WeekWatch

Stronger data welcomes in the new UK prime minister 

The UK’s incremental 0.1% economic growth in May was unexpected but welcome. A rebound from the contraction in April, it was also ahead of consensus expectations. The key driver was the services sector, which accounts for the bulk of the domestic economy. The performance here was driven by research and development in medical sciences. Retailers also did well, buoyed by the warm weather. Assuming June’s numbers don’t disappoint, the UK economy could see growth of 0.3%-0.4% in the second quarter, which would be ahead of consensus. Separately, the Organisation for Economic Co-operation and Development’s June forecast for UK economic growth (GDP) in 2026 is 0.9%, followed by 1.1% in 2027. This contrasts with the 1.3% delivered in 2025.

Old problems remain 

In absolute terms, many investors remain cautious about the state of the UK economy. 10-year bond (gilt) yields remain elevated on a historic basis at just under 5%. Domestically, the country’s low economic expansion is a concern. As highlighted by the governor of the Bank of England (BoE) during the week, the UK has been a low growth economy for 17 years. 

Will yet another prime minister, the seventh in a decade, have the tools to turn things around? Few details have been revealed about Andy Burnham’s fiscal agenda. However, just a few of the key issues on the agenda will be welfare spending, the ongoing debate over the pensions triple lock, and the question of oil and gas drilling in the North Sea. 

Meanwhile an ongoing concern is the breakdown of the ceasefire between the US and Iran. Iran’s closure of the Strait of Hormuz has global ramifications. For the UK, the rise in energy prices once again raises costs for business and consumers, resulting in more inflation and weaker growth. Market hopes for a rate cut by the BoE this year have been replaced by expectations of at least one 0.25% increase in the coming months.

China’s Moonshot and the AI roller-coaster

US tech stocks sold off on Friday, with investor caution spreading across the market. Other than energy, all sectors in the S&P 500 ended the day in the red. The main reason was the shock release of an AI model from Moonshot, a Chinese start-up. Called Kimi K3, its capabilities in some areas exceed those from US rivals such as Anthropic's Claude and OpenAI’s GPT. Investor reaction echoes that of China’s DeepSeek model, released last year. 

Kimi K3 will be open source, allowing anybody to download and modify it. This goes head-to-head with the business-model adopted by US companies, based on keeping control of the technology and the use of subscriptions. If this competitive AI clash between the US and China results in a more commoditised market, it will be difficult for the current mainstream providers, mostly from the US, to justify premium pricing and high market valuations. 

The addition of Kimi K3 is reinforcing a valuation reassessment across this US-dominated sector. Shares of chip companies supplying AI companies have weakened in recent weeks, although this comes after some spectacular rises over the past year. 

While Kimi K3 is unlikely to prove the straw that broke the camel’s back, it is a reminder how AI is rapidly becoming more competitive, with downward pressure on prices. The best US AI models are still regarded as better than their equivalent Chinese counterparts, but the gap is closing. For many users, Chinese models’ price advantage compensates for their technical drawbacks.  

Why IBM’s market value fell almost 30% last week.

For much of the post-second world war era, IBM was a byword for technology. It helped shape modern computing and was viewed as an essential partner for governments and businesses worldwide. Yet last Tuesday, without waiting a few more days for the release of its second quarter results, the company issued a shock profit warning, stating that sales and earnings over the period were below expectations. The reaction was brutal. The company’s share price fell 25%, the largest one-day correction in its history.  

IBM differs from other AI and tech providers renting out computing capacity in the cloud or selling chips. Instead, it offers a different type of technology, selling both hardware and software. Yet, thanks to the global AI boom, clients are having to prioritise their expenditure. This summer, much of the attention has been about securing key, and increasingly scarce, AI infrastructure such as chips and memory. Something had to give, and in this case, it was IBM’s hardware and software. Some analysts suggest the company has become reliant on large customer accounts, where the deals are infrequent but high value. More optimistic observers note that IBM has successfully managed to reinvent itself many times. Investors will be looking for indications how this can be achieved at the analysts’ call with company management on 22 July.  

Income tax threshold freeze drives more workers into higher band

Millions more workers are being caught by higher income tax bands due to the freeze in the tax thresholds.

Data released last week by HM Revenue and Customs (HMRC) shows that 7.7 million workers will pay the higher rate of income tax in the current tax year (2026/27). This is a rise of 34% compared to the 2023/24 tax year. 

Meanwhile, the number of additional rate tax payers (those paying 45% on earnings above £125,140) is expected to rise to 1.3 million in the 2026/27 tax year. This represents an increase of 44% compared to the 2023/24 tax year.

Additional rate taxpayers will represent around 3.2% of total taxpayers in the 2026/27 tax year. 

Income tax thresholds have not changed since April 2021 and are frozen at current levels until April 2031.

This creates what’s known as fiscal drag. As wages rise, typically with the rate of inflation, more people move into higher income tax bands because the tax band thresholds don’t move with inflation. 

More pensioners paying income tax due to frozen thresholds

Growing numbers of over-65s will pay income tax in the current tax year due to the freeze in the personal allowance.

The number of older taxpayers is projected to reach 10.2 million for the 2026/27 tax year. This is an increase of around 19% since the 2023/24 tax year.

The personal allowance, the amount of income an individual can earn in a tax year before they must pay income tax, has been frozen at £12,570 since the 2021/22 tax year.

But in the 2026/27 tax year, retirees receiving the full state pension would need only a small amount of additional income to go over the tax-free threshold. The full state pension currently stands at £241.30 per week, or £12,547.60 per year.

Under the triple lock, the state pension increases each year by the highest of inflation, average earnings or 2.5%. As a result, the full state pension is expected to exceed the personal allowance in the 2027/28 tax year.

The data release can be accessed here

State pension age increase to be brought forward

Millions of people will have to wait longer to receive their state pension under plans to bring forward the rise in the state pension age.

The state pension age is currently 66 and will rise to 67 in April 2028. Under current rules, a further increase to 68 is due to happen between 2044 and 2046.

But the Office for Budget Responsibility (OBR) has confirmed the government intends to increase the state pension age to 68, between 2037 and 2039, seven years earlier than previously intended.1

According to the OBR, bringing the change forward would save the government around £6 billion a year.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Source

¹ Office for Budget Responsibility, Fiscal risks and sustainability – July 2026