The next UK Prime Minister

The UK political landscape appears even more difficult to navigate than at the start of the year: we are on the cusp of welcoming our fifth Prime Minister, in not quite as many years.

Andy Burnham’s decisive victory at the Makerfield by-election – a seat that was polling heavily in Reform’s favour only a fortnight ago – underscores the former Mayor of Manchester’s political momentum. Starmer, who has suffered a spectacular fall from grace over the last two years, has shifted from defiance to capitulation in the space of 48 hours. He will remain in a caretaker role until his successor is confirmed.

For now, any market unease – perceived fiscal intemperance or otherwise – is imperceptible: gilt yields have retreated this morning and are down sharply over the past month or so, echoing the big falls in the cost of energy. Sterling has weakened against the dollar in recent days, but this largely reflects recent monetary policy developments. Sterling remains stable against the euro.

While the outcome of the pending leadership race may be clear, it is not formally a coronation. Burnham must still receive the backing of the parliamentary Labour Party, which must be concluded by early September – though this may come as soon as mid-July if the race indeed remains uncontested.

The question of legitimacy still remains. Constitutionally, a change of leadership does not require a general election, but informally his mandate to govern will be debatable. The party was elected on a manifesto, and a big deviation from its policies would likely undermine that mandate (as many Conservative PMs have found to their cost in recent years).

In reality, Starmer’s original growth pitch has already suffered from mission creep: a return to more ‘tax and spend’ policies, compounded by a catalogue of missteps and climbdowns. Ironically, the government’s inflexibility towards the largely self-imposed and somewhat arbitrary fiscal rules – which Burnham seems committed to (mostly) keeping – is the most compromising policy millstone of all.

The PM-in-waiting’s convictions and policy agenda are far from clear, but something fiscally reckless – or wildly redistributive – seems unlikely. While it’s possible to imagine something more populist taking root, his political experience and his growing team of rumoured advisors point to something progressive but pragmatic. Ultimately this suggests evolution, rather than revolution.

Our central view remains that geopolitics and the business cycle still matter more than domestic politics for the wider economy and capital markets. The cycle continues to have some momentum – even in the much-maligned UK, particularly with inflation and interest rate risk falling back. The prospect of a more enduring peace accord in the Middle East suggests the balance of risk is shifting in a more positive direction.

Despite the inevitable political noise that will accompany this leadership contest, the geopolitical and investment outlooks may be brightening.

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