Business Friendly Bureaucracy or No, Britain is Growing

Editors’ Note: MarketMinder is politically agnostic. We prefer no politician nor any party and assess developments for their potential economic and market implications only.

With incoming UK Prime Minister Andy Burnham set to take office and unveil his cabinet Monday, headlines continue parsing rumors and stray comments for clues on who will replace Rachel Reeves as Chancellor of the Exchequer. Early chatter about Energy Secretary Ed Miliband taking the reins has died down, with Home Secretary Shabhana Mahmood the new favorite and Foreign Secretary Yvette Cooper the dark horse. No doubt commentators appreciate having some fresh subject matter during the summer “silly season,” but it all seems beside the point. With May GDP rebounding from April’s slide and extending cumulative growth since Reeves entered the Treasury, we have more proof fiscal policy isn’t make-or-break for the economy or markets.

Think about Reeves’s record for a moment. Over the last two years, she did a lot of the things headlines warned would be economic poison. Payroll taxes and the minimum wage rose, lifting businesses’ operating costs. Capital gains taxes rose. Income tax bands stayed frozen, dragging more people into higher brackets as inflation lifted wages and salaries. Attempts at reforming tax-free savings accounts to pump more money into stocks got buried in details and loopholes. Welfare reform attempts floundered amid popular pushback. Ditto for attempts to streamline permitting and cut red tape. Public spending and deficits stayed high. On paper, the things people feared came true.

Yet tax hikes weren’t as big as feared. And despite them, with May GDP’s 0.1% m/m rise, UK GDP is now up 2.4% since Reeves and Prime Minister Keir Starmer took office in early July 2024.^[i] UK stocks rose 42.3% between the election and yesterday’s close, beating the MSCI World Index (40.3%) and Europe (37.7%).^[ii]

GDP growth wasn’t fast, but it didn’t need to be. Fiscal policy wasn’t perfectly free-market, but it didn’t need to be. Deficits didn’t shrink markedly, but they didn’t need to. Not when headlines warned massive tax hikes and runaway spending would sink the economy and markets. Modest growth defied deep recession fears just as modest tax hikes proved something of a relief. Reality went better than expected, and stocks rallied in response.

May’s GDP report shows the UK’s underappreciated resilience. When GDP dropped in April, it had a simple culprit: the outbreak of war in the Middle East. It didn’t knock industrial or services activity in Britain itself, nor was it really the effect of higher oil prices. The war caused the cancellation of two Formula 1 auto races. Most teams are based in Britain, so cancellation meant British entities earning less sponsor revenue. It also meant less business for UK-based hospitality firms and broadcasters. Both showed in GDP because of where these entities book their activity. The drop was almost entirely from external events that had nothing to do with fiscal policy. Yet headlines still warned it was the tip of the iceberg, with bigger declines to come and tax hike chickens finally coming home to roost.

That didn’t come true. April’s services decline was rounded up, and the sector rebounded in May, rising 0.3% m/m. The F1-related categories snapped back as normal racing resumed in Canada and Miami, with UK-based Formula 2 teams getting an extra boost from the category’s last-minute addition to both events.^[iii] Professional, scientific and technical activities had a banger month, up 1.8% m/m.^[iv] Arts, entertainment and recreation jumped 1.0%.^[v] This was a very strong month in Britain’s biggest sector, despite all the fiscal headwinds allegedly pushing it back.

Heavy industry also had a sneaky good month. Overall production fell -0.5% m/m, but this stemmed from an utterly unsurprising -4.5% m/m drop in mining and quarrying (which includes oil drilling, perpetually on Miliband’s naughty list) and a small drop in utilities output.^[vi] Manufacturing, the actual making of “stuff” in the country, rose 0.1%.^[vii] That looks lame until you consider manufacturing also grew 0.5% m/m in April and 1.4% in March, making May a small gain on earlier strength—rather than the widely feared fall to Earth as the war snarled supply chains.^[viii] Businesses did cite the war as a headwind, but they clearly overcame it.

So this is the legacy of a government few called business friendly. Modest growth, resilient businesses and outperforming stocks. With Burnham’s government looking likely to extend the status quo in substance if not in style, we reckon markets can keep chugging along as reality quietly beats expectations.