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Market Perspectives: A(nother) new dawn for the UK

Anthony Willis

Senior Economist, Multi-Asset Solutions team

Key Takeaways

The UK enters the second half of 2026 with a new prime minister, a large Labour majority and another opportunity to rebuild economic credibility.
Fiscal constraints remain tight, with high debt-servicing costs, defence commitments and welfare spending limiting room for policy manoeuvre.
Inflation risks persist, particularly given the UK’s exposure to energy prices and the large share of inflation-linked government debt.
The key test is whether policy can lift productivity and investment without undermining fiscal discipline.
UK assets remain attractively valued relative to global peers, meaning even modest improvements in confidence could have meaningful market implications.

Transcript

The UK has a new prime minister – its seventh in just over a decade – and another opportunity to reset the country’s economic narrative. Andy Burnham enters Downing Street with a large majority, but the challenge is familiar: restoring confidence in the UK’s growth outlook while fiscal headroom is limited, inflation risks persist and geopolitical uncertainty remains elevated.

Those pressures were compounded by the energy shock after Russia’s invasion of Ukraine, the gilt-market stress that followed the 2022 mini-Budget and a prolonged cost-of-living squeeze. More recently, defence spending, welfare commitments, tariffs and renewed concern over energy prices have narrowed the policy space further. With oil again above $90 a barrel, another inflationary impulse remains a risk.

Many of these pressures are global, but the UK has been particularly exposed. Its energy market remains vulnerable to the way electricity prices are set, while the country remains a net energy importer. That leaves households and businesses exposed to swings in global prices and makes it harder to return inflation sustainably to target.

The structure of the UK’s debt stock adds to the strain. A sizeable share of government borrowing is inflation-linked, so higher prices feed directly into debt-servicing costs. Higher gilt yields have also increased the cost of new borrowing and refinancing. As a result, more than £100 billion a year is now being spent on debt interest – a large fiscal burden that does little to improve public services or living standards.

This is the inheritance facing the new government. The ambition to lift UK growth towards 2.5% is understandable, but there is no obvious quick fix. Policy will need to strengthen the supply side, improve productivity and encourage investment, while operating within tight fiscal constraints. That task is complicated by competing demands from defence and welfare spending.

Burnham has committed to maintaining the existing fiscal framework, limiting the scope for a dramatic policy shift. That may reassure gilt markets, but it leaves little room for unfunded commitments or broad fiscal stimulus. For investors, the key question is whether the government can improve the UK’s medium-term growth profile without undermining fiscal credibility.

There are reasons to avoid excessive pessimism. The government is only two years into the Parliament and still has a substantial majority. That gives the prime minister time to reset the message, build credibility and demonstrate progress before the next election. The political test is whether voters can be persuaded that the economy is moving in the right direction.

For investors, valuation is also important. UK assets remain inexpensive relative to many international peers, particularly in equity markets. That discount reflects long-standing concerns about weak growth, political uncertainty and limited domestic investor demand. If the new administration can rebuild confidence and establish a credible policy framework, sentiment could improve from a depressed base.

The second half of 2026 is therefore likely to be shaped by the balance between constraint and opportunity. The constraints are clear: limited fiscal room, persistent inflation risks, high debt-servicing costs and a fragile external backdrop. The opportunity lies in political stability and attractive valuations. If the government can shift the debate from crisis management to productivity, investment and long-term growth, UK assets could warrant closer attention.

20 July 2026

2026年 July 20日

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Market Perspectives: A(nother) new dawn for the UK

The UK has a new prime minister – its seventh in just over a decade – and another opportunity to reset the country’s economic narrative.

Key topics

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The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

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Market Perspectives: A(nother) new dawn for the UK

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Market Perspectives: A(nother) new dawn for the UK

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