt currently stands at approximately £2.90 trillion, which is just shy of the whole of the UK’s GDP. This level of debt is historically high and reflects ongoing fiscal pressures, including increased borrowing costs and sustained public spending. And this doesn’t include unfunded pension liabilities, which cover most central government employees and operate on a pay-as-you-go basis. These liabilities were conservatively estimated at £1.4 trillion as of the end of 2024/25.

Total UK debts are £4.3 trillion and counting.

It is difficult to rationalise a trillion pounds, so to put it in perspective, what about a trillion seconds?

A trillion seconds is approximately 31,710 years, which would take us back to around 30,000 years before Jesus was born. Long before the dawn of recorded history and deep into the Palaeolithic Age, when early humans were using stone tools and cave art was just emerging.

The UK’s fiscal room for manoeuvre is shrinking fast. This is what happens when a decade of ultra-low rates meets the harsh reality of inflation and money printing.

What could change the outlook?

There are potential catalysts for improvement. A clear fall in inflation below 3% would relieve pressure on the BoE and could trigger a rally in gilts and a corresponding fall in borrowing costs. A credible, long-term plan for fiscal discipline would rebuild trust, and an improvement in economic growth would help sentiment. Global shifts, such as cooling in the AI spending boom or risk-off flows into safer assets, could also provide some relief. But a return to economic growth is undoubtedly the key.

There is scope for yields to stabilise or even retrace if markets start to price in interest rate cuts and sustainable economic growth.

What should investors do?

When countries rack up unsustainable debt, investors holding the wrong assets pay the price.

– Bonds and cash get inflated away

– Currencies weaken

– Real returns disappear

And yet most portfolios are built on assumptions that worked before the rules started to change. So, what should investors do?

1) Avoid long-duration government bonds – they are no longer the safe haven they once were.

2) Only keep cash for short-term requirements and as an emergency fund.

3) Diversify internationally. Don’t bet your future on one currency or economy. Not even the US dollar is safe. Relying on a single country’s bonds or equities is riskier than it used to be.

4) Hold real assets: Over the long term, equities offer the best protection from inflation-driven erosion.

5) Plan for policy volatility: Higher debt means more political risk – tax changes, surprise reforms, possibly even capital controls in extreme cases.

6) Have a robust financial strategy and get good advice. The old playbook of riding the wave of falling interest rates is finished. We’re entering a new regime. Investors need to adapt.

What’s your strategy for navigating this new investment world?

To quote Muhammad Ali, “I never won a fight in the ring, I always won in preparation”.

Plan, Plan, Plan.

Please click here to access the Clarion Investment Diary for September, which provides a review of recent investment performance and benchmark comparisons and full details of the Clarion Portfolio Funds.

As always, we thank you for your continued support and we look forward to updating you regularly throughout the remaining months of 2025. Please get in touch if you have any questions.

Keith W Thompson CIP; Dip FA

Clarion Group Chairman

September 2025

Creating better lives now and in the future for our clients, their families and those who are important to them.

Risk Warnings

Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.

The content of this article does not constitute financial advice and you may wish to seek professional advice based on your individual circumstances before making any financial decisions.