CNBC UK Exchange: Reflections on Britain’s tough economic reality

This is the final edition of CNBC UK Exchange. I want to say a sincere thank you to everyone who has read, subscribed, shared the newsletter or got in touch since it launched. While this may be the last newsletter, the stories, personalities and businesses that have filled these emails certainly aren’t going anywhere, and I hope you’ll continue to follow them through CNBC’s coverage.

From growth of 0.6% in the first three months of 2025, the economy expanded by just 0.1%, 0.2% and 0.2% in the subsequent three quarters before, somewhat surprisingly, coming out of the blocks with a 0.6% gain for the first three months of 2026.

That, as the then-Chancellor (or Finance Minister) Rachel Reeves was quick to remind listeners, was the best performance of any G7 economy, although strictly speaking, it was the joint-best showing along with Japan.

Things have been less encouraging since: the economy actually contracted by 0.1% in April due to the shock of higher oil prices following the attacks on Iran, but still eked out growth of 0.4% for the second quarter as a whole. Recent business surveys suggest the modest growth continued into July,

This is no longer Reeves’s problem since she was replaced as chancellor last month by John Healey, the former defense secretary, whose resignation over defense spending precipitated Keir Starmer’s own resignation as prime minister. His replacement, the former Greater Manchester Mayor Andy Burnham, faces an uphill battle in growing the economy.

Reeves’s biggest mistake in office was the decision in her first budget, in October 2024, to increase employers’ national insurance, a payroll tax, as well as to lower the threshold at which it became payable.

That dragged millions of part-time workers, particularly in sectors such as retail and hospitality, into the tax net and explains why, according to the latest figures, the unemployment rate has risen during Starmer’s time in office, and the number of job vacancies has fallen to its lowest level — excluding the pandemic — since 2014.

It also curdled the relationship between business and the government.

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

The experienced Healey was an astute appointment, as was that of his No. 2, Lucy Rigby, a former competition lawyer who trained at Slaughter and May, one of London’s genuinely world-class law firms.

Burnham has also shown signs of being more pragmatic about North Sea oil and gas extraction than his predecessor, while his decision to appoint the well-regarded Kanishka Narayan as the first AI minister attending cabinet was also well-received, even if his appointment to scrap the Department for Science, Innovation and Technology, a creation of his predecessor-but-one Rishi Sunak, has caused alarm — not least because it is now being subsumed by the historically lethargic business department.

Just over £1 in every £10 spent by the U.K. government now goes on servicing the national debt, which currently stands at 94.9% of GDP, a level last seen in the early 1960s.

Crucial to reducing U.K. borrowing will be cutting the country’s ballooning welfare spending, particularly for people of working age, something Starmer was prevented from doing by his own party.

Simon French, chief economist and head of research at investment bank Panmure Liberum, has written at length on how “government policy is effectively rationing supply — in land, energy and capital” and, in the process, impeded growth.

One would not know of this lackluster economic performance by looking at the FTSE 100, the U.K.’s premier stock index, which is up by nearly one-third since Labour returned to office in July 2024 and which hit a new record high in February this year.

Not that the government can take credit for that: the Footsie is a global index, with three-quarters of its constituents’ earnings derived from overseas.

The increase also reflects a spate of takeover activity: a clutch of Footsie constituents have succumbed to takeovers during the last 15 months, including the Lloyd’s of London insurer Beazley, the asset manager Schroders, the laboratory testing group Intertek and the energy services group DCC.

The latest, the commercial real estate group Segro, accepted a £14 billion ($19 billion) offer from U.S. rival Prologis earlier this month.

Outside the Footsie, there have also been plenty of takeovers, with the likes of ingredients maker Tate & Lyle, specialist engineer Rotork, outsourcing group Mitie and property group Assura all agreeing takeovers, and budget airline EasyJet now set to be bought by Apollo Global Management.

All of that reflects the fact that U.K. stock market valuations have been more depressed than those of global peers for many years — something buyers have spotted.

Those depressed valuations, interestingly, have not shown up in the exchange rate. Sterling is up by around 6% against the U.S. dollar and down by less than 1% against the euro since Labour came to power. Part of that is because the U.K. has higher interest rates than those of the U.S. or the euro zone.

However, given the Labour Party’s unfortunate historic record of sterling crises, it is one positive for the country during the last 15 months — which it has been a pleasure to chronicle for subscribers.

— Ian King

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