For the past 15 months, the British economy has struggled to achieve sustained growth, presenting difficult choices for Prime Minister Andy Burnham and Chancellor John Healey. Despite weak domestic performance, the FTSE 100 index has risen by nearly a third since the Labour Party took office, benefiting from its constituents' extensive overseas operations.
The pound's resilience has also far exceeded market expectations, serving as another bright spot amid the UK's broader economic and political difficulties. Just over 15 months ago, when the UK Bulletin column was first launched, the British economy had just delivered its best quarterly GDP performance of the year. It's no exaggeration to say that since then, the UK economy has slipped into a slow struggle.
The UK's economic growth rate in the first quarter of 2025 was 0.6%, followed by three consecutive quarters of growth at just 0.1%, 0.2%, and 0.2% respectively. It wasn't until the first quarter of 2026 that the economy unexpectedly rebounded again, recording 0.6% growth. At that time, then-Chancellor Rachel Reeves immediately emphasized that this performance ranked first among G7 economies, though strictly speaking, the UK was tied with Japan for the top spot.
However, subsequent economic data proved disappointing: affected by the oil price surge following the attack on Iran, the UK economy actually contracted by 0.1% in April, although the second quarter still achieved overall growth. Recent business surveys indicate that the UK economy continued to maintain moderate growth in July. This is no longer a problem that Reeves needs to solve.
Former Defence Secretary John Healey has taken over as the new Chancellor of the Exchequer; previously, Healey resigned over defence funding issues, which also became the trigger for Keir Starmer's downfall. Former Greater Manchester Mayor Andy Burnham, who succeeded Starmer as Prime Minister, faces an uphill battle in driving economic growth.
Where to Begin
The biggest policy misstep during Reeves' tenure was raising employer National Insurance contributions (a payroll tax) while lowering the threshold for this tax in her first Budget in October 2024. Millions of part-time workers—particularly in the retail and hospitality sectors—were thereby brought into the tax net. Labour market data released by the Office for National Statistics in August shows that during Starmer's tenure, the UK unemployment rate rose, and job vacancies fell to their lowest level since 2014, excluding the pandemic period.
This policy also damaged the relationship between the business community and the government. After Burnham took office, this situation might improve in the short term. Appointing the experienced Healey to lead the Treasury is a shrewd move; his deputy, Lucy Rigby, is equally capable—the former competition lawyer graduated from the elite Magic Circle law firm Slaughter and May. There are signs that Burnham's stance on energy policy is more pragmatic than his predecessor's. His appointment of the well-regarded Kanishka Narayan as the first cabinet-level Minister for AI received widespread acclaim.
At the same time, however, his decision to abolish the Department for Science, Innovation and Technology established by former Prime Minister Rishi Sunak has raised concerns; the department's functions will be merged into the notoriously slow-moving Department for Business and Trade.
A Silver Lining for the Labour Government
Beyond stimulating economic growth, Burnham and Healey must also address the many problems left behind by Starmer and Reeves. The UK government now spends more than £1 out of every £10 of fiscal expenditure on servicing national debt, with the debt burden returning to levels not seen since the early 1960s. Reducing the UK's borrowing levels depends on curbing the ever-expanding welfare spending, particularly benefits for working-age people. During Starmer's tenure, internal party resistance prevented such reforms from being implemented.
Simon French, Chief Economist and Head of Research at investment bank Panmure Liberum, wrote: "Government policy is actually artificially suppressing supply in land, energy, and capital, thereby dragging down economic growth." But looking at the FTSE 100, you would never sense the UK economy's malaise. Since Labour's election victory in July 2024, the index has risen by nearly a third and hit a record high in February this year. This achievement cannot be credited to the UK government: the FTSE 100 is a global index, with constituent companies generating three-quarters of their profits from overseas markets.
The index's rise also stems from a wave of acquisitions. Over the past 15 months, several FTSE 100 constituents have been the subject of takeover news, including Lloyd's of London insurer Beazley, asset manager Schroders, testing group Intertek, and energy services group DCC. The latest case is commercial property group Segro, which earlier this month accepted a £14 billion (approximately $19 billion) takeover offer from US peer Prologis.
Beyond the FTSE 100, takeover deals have been equally abundant: ingredients maker Tate & Lyle, specialist engineering firm Rotork, outsourcing services provider Mitie, and property group Assura have all reached acquisition agreements; budget airline easyJet is also about to be acquired by private equity. All of this reflects the fact that UK stock market valuations have been persistently below global peers for years, and overseas buyers have keenly seized this opportunity.
Interestingly, the low stock market valuations are not reflected in the exchange rate. Since Labour took power, the pound has risen about 6% against the US dollar and fallen less than 1% against the euro. Part of the reason is that UK interest rates are higher than in the US and the eurozone. Historically, Labour governments have often been accompanied by sterling crises; the pound's strong performance over the past 15 months is truly rare, and I am honoured to have documented this journey for our subscribers.
Risk warning: This article is for learning purposes only and does not constitute investment advice.