Why the UK stock market and pound continue basking in sunshine of global bull market
The persistent weakness of the US dollar has been spurring the currency and UK equities since January
[LONDON] Ray Dalio, the billionaire hedge fund tycoon, is among those who are not too optimistic about the outlook for the British economy.
The 75-year-old American founder of hedge fund giant Bridgewater Associates, said in a recent podcast interview that the UK is stuck in a “doom loop” of rising debt, higher taxes and declining growth.
He even went so far as to say that British Chancellor of the Exchequer Rachel Reeves was driving away entrepreneurs and business leaders from the UK because of the government’s tax increases.
The markets, however, seem to be ignoring Dalio’s sentiments. What’s more, many economists and traders are predicting that the Bank of England (BOE) will slash interest rates on Thursday (Aug 7) to 4 per cent, from 4.25 per cent currently.
In recent months, the pound and the UK stock market have outperformed expectations.
At its peak in July, the pound was up by 13.7 per cent against a weaker US dollar, and had been up since the beginning of January. This week, it was roughly 7.3 per cent higher – lifted by both the softer greenback and fading recession fears in the UK.
A NEWSLETTER FOR YOU
Friday, 2 pm
Lifestyle
Our picks of the latest dining, travel and leisure options to treat yourself.
Since January, the FTSE 100 of UK multinationals has risen by 12 per cent. The FTSE 250, comprising mainly mid-cap local companies, has appreciated by 6.5 per cent. The performance of both these key indices are several percentage points better than the Dow Jones and S&P 500 indices.
Persistent weakness in the US dollar has spurred the pound and UK equities, both of which have been basking in the sunshine of a global bull market since US President Donald Trump’s so-called “Liberation Day” tariffs announcement in April.
But despite the ongoing buoyancy in the UK market, some analysts still feel that Dalio’s views should not be ignored.
Business confidence has plunged since Reeves unleashed heavier taxes on UK employers in the past year, with the government insisting that it needs more in the kitty to meet national healthcare and other public-sector wage demands.
Reeves is also in a bind because of a wide government deficit and state borrowing that is fast threatening to rise to above 100 per cent of the UK’s gross domestic product (GDP).
Business leaders not confident about outlook
A survey published by the Institute of Directors (IoD) in July found that the share of business leaders indicating that they were pessimistic about the economic outlook exceeded those who were optimistic by 72 percentage points.
It means that employers are now at their most pessimistic since the monthly survey began in 2016 – worse than during the Covid-19 pandemic lockdowns, Brexit and the fallout from former prime minister Liz Truss’ failed mini-Budget in 2022.
Shadow Business Secretary Andrew Griffith accused Prime Minister Keir Starmer’s government of “attacking private enterprise with the zeal of a left-wing student union”.
“Instead of the cuts in spending which are urgently needed, this socialist government hits businesses with higher taxes, raised energy costs and more trade-union inspired red tape,” he said.
Griffith added that many businesses were postponing employment-creating investment projects.
IoD chief economist Anna Leach said that Reeves should “urgently quash rumours” of further tax rises for businesses as soon as possible.
“(The government) should accelerate planning reforms and de-regulation to restore confidence and drive growth,” she said.
Companies continue to battle cost increases that have mainly arisen from higher national minimum wages and national insurance contributions, she added, in a reference to the rise in corporate national Insurance contributions from an already-high 13.8 per cent to 15 per cent today. The effective tax rise came into force in April, alongside a 7 per cent increase in the national living wage.
Following growth of 0.4 per cent in March, the British economy shrank by 0.3 per cent in April and a further 0.1 per cent in May, the UK’s Office of National Statistics (ONS) reported. The estimated number of job vacancies fell by 7.2 per cent to 727,000 during the second quarter ending June 2025.
“This is the 36th consecutive period in which vacancy numbers have dropped, compared with the previous three months,” the ONS estimated. It added that unemployment rose marginally to 4.7 per cent in the three months ended May 2025, compared with 4.4 per cent 12 months before.
Meanwhile, inflation is stubbornly staying at 3.6 per cent.
The International Monetary Fund projects the UK economy to grow by 1.2 per cent in 2025 and 1.4 per cent in 2026. Easier money and lower interest rates should bolster private consumption, it said.
The Organisation for Economic Co-operation and Development, slightly more cautious, is projecting a fall in this year’s growth from 1.4 per cent to 1.3 per cent.
Reeves is banking on infrastructure spending to boost growth, and wants the BOE to deregulate as much as possible. But the central bank’s governor Andrew Bailey has issued stark warnings about doing this. Earlier this year, he told lawmakers in Parliament that there is “no trade-off” between growth and financial stability.
Dalio said in the podcast that the UK and other countries should prioritise lowering central government deficits to what he feels is a “sustainable” level of about 3 per cent of GDP.
“They have to do it equally in spending cuts and taxation. Because no one of those (alone) is possible. And if that is done, then interest rates will come down, or not rise,” he said.
Copyright SPH Media. All rights reserved.
