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Storm clouds have gathered over Sir Keir Starmer's government.
Sir Keir Starmer looks to be running on borrowed time as prime minister after a chaotic period that saw sterling fall and Labour contenders jostle to succeed him. It is this realisation that prompted jitters in the bond markets last week and sent the pound down sharply against its key rivals.
Greater Manchester mayor Andy Burnham looks best placed to benefit from Starmer’s shaky position. Top of the worry list for investors is what approach Burnham would take to both economic and fiscal policy. But how exactly would an Andy Burnham premiership impact the pound?
The kingmaker
The bond market has become something of a kingmaker for British prime ministers. Today, the so-called vigilantes are able to voice their displeasure with government policies by selling their holdings, thereby making the price fall and the yield (the cost, in other words) rise. Sterling often falls as the government scrambled to shore up this volatile market.
It is a trend we have seen several times in recent years, most famously with the 2022 mini-budget. Back then, Liz Turss and Kwasi Kwarteng unveiled an ambitious, uncosted plan to boost growth by reducing the tax burden.
Famously, the bond market weren’t fans of this gambit. But while Truss and Kwarteng were forced to row back on these plans, the bond market didn’t lose significance. If anything, it became even more of a major presence in British political life.
Heed the warnings
In the past, Burnham has argued that the bond market effectively holds government, the pound and the country to ransom. It is a not entirely unfair argument and one that probably has a fair amount of support across the country.
Recent reports that Ed Miliband has been coaching Burnham on how to soothe the bond market show just how much his position has changed. Like it or not, any incoming prime minister would be foolish to underestimate the risk of cheesing off the bond market. Doing so has, after all, plunged the country into chaos on more than one occasion and it appears he is happy to heed the warnings of the past.
Burnham as PM
The general perception is that Burnham would skew left with his economic policies, partly to placate the far wing of the party and to consolidate his support among mutinous MPs.
While we don’t know for certain what he would do, there have been suggestions that Burnham would pay for higher government spending with a wealth tax and other levies on capital. Should the war in the Middle East continue, Burnham’s treasury would likely take a more interventionist approach to supporting households. Higher spending is a risk for the pound, which could take a pounding should the bond market balk at Burnham’s roadmap.
At the end of the day, currency markets will judge the pound on the UK’s ability to generate economic growth and productivity gains. Spending much of the tight spending headroom on repaying borrowing is rarely a recipe for strong GDP gains, so Burnham must be mindful to comply with clear spending rules or risk incurring the wrath of the vigilantes. Should he become prime minister, that is.
Find clarity in the uncertainty
British businesses have unfortunately become accustomed to a degree of political risk in their daily operations. The country is now on its sixth prime minister in ten years. All the chopping and changing has made it harder to invest, harder to rely on a stable foundation and harder to counteract the frequent fluctuations in exchange rates.
Clarity is a vital component of success. Being able to protect your cashflow and net profits will set your business up for growth and means you can spend less time worrying about who will be prime minister and more time implementing strategies to grow your business.
To find certainty in these uncertain times, register with Smart Currency Business today or request a call back from our team to discuss how our comprehensive solutions can help protect your bottom line.
