Europe macro tracker Getting defensive

Research evidence excerpt

Europe macro tracker Getting defensive

1 July 2026

Europe macro tracker EconomicsEurope

Getting defensive

◆ The UK has announced GBP15bn of new defence spending, Elizabeth Martins

leaving a financing gap for the new chancellor to deal with... Senior Economist, UK HSBC Bank plc

liz.martins@hsbc.com

◆ …while the EU is increasingly concerned with steps to protect +44 20 7991 2170

manufacturers and redress trade imbalances with China

◆ Elsewhere, eurozone inflation came in below expectations in

June, backing up our view of no more hikes from the ECB

UK: Announcements from outgoing and incoming PMs

The UK’s probable incoming prime minster, Andy Burnham, this week set out a vision

of “good growth in every postcode”, delivered through an ambitious devolution

programme, but also a number of measures – including the biggest council

housebuilding programme since the post-war period – that sound potentially expensive.

How that might be financed is a conundrum, but before he even gets to that question,

there are existing fiscal headaches for Mr Burnham and whoever he picks to be his

chancellor. Yesterday’s announcement from outgoing PM, Keir Starmer, of an extra

GBP15bn of defence spending was only partly financed by “reprioritising”

government spending elsewhere. In reality, the gap amounts to GBP1.2bn a year, so

it’s pretty small in the scheme of things. But it adds to the risk of increased borrowing

due to higher inflation and yields, and lower immigration. Against this tricky backdrop,

we fear it might be another late autumn Budget, with potentially months of uncertainty

leading up to it. We expect a slowdown in growth towards the end of the year (barring

an unforeseen positive sentiment shock, such as England winning the World Cup).