European stock markets started Friday on a positive note, attempting to shake off some of the week’s losses as investors found some relief in easing bond yields.
However, this tentative rebound is set against a backdrop of deeply concerning UK economic data and the ever-present shadow of geopolitical conflict in the Middle East.
In a reversal of the trend seen in recent days, most sectors began the day in the green.
The pan-European Stoxx 600 index was up 0.5% in early trading, while Germany’s DAX gained 0.75% and the UK’s FTSE 100 rose 0.33%.
Even the travel sector, often sensitive to global uncertainty, was up 1.2%, while oil and gas shares eased by 0.6%.
This initial buying interest comes after a difficult week where markets were rattled by a slew of central bank actions—including a rate cut in Switzerland and rate holds from the Bank of England and US Federal Reserve—and persistent fears over the Israel-Iran conflict and the possibility of US involvement.
UK economic woes
The improved market sentiment, however, is being tested by a fresh batch of troubling economic news from the United Kingdom.
British shoppers pulled back on spending sharply in May, with retail sales falling 2.7% on the month, according to the Office for National Statistics.
This was the steepest drop since December 2023 and significantly worse than the 0.5% decline economists polled by Reuters had expected.
The disappointing figures break a four-month run of consecutive rises in retail sales, which had been the best streak since 2020.
Retailers had previously attributed stronger sales in April, which saw 1.3% growth, to a spell of sunny weather.
The May downturn suggests a more fundamental weakness in consumer spending.
Phil Monkhouse, UK country manager at Ebury, pointed to several contributing factors, including “higher inflation, energy bill increases and the tighter UK labor market,” all of which have contributed to lower spending.
He also noted that retailers are grappling with the impact of recent tax hikes.
Looking ahead, the outlook remains challenging. “With the Middle East tensions at breaking point, US tariff uncertainty still high and the Bank of England holding off interest rate cuts, the outlook for consumer demand looks rocky,” Monkhouse said.
This data follows figures published last week which showed the UK economy had already contracted in April.
Alongside the weak retail sales, the UK’s public finances also showed signs of strain.
The Office for National Statistics reported this morning that public borrowing hit £17.7 billion ($23.8 billion) in May, which is £700 million higher than the previous year.
The budget deficit, defined as the borrowing required to fund day-to-day public sector activities, came in at £12.8 billion. While this was down £1.7 billion compared to May 2024, the overall debt picture is worsening.
Public sector net debt (excluding banks) was provisionally estimated at 96.4% of gross domestic product, representing a 0.5 percentage point increase year-on-year.
Economists have warned that a combination of weak growth, higher borrowing costs, and recent reversals on some government spending policies means the UK may be facing more tax hikes later this year if Finance Minister Rachel Reeves is to meet her self-imposed “fiscal rules.”
Joe Nellis, economic advisor at accountancy firm MHA, cautioned in emailed comments, “If current trends persist, total borrowing for the 2025–26 fiscal year could approach or exceed £150 billion — well above the Office for Budget Responsibility’s Spring forecast of £137 billion.”
He added, “With limited scope for major tax rises or deep spending cuts in the short term, the Chancellor’s options to meet her fiscal rules are narrowing, especially the target to reduce debt as a share of GDP over the medium term.”
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