Markets signal a brighter UK future after lost decade

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is chair and chief executive of Caxton Associates

Much has affected the UK’s growth performance over the past decade. By overwhelming consensus, little of it is good. The economy has suffered the uncertain aftermath of the Brexit vote as well as the pandemic lockdowns and the inflation that followed. In addition, there have been two damaging Budgets in the past four years — one in the Liz Truss government and Labour’s first Budget back in power. All in all, it has been a time that may come to be referred to as the lost decade.

But despite all this, the economy has shown resilience. Yes, unemployment has risen more than elsewhere, but slack in the labour force has only recently developed, rising above estimates of the level where inflation is less affected. The resilience is probably due to the health of private-sector balance sheets following a stunning deleveraging after the Great Financial Crisis. Corporate debt is now only 58 per cent of GDP, down from 90 per cent at the 2008 peak. Household balance sheets are much healthier too, with debt at 73 per cent of GDP, down from almost 100 per cent in 2010. In more recent years, the household sector has boosted its savings rate to around 10 per cent of disposable income from a post-pandemic low of 3.8 per cent. Whether this was due to worries over job prospects or potential tax charges is debatable. But if the worst of these are over, then households should feel more confident to spend.

With enhanced fiscal headroom restored in the thankfully anti-climactic Budget in November, it is now plausible that the private sector is able to function more confidently with a reduced threat of further government encumbrance. In addition to more willingness to re-leverage private sector balance sheets, more spending of savings alongside rising real incomes could deliver a robust positive surprise on growth.

The Bank of England has reduced its benchmark interest rate by 1.5 per cent so far from recent peaks of 5.25 per cent in 2024 but it has been the most contested cutting cycle since its monetary policy independence was established in 1997. In this cycle, both the first initial rate cut and the two most recent ones were achieved with only 5-4 voting majorities among the Monetary Policy Committee’s members, with the BoE’s chief economist voting against four of the six rate cuts. As in the case of the Budget shenanigans in recent years, the private sector has been unable to take any firm guidance that good news is forthcoming. But with inflation now set to plunge to target by mid-2026, the hawks will perhaps relent, allowing the bank rate to fall to a more neutral level around 3 per cent. The impact could be substantial.

While the above is currently economic conjecture, the markets are moving ahead at their own usual faster pace. The FTSE 100 was one of the best-performing stock markets of 2025, comfortably beating US benchmarks on a total return basis, even in local currency. As a further case in point, the UK banking sector has significantly outperformed the so-called Magnificent Seven tech behemoths over the past two years. While the rally is yet to broaden into smaller caps, the UK market is benefiting from its relatively cheap valuations, sturdy dividends and exposure to the now in vogue basic resources sector.

Similarly, sterling has been confounding the Cassandras. Overseas capital is now flowing into domestic equity markets. The confidence extends to debt markets too, with the UK now in surplus once again on net fixed income flows. The cheapness of UK assets is evidently no great secret in the corporate finance world either. Some $142bn of UK companies were acquired in 2025 by foreign bidders. When these deals feed into the balance of payments numbers, it’s likely that a big improvement of several percentage points of GDP will be revealed. Such moves in the past have been associated with sterling strength.

More holistically, there has been a large risk premium associated with UK markets in recent years, manifesting most clearly in an elevated level of longer-dated gilt yields compared with other sovereigns. A reduction of this spread could provide quite a tailwind to the broader pricing of assets that would provoke further foreign inflows. If the UK economy saw an ongoing but modest 0.3 per cent increase in sustainable growth alongside falls in bond yields, that would set the stage for an increase in the UK’s fiscal headroom in Budgets of a potential £50bn.

In summary, the UK markets are signalling a brighter future than the dim consensus view. Sustained periods of market outperformance typically start quietly amid entrenched bearish views despite resilient fundamentals. This may well be one of those times.