Friedrich Merz’s conservatives emerged as the biggest party, positioning Merz to become the next chancellor. It was also a strong night for the far-right Alternative for Germany (AfD), which won a record number of seats, finishing second. Meanwhile, Olaf Scholz’s Social Democrat Party (SPD) had a disappointing result, coming in third.

As leader of the largest party, Merz will now look to form a coalition government. Having ruled out working with the AfD, this will likely be a coalition between his party and the SPD. Between them, the two parties have a narrow majority of 328 out of 630 parliamentary seats.

In terms of what this could mean for Germany – and European markets more broadly – coalition negotiations will be the immediate focus. One potential consequence is an increase in European defence spending, after Mers declared in his victory speech: “Step by step, we can really achieve independence from the US.”

However, his ability to make significant fiscal changes may be limited by Germany’s sluggish economic performance. The proposed coalition parties do not hold the two-thirds majority needed to overturn the constitutionally enshrined debt brake, which has left the government with little fiscal flexibility.

Turning to the UK, January’s CPI inflation figures were released last week. These showed a 3.0% increase in prices over the previous 12 months, up from 2.5% in December.

UK inflation has been rising steadily since September, with January marking the first time CPI inflation hit 3.0% since last March. Higher living costs were driven by rising food prices, plane fares and the introduction of 20% VAT on public school fees at the start of the year.

With little to no economic growth in recent months, the spectre of stagflation – a period of high inflation alongside weak growth – is rising. Speaking after the figures were released, Andrew Bailey, Governor of the Bank of England, said: “It’s quite hard to work out to what extent the weaker growth story is a result of supply-side weakness or supply-and-demand-side weakness.”

As the government considers its response, Mark Dowding, Chief Investment Officer at BlueBay, painted a bleak picture of the UK’s economic position. He said: “As it stands, we would assess the UK is already at risk of breaching its OBR rules on the budget, and this assessment itself is heavily dependent on eye-wateringly optimistic projections for rapid productivity growth. Consequently, this leaves the government with little room for manoeuvre or scope to massage the calculations to paint a rosier picture.”

Given the higher inflation outlook, it was unsurprising that the FTSE 100 fell 0.84% last week.

It was also a poor week for US equities. The S&P 500 saw its worst day of the year on Friday, dropping 1.7%. In sterling terms, the S&P 500 was down 1.8% by the end of the week, while the tech-heavy NASDAQ Composite fell 2.65%. American markets were hit by weakening business sentiment, which followed disappointing inflation figures from the week before. Uncertainty around the potential impact of future tariffs added to concerns about the strength of the US economy.

In contrast, Chinese equities continued their strong start to the year, with the Shanghai Composite rising 0.96%. Tech and auto companies have led the rally.

Commenting on the figures, Martin Henecke, our Head of Asia & Middle East Investment Advisory, noted: “The China tech stock rally serves as a good reminder that unpopular markets can experience turnarounds swiftly. The stars aligned for this sector last week, from Xi Jinping taking a more supportive stance – and meeting executives including Jack Ma – to strong earnings reports. However, investors might be well advised to manage concentration risk carefully by considering opportunities beyond just technology and AI.”

We all want to do the right thing for our families and loved ones, both now and when we’re no longer around.

But while thinking about the years ahead, we also need to be thinking about the present. Later-life and legacy planning can feel like being pulled in all directions. You may want to help your loved ones now, especially with the squeeze on household budgets. But you also owe it to yourself to make sure you have enough money to feel financially secure as you get older.

That’s quite a balancing act. But with careful planning and advice, you might be surprised at how much you can achieve.

In the Autumn Budget, the Chancellor announced that unspent pension pots are now proposed to be counted as part of an estate and taxed. Many people had planned to pass these on tax free. Now, they may face higher inheritance tax bills than expected.

Despite this, there are still ways you can leave money to younger generations:

• Use your annual gifting exemption. You can gift up to £3,000 per year (£6,000 for couples) tax-free, reducing the size of your estate over time.
• Make a gift of over £3,000. Note, however, that if you die within 7 years of making the gift, the money may still count as part of your estate.
• Support loved ones regularly. Gifting money regularly – such as helping with childcare or school fees – can be inheritance tax-free if made from disposable income.
• Take out a Lifetime Assurance policy. This can help cover any eventual inheritance tax bill.
• Use trusts. Trusts not only offer tax advantages, they also provide control and protection, helping safeguard family wealth against risks such as divorce, bankruptcy, or reckless spending.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.