London’s FTSE 100 index recorded its sharpest decline in over two weeks on Friday, led by a notable drop in the stock price of spirits maker Diageo, following a recommendation from the U.S. Surgeon General for cancer warnings on alcoholic beverages. Despite this daily setback, the FTSE 100 ended the week with a 1.4% gain, marking its second consecutive week of positive performance and the best weekly performance in six weeks.

The FTSE 250, representing mid-cap stocks, fell by 0.2% on Friday but posted a solid 0.7% weekly gain, the best in four weeks.

Diageo Leads Losses on FTSE 100

Diageo (DGE.L), the world’s largest spirits producer and home to brands such as Johnnie Walker, Guinness, and Tanqueray, was the worst performer on the FTSE 100, dropping by 3.9%. This decline followed the U.S. Surgeon General’s recommendation for cancer warning labels on alcoholic drinks, which significantly impacted the broader beverages sector. The FTSE Beverages sector (FTNMX451010) fell by 3.4%, with Diageo’s slump leading the way.

The news surrounding Diageo sent ripples through the market, affecting investor sentiment, particularly within the drinks industry, which was already grappling with broader economic concerns, including inflationary pressures and changing consumer behaviours.

Energy Shares Gain Amid Oil Price Stability

Despite the broader market’s weakness, energy stocks were an exception, buoyed by a steadying in oil prices, which had reached a two-month high on Thursday. The energy sector (FTNMX601010) rose by 1.5%, providing a bright spot for the market. Oil prices remained relatively stable despite the economic uncertainties, with investors seemingly undeterred by the concerns surrounding global growth.

Thin Trading Volumes and Economic Data Scrutiny

Trading volumes throughout the week were relatively thin, with markets impacted by the New Year holiday on Wednesday. As investors returned to their desks, attention turned to some of the first economic datasets of 2025, which painted a mixed picture of the UK’s economic health.

One key piece of data from the British Retail Consortium revealed that footfall in UK shops had dropped by 2.2% last year, marking the biggest annual decline since 2021. This trend was also evident in the final quarter of 2024, which encompasses the crucial holiday shopping period. The retail sector’s struggles reflected broader consumer caution and cost-of-living pressures that are affecting discretionary spending.

Weaker Consumer Lending and Housing Market Concerns

Additional data from the Bank of England indicated that consumer lending grew at its weakest pace since mid-2022 in November, with the growth rate slowing to 6.6% from 7.3%. The slowdown in consumer credit, alongside fewer-than-expected mortgage approvals, points to a general pullback in borrowing, as households adopt a more cautious approach to debt in the face of higher living costs.

This softer data further compounded concerns about the UK housing market, with fewer mortgages being approved than anticipated. These figures are seen as a signal of tightening credit conditions, which could weigh on housing demand and the broader economy moving forward.

The Impact of Fiscal Policy and Global Risks

The release of the October budget by Finance Minister Rachel Reeves, which included substantial tax increases on businesses to fund higher public spending, added to the uncertainty. Surveys of businesses have since shown a deterioration in sentiment, raising doubts about the effectiveness of the government’s fiscal policies in driving sustainable growth.

Economists are now questioning whether the government’s tax hikes and spending plans will stifle business investment or lead to a further slowdown in economic activity. Some have warned that these policies may force the Bank of England (BoE) to reassess its approach to monetary policy, especially as the central bank has already delivered two interest rate cuts totalling 50 basis points in 2024. The BoE had signalled a more gradual approach to easing in 2025, but the evolving economic landscape could force a shift in direction. Currently, markets are pricing in a reduction of nearly 58 basis points in UK interest rates this year, but this forecast remains highly dependent on upcoming economic developments.

Global Concerns Add to Investor Jitters

Further complicating the outlook are global risks, particularly surrounding the return of Donald Trump to the U.S. presidency. Analysts are concerned about the potential for new tariff policies that could exacerbate global trade frictions, particularly with China and the European Union. This adds another layer of uncertainty, as investors closely monitor political developments in the U.S. that could have far-reaching effects on global markets, including the UK.

Outlook for 2025

Looking ahead, the FTSE 100 faces a delicate balancing act. While the strong weekly gains are encouraging, the broader economic picture remains fraught with challenges. The slowdown in consumer lending and retail footfall, alongside weakening business sentiment, suggests that the UK economy may struggle to gain momentum in 2025. The ongoing rise in inflation, coupled with the uncertain impact of fiscal policy and global trade risks, will likely keep investors on edge in the coming months.

Despite these challenges, the strength of the energy sector and potential stabilisation in oil prices could provide some support to the broader market. The coming weeks will be crucial for gauging the sustainability of this recovery, particularly as investors await further economic data and the government’s response to evolving fiscal and monetary challenges.

In summary, while London’s FTSE 100 experienced its sharpest drop in two weeks on Friday, the index posted a notable weekly gain. The key drivers of this mixed performance included the negative impact of Diageo’s decline, a relatively stable energy sector, and disappointing retail and lending data. Looking ahead, the economic outlook remains uncertain, with concerns over consumer caution, business investment, and global trade frictions likely to dominate market sentiment in the near term.