Spain’s central bank has projected a budget deficit of 2.3% for 2026. That’s an improvement from the projected shortfall of 2.5% for this year. Japan’s economy shrank at the fastest pace in almost three years during the third quarter of this year. The drop off wasn’t as bad as analysts expected. Global equity and bond markets are responding very favorably to these economic signals. The UK and Germany are addressing their fiscal stresses, which is driving their economic recovery more strongly.
Spain’s economy is booming, and there are signs all around that it is experiencing a renaissance. This positive trend signals a secure base for the Central American nation’s budget projections. Japan’s economy is under the microscope following last week’s unexpected contraction. At the same time, surging bond yields have investors focused as they head into next week’s major October cash bond auction.
Spain’s Economic Growth and Budget Projections
As of March this year, Spain’s central bank has penciled in a budget deficit figure for 2026 at 2.3%. That’s down from 2.5% that was projected for this year. This change should be lauded as it underscores the impressive strength of our nation’s economy. More than meet expectations, it has set the state up for future fiscal success. Several factors have contributed to this explosive growth. Surging domestic consumption and surging exports, especially of minerals, have artificially inflated GDP growth rates.
Combined with the increasingly robust, fast-growing economy of Spain, there are promising signs on the horizon for new job creation and investment attraction. Fiscal hawks like to pretend that this growth trajectory is going to magically pay for the entirety of the deficit. Moreover, it would stabilize public finances in the long run. What’s driving the optimism? The government’s proactive decision-making to control spending and improve revenue generation is driving the optimistic outlook.
Spain’s fiscal management strategies are important in light of European reform efforts at the economic level. France, Belgium and other European countries are reining in their public budgets. At the same time, Spain’s progress may serve as a model for other nations struggling with similar issues.
Japan’s Economic Contraction and Rising Yields
This was a surprise, as Japan’s GDP actually contracted in Q3 of this year, a sign of the continued fog of war economic malaise. Analysts had been bracing for an even worse contraction. The real measurement was much lower than that, coming as a relief to investors. The news still casts a shadow over Japan’s long-term economic stability as it grapples with internal and external pressures.
Compounding these worries is the increase in Japan’s 20-year yield, which hit a new multidecade high of 2.75%. The auction next Wednesday has caught national attention because of this surprising spike. It completely undermines confidence with investors over what the cost of borrowing will be going forward. Analysts are watching these developments carefully as they will likely affect Japan’s fiscal policy trajectory in the coming years.
Now, Prime Minister Takaichi has an uphill battle. This summer, she’s expected to announce a big fiscal package to revive the economy. This new infrastructure initiative would give those beleaguered industries the help they need to fight back against the current downturn and get things moving again.
The UK’s Fiscal Landscape and Market Response
Indeed, the UK government itself has forecast a primary surplus this year. That’s the first time they’ve done so since 2007. This announcement comes despite the UK’s economy contracting by 0.4% on the quarter and by 1.8% year-on-year. Curiously, these numbers are actually an improvement over previously projected declines of -0.6% and -2.4%.
Chancellor Reeves has confirmed that the income tax rate thresholds will not be changed. In place of the allocation freeze, she says she will maintain it at the current levels. This strategy seeks to ensure fiscal perpetuity and stability while respecting the public desire not to increase taxes in times of economic instability.
Last Friday, the UK’s gilt market was rocked by a fresh round of selling. This naturally had the effect of a bear steepening of the yield curve. Yields jumped two hundred basis points across the curve. Two-year bonds rose 8.2 basis points, and thirty-year bonds were up 16.4 basis points. These movements are the clearest evidence of market adjustments to government policies and economic conditions more broadly.