London – Sir Keir Starmer’s grip on the UK premiership is looking increasingly precarious, according to a new analysis from investment bank Jefferies, which assigns a 60% probability to him leaving office before the end of July. The assessment, released on Tuesday, stems from a series of damaging news stories and a perceived vulnerability that could lead to a leadership change within the Labour party.
Jefferies analysts warn that even if Starmer remains in power, it will likely require concessions to the party’s left wing. Alternatively, a replacement for Starmer would almost certainly come from the left of the party. “Either scenario would be negative for the fiscal picture in the UK,” the bank stated in a macroeconomic strategy note. This concern centers on the potential for increased spending or tax hikes that could undermine economic growth and strain public finances.
The timing of this analysis coincides with a period of significant upheaval within Starmer’s Downing Street operation. Last week’s resignation of chief of staff Morgan McSweeney, following his role in the appointment of Peter Mandelson as US ambassador, triggered a wider reshuffle of key personnel. The move sparked intense speculation about Starmer’s future, even prompting a public call for his resignation from Anas Sarwar, leader of Scottish Labour, before a wave of support from cabinet ministers temporarily stabilized his position.
Further compounding the challenges, Starmer’s administration has recently parted ways with the most senior civil servant in Whitehall. Simultaneously, the Labour leader is navigating fallout from a think tank associated with the party’s return to power, which commissioned a public relations firm to gather potentially damaging information on two journalists from The Sunday Times.
Fiscal Concerns and Market Reaction
The Jefferies report highlights growing anxieties about the UK’s fiscal outlook. The bank’s strategists express particular concern over the potential for a shift towards more left-leaning economic policies, which they believe could necessitate either tax increases or spending cuts. They argue that further tax hikes could prove counterproductive, hindering economic growth, while spending cuts would also likely have a negative impact.
The analysis suggests that these fiscal concerns are already impacting market sentiment. Jefferies predicts that the UK’s economic growth will be 0.4% lower than previously anticipated, forcing the Bank of England to implement more aggressive interest rate cuts than currently priced in. The bank forecasts a neutral interest rate of three percent.
This outlook is also expected to contribute to a steepening of the yield curve – the difference between short-term and long-term government borrowing costs – which often signals a lack of confidence in the government’s ability to manage the public finances effectively. A widening yield curve can indicate increased risk and potentially higher borrowing costs for the government.
The Jefferies assessment arrives at a sensitive time for the UK economy, which is still grappling with the aftermath of Brexit and the global economic slowdown. The political instability surrounding Starmer’s leadership adds another layer of uncertainty, potentially deterring investment and hindering economic recovery.
The bank’s analysis also comes after a period of declining popularity for Prime Minister Starmer, despite a significant victory in the July 2024 general election. Polling numbers have remained stagnant, raising questions about the Labour party’s ability to maintain its momentum and deliver on its promises.
The situation is further complicated by the recent ruling by the UK’s Supreme Court in a case involving the Financial Conduct Authority (FCA) and former Julius Baer Group employees. While not directly related to Starmer’s leadership, the ruling – which effectively ended the FCA’s case – underscores the challenges faced by regulators in pursuing complex financial investigations and highlights the potential for legal challenges to regulatory actions. The FCA had alleged a “lack of integrity” in Julius Baer’s dealings with the Yukos Group, but the Tribunal criticised the FCA’s investigation, citing failures in gathering relevant documents and approaching witnesses.
The confluence of these factors – political instability, fiscal concerns, and regulatory challenges – paints a complex picture of the UK’s economic and political landscape. The coming months will be crucial in determining whether Starmer can regain control of his premiership and steer the country towards a more stable and prosperous future.
