October monthly market update - Reflections on September 2026

What could happen in this year’s Autumn Budget?

UK Chancellor John Healey faces some difficult decisions in this year’s Autumn Budget as he seeks to balance spending pressures with the need to maintain market confidence. Higher government borrowing costs have added to the pressure on the public finances, while concerns over inflation and public debt have kept financial markets focused on the government’s plans for spending and taxation.

The UK government is likely to face pressure to further raise taxes on wealth after the conflict in the Middle East and sluggish growth almost halved its fiscal headroom. Healey is likely to have lost nearly £12 billion of his £23.6 billion headroom for meeting the government’s fiscal target, according to a report by KPMG.

The government has recommitted to its core election pledges, which means there will be no increase in income tax, VAT, or employee National Insurance. However, the Treasury is widely expected to find alternatives to close the fiscal gap.

Although the Budget measures remain uncertain, there has been considerable speculation about potential tax changes.

What we know already

Several measures have already been announced ahead of the Budget on 28 October. The government plans to reform the state pension triple lock from 2030, removing the direct link to earnings while ensuring pensions keep pace with inflation and earnings over time.

First-time buyers are also set to benefit from a new scheme offering a 20% equity loan to those with a 2.5% deposit, with more details expected in the Budget. The government has also removed VAT from domestic electricity bills with effect from 1 October, saving households around £45 a year. Other possible Budget measures include:

• Personal allowance

The personal allowance, which is the amount you can earn before paying tax on your income, could get its first boost in five years. The government is said to be considering raising the amount at which people start paying tax on their income from £12,570 to £15,570. The personal allowance has been frozen at £12,570 since 2021 and is currently due to remain frozen until 2031.

• Capital Gains Tax (CGT)

There have been reports in the national press that CGT, which is generally paid on gains when assets are sold, could rise. CGT is currently paid at 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers. It has been mooted that these rates would be increased to mirror the current income tax bands, ranging from 20% for basic taxpayers to 45% for additional taxpayers.

• Mansion tax expansion

The mansion tax was announced in the 2025 Budget and will see an annual charge placed on homes worth £2 million or more from 2028. It has been reported that the government is now thinking of lowering this threshold to £1.5 million. This could potentially double the yearly receipts from the levy to £800 million, while at the same time doubling the number of affected properties to around 245,000.

• Inheritance tax

Inheritance tax (IHT) could also be a target for change, with reports suggesting the Chancellor is considering wider reforms to the current system. Around 5% of estates currently pay IHT, but changes could bring more estates into the tax net as the government looks for additional revenue to meet spending pressures. Changes are already planned for April 2027, when unused pension funds are due to be brought within the scope of IHT, potentially subjecting them to a 40% tax charge.

How could markets react?

Financial markets will be watching the Budget closely, particularly the bond market. UK government borrowing costs have risen sharply this year, with the 30-year gilt yield recently reaching 6%, partly due to a global selloff in bonds driven by higher oil prices and inflation concerns. If investors see the Chancellor’s plans as credible and fully funded, this could help calm bond markets. For UK shares, much will depend on how the Budget is received by bond markets, as higher borrowing costs can weigh on company valuations.

Is the global economy proving stronger than expected?

While global growth eased in the first half of 2026, the economy has proved more resilient than expected. The OECD has raised its forecast for global GDP growth this year to 2.9%, from 2.8% previously, and expects growth to rise slightly to 3.0% in 2027.

Substantial oil inventories, additional supply from outside the Gulf region and government support measures have so far managed to contain much of the economic fallout from the conflict in the Middle East. Strong investment in artificial intelligence (AI) has also helped support production, trade and economic activity.

Recent business surveys suggest momentum picked up towards the end of the third quarter, particularly in the US. The S&P Global US composite PMI rose to 58.4 in September, its highest level since July 2021. The US unemployment rate is nearing a record number of consecutive months below 5%.

The eurozone is also showing signs of improvement. Its composite PMI reached its highest level since April 2023 in September, with activity expanding across both manufacturing and services. S&P Global said the data pointed to quarterly GDP growth of around 0.4%, although this remained considerably weaker than the pace indicated for the US. Meanwhile, Britain’s economy was the fastest-growing in the G7 in the first half of the year, expanding by 0.6% in the first quarter and a stronger-than-expected 0.5% in the second.

However, stronger activity is bringing renewed inflationary pressures. US companies reported their fastest increase in input costs for almost four years in September, driven partly by higher fuel and transport costs. Rising demand and supply constraints are also giving companies greater pricing power, potentially making it harder for central banks to bring inflation back towards target.

This has created a more complicated outlook for the final quarter of the year. The OECD expects higher prices, weaker real incomes and elevated interest rates to weigh on economic activity, although continued AI investment and an expected easing in energy prices could support growth into 2027.

The key risk is that disruption to Middle Eastern energy supplies lasts longer than expected. A prolonged period of high oil prices could push up inflation and erode household spending power, while further geopolitical or weather-related supply shocks could add to the pressure.

Is China’s economy turning a corner?

There are signs China’s economy is starting to turn a corner, with factory activity expanding in September after two consecutive months of contraction. The official manufacturing purchasing managers’ index (PMI) rose to 50.1 from 49.8 in August, while the non-manufacturing PMI, covering services and construction, increased to 50.2 from 49.0.

The improvement follows stronger industrial activity in August, when output rose 5.2% from a year earlier, up from 4.5% in July. Strong growth in equipment and high-tech manufacturing, supported by the global boom in artificial intelligence (AI), helped drive the increase.

However, the recovery remains uneven, with retail sales rising just 0.4% in August, down from 0.6% in July and below expectations. Meanwhile, fixed-asset investment fell 7.2% in the first eight months of the year. Property investment fell by almost 20% over the same period, highlighting the continued weakness in one of the economy’s most important sectors.

China has increasingly relied on exports and industrial production to support growth amid weak domestic demand. Strong demand for advanced technology and AI-related products has provided an important source of growth, with high-tech investment rising 5.2% in the first eight months of the year. However, the benefits of this investment have yet to translate into stronger household spending or greater job security.

The reliance on exports also leaves the economy exposed to geopolitical uncertainty and growing trade tensions. Chinese goods face greater scrutiny in overseas markets, while changes in tariffs and trade policy could affect demand. China and the US have agreed to pursue tariff reductions on some goods traded between the two countries, although important products remain excluded from the agreement.

Falling house prices and weak investment have also weighed on confidence among households and businesses, contributing to slower consumer spending. China’s economy grew by 4.3% in the second quarter, its slowest pace in more than three years.

Policymakers have responded with measures including cheaper credit for infrastructure and technology, support for home buyers and greater fiscal spending. The government has also accelerated bond issuance and expanded loan interest subsidies for small businesses and consumers.

Looking ahead

The next test of Donald Trump’s presidency is fast approaching, with Americans set to vote on 3 November in a midterm election that could reshape the balance of power in Congress. Forecasts point to gains for the Democrats, particularly in the House of Representatives, with the Senate also potentially within reach.

A Democratic majority in either chamber would be a major setback for Trump, giving the party greater power to derail parts of his legislative programme and intensify scrutiny of his administration.

The US labour market slowed sharply in September, with employers adding just 29,000 jobs. The figures suggest the American economy is cooling, which could reduce the chances of further rate hikes by the US Federal Reserve. The unemployment rate rose slightly from 4.1% in August to 4.2% in September.