CNBC UK Exchange: Reflections on the UK’s harsh economic realities

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When we launched CNBC UK Exchange just over 15 months ago, the UK economy had just enjoyed its best quarterly GDP growth in a year.

It’s no exaggeration to say that I’ve been slowly working on it ever since.

From a 0.6% growth in the first three months of 2025, the economy expanded by just 0.1%, 0.2%, and 0.2% in the following three quarters, but somewhat surprisingly, the first three months of 2026 saw economic growth with a 0.6% growth.

As then-Prime Minister (or Treasurer) Rachel Reeves was quick to remind the audience, this was the best performance of any G7 economy, but technically the best performance along with Japan.

Since then, the situation has not been so rosy. The economy actually contracted by 0.1% in April due to the shock of rising oil prices after the Iran attack, but still grew by 0.4% in the second quarter overall. According to recent corporate surveys, moderate growth continued until July, but

This is no longer an issue for Reeves since she replaced former defense secretary John Healey as prime minister last month. His resignation over defense spending prompted Keir Starmer’s own resignation as prime minister. His successor, former Greater Manchester mayor Andy Burnham, faces an uphill battle in growing the economy.

Mr Reeves’ biggest mistake during his tenure was deciding in his first budget in October 2024 to increase employer national insurance (payroll tax) and lower the threshold for paying it.

This has drawn millions of part-time workers into the tax net, particularly in sectors such as retail and hospitality, and explains why unemployment has risen during Mr Starmer’s tenure and job vacancies have fallen to their lowest level since 2014, excluding the pandemic, according to the latest figures.

Furthermore, the relationship between companies and the government has become more rigid.

Things may improve under Burnham, at least in the short term.

The experienced appointment of Mr Healy was a wise appointment, as was No. 2 Lucy Rigby, a former competition lawyer trained at Slaughter & May, one of London’s truly world-class law firms.

Mr Burnham has also shown signs of being more pragmatic about North Sea oil and gas extraction than his predecessor, while his appointment of the well-regarded Kanishka Narayan as his first cabinet AI minister was also well-received, even if his appointment to abolish the Department of Science, Innovation and Technology created by his predecessor Rishi Sunak caused alarm. This is especially true as the department is being integrated into the historically lethargic business sector.

Apart from creating growth, Burnham and Healy will also have to deal with other issues that Starmer and Reeves failed to address.

Just over £1 of every £10 spent by the UK government goes towards servicing the country’s debt, which now stands at 94.9% of GDP, the highest level since the early 1960s.

A key part of reducing Britain’s borrowing is cutting ballooning welfare spending, particularly for working-age people, but Mr Starmer has been prevented from doing so by his own party.

Simon French, chief economist and head of research at investment bank Panmure Liberum, has written at length about how “government policies have effectively rationed the supply of land, energy and capital” and stunted growth in the process.

This lackluster economic performance cannot be understood even by looking at the statistics. FTSE100Britain’s Premier share price index has risen by nearly a third since Labor returned to power in July 2024, hitting a record high in February this year.

The government doesn’t get any credit for it. Fussy is a global index, with three-quarters of its constituents’ revenues coming from overseas.

This increase also reflects a flurry of acquisition activity. A number of Footsie’s constituents have succumbed to takeover bids in the past 15 months, including Lloyd’s of London insurer Beasley, asset manager Schroders, clinical testing group Intertek and energy services group DCC.

The newest commercial property group, Seguro, accepted a £14bn ($19bn) offer from US peer Prologis earlier this month.

There have been a number of other acquisitions in addition to Hussey, with materials manufacturer Tate & Lyle, specialist engineers Rotork, outsourcing group Mitie and real estate group Ashura all agreeing to take over, while low-cost airline EasyJet is currently set to be acquired by Apollo Global Management.

All of this reflects the fact that UK stock market valuations have been weaker than their global peers for many years, and buyers are aware of this.

Interestingly, these lower valuations are not reflected in exchange rates. sterling Since Labor took power, it has risen about 6% against the dollar and fallen less than 1% against the euro. Part of the reason is that interest rates in the UK are higher than in the US and the euro area.

But given Labor’s unfortunate historical record of the pound crisis, this has been one of the positive things for the country in the past 15 months, and it’s been a pleasure for our subscribers to document.

— Ian King

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August 19: Inflation data (July)

August 21: Retail Sales (July). S&P Global Flash UK PMI (August)