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Investing.com - The U.K. government faces mounting fiscal challenges that will likely necessitate tax increases in the autumn Budget, according to a Barclays (LON:BARC) outlook report.
Recent political developments have further strained the fiscal position, with the government forced to water down its welfare reform bill, adding £4.8 billion in spending by FY29-30.
The fiscal situation briefly rattled markets midweek, with gilt yields rising 0.2 percentage points and sterling falling 1% against the dollar amid speculation about the Chancellor’s position.
These moves partially reversed following Prime Minister Starmer’s public support for Chancellor Reeves, though Barclays notes the underlying fiscal difficulties remain unresolved.
Economic data showed Q1 GDP growth confirmed at 0.7% quarter-on-quarter, with private consumption revised slightly higher to 0.3%.
However, this consumption increase came as real household disposable income fell 0.9%, forcing the household saving ratio down 1.1 percentage points to 10.9% - ending seven consecutive quarterly increases.
Final June PMI data indicated modest improvement at the quarter’s end, with the composite index revised up to 52.0 from the flash estimate.
Despite this uptick, the quarterly average remained 0.5 points below Q1 levels, suggesting positive but subdued private sector growth in Q2, with Barclays forecasting just 0.1% monthly GDP growth for May.
The labor market shows signs of loosening, with Barclays’ alternative employment indicator suggesting a contraction of 27,000 jobs in May.
Meanwhile, inflation expectations remain elevated but appear to have peaked, with firms’ three-month smoothed price growth expectations declining to 3.6% in June, down 0.1 percentage points from the previous reading.