The economy grew 0.4% in Q2 after a 0.1% April contraction. New PM Burnham inherits rising unemployment, a 94.9% debt-to-GDP ratio, and a business class still smarting from Reeves' payroll tax hike.
The UK economy expanded 0.4% in the second quarter of 2026, a number that masks a contraction in April and business surveys that point to a summer slowdown. The 0.1% April drop followed higher oil prices after the attacks on Iran. July data looks modest at best, based on recent purchasing managers' indexes.
That leaves new Prime Minister Andy Burnham and his Chancellor John Healey with a familiar problem: how to generate growth when the last government's own policies are dragging it down.
Rachel Reeves' first budget in October 2024 raised employers' national insurance contributions and lowered the threshold for paying them. That pulled millions of part-time workers in retail and hospitality into the tax net. The unemployment rate has risen since. Job vacancies, excluding the pandemic period, are at their lowest since 2014.
The payroll tax increase also poisoned the relationship between business and the government, a rupture Burnham is trying to mend.
Healey, the former defence secretary, was seen as a steady pick. His deputy Lucy Rigby, a Slaughter and May-trained competition lawyer, brings legal credibility. Burnham has signalled more flexibility on North Sea oil and gas extraction than his predecessor. His appointment of Kanishka Narayan as the first AI minister attending cabinet was well received, though folding the Department for Science, Innovation and Technology into the business department has drawn criticism.
None of that addresses the fiscal math. Just over £1 in every £10 the government spends goes to debt service. National debt stands at 94.9% of GDP, a level not seen since the early 1960s. Cutting the borrowing bill means tackling welfare spending for working-age people, something Keir Starmer could not do without splitting his own party.
Simon French, chief economist at Panmure Liberum, has written that government policy is effectively rationing supply in land, energy and capital, choking off growth.
The FTSE 100 has risen nearly a third since Labour took office in July 2024 and hit a record high in February. That has little to do with the domestic economy. Three-quarters of the index's earnings come from overseas. A wave of takeovers has also lifted the market: Beazley, Schroders, Intertek and DCC have all been bought. The latest, commercial property group Segro, accepted a £14 billion ($19 billion) offer from U.S. rival Prologis this month.
Outside the Footsie, ingredients maker Tate & Lyle, engineer Rotork, outsourcing group Mitie and property group Assura have agreed takeovers. Budget airline EasyJet is set to be bought by Apollo Global Management.
Those deals reflect years of depressed UK stock valuations relative to global peers. Buyers have noticed.
Sterling has held up better than the equity discount might suggest. The pound is up about 6% against the dollar and down less than 1% against the euro since Labour came to power. Higher UK interest rates relative to the US and euro zone have supported it. Given Labour's history of sterling crises, that counts as a win.
This is the final edition of CNBC UK Exchange.
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