The UK’s Political Ructions Hide a Better-Than-Feared Economy

UK Health Secretary Wes Streeting resigned Thursday morning, likely teeing up a Labour Party leadership contest that may oust Prime Minister Keir Starmer. And it happened in the shadow of a bustling Q1 GDP report, with all eyes on bond yields’ wiggles. As pundits parse potential challengers and rank them according to their bond market friendliness, we have a helpful reminder: Volatility is normal, and markets (stocks and bonds) price political change much faster than folks suspect. Look past headlines and wiggles, and look longer-term as markets do.

For now, nothing has changed. Starmer remains in office, resisting calls to resign and reminding everyone the Labour Party has a process for leadership challenges. Under its rules, it isn’t enough that dozens of Labour Members of Parliament (MPs) pulled support. To trigger a contest, a potential challenger must have official backing from at least 81 MPs. To date, no one has filed this, and there is skepticism about whether Streeting has sufficient support. Ditto for the Labour bigwigs mooted to throw their hat in the ring if Streeting kicks things off, including Energy Secretary (and former party leader) Ed Miliband and former Deputy Prime Minister Angela Rayner. Streeting, meanwhile, is reportedly kicking an actual contest into the long grass, telling confidants he would prefer Manchester Mayor Andy Burnham to be able to enter the fray for the party’s good. But Burnham isn’t in Parliament right now and would have to win a by-election to be eligible. That process evidently also began Thursday amid reports that a Greater Manchester MP will stand down and let Burnham contest his seat. But even “safe” seats may be vulnerable to the populist right (Reform UK) and populist left (Green Party), depending on the candidates and campaigns. So things are in limbo, and Starmer clings on.

As does Chancellor of the Exchequer Rachel Reeves, which is where today’s Q1 GDP report enters the fray. And it was … good! GDP grew 2.5% annualized, the fastest since Q2 2024.^[i] Household spending accelerated from 0.5% annualized in Q4 2025 to 2.6%, while business investment rebounded from Q4’s agonizing -11.1% drop with 2.9% growth.^[ii] Budget uncertainty may have delayed risk taking in Q4, but it seems that once they knew the lay of the land, businesses and consumers got on with things.

Headlines call this a statistical anomaly, warning it is an artefact of seasonal adjustments and maybe not quite real. Reeves, trying to cling to her own job, says the strong results are evidence the economy is on the right track and a leadership change would put the economy at risk by “plunging the country into chaos when there is conflict in the world, but also at a time when our plan to grow the economy is starting to bear fruit.”^[iii] Most coverage calls faster growth the last gasp before new leadership inevitably lurches policy to the left, inviting a debt crisis as yields soar.

We find all of these views overwrought. Yes, some seasonal adjustment is probably at work, given the UK’s recent history of quarterly GDP fizzling after strong Q1s. COVID lockdowns and reopenings skewed this around the developed world. But it is also probably true that households and businesses sat tight in Q4, waiting to see how the Budget (released in late November) would alter taxes and investment incentives, then deployed pent-up demand in Q1. Monthly GDP numbers back that up, with March particularly strong in manufacturing especially. That echoes what purchasing managers’ indexes showed worldwide as well as in Britain. It also meshes with US GDP, which showed surging imports as businesses’ pre-tariff stockpiles ran out and Iran war jitters inspired the world to stock up ahead of feared supply chain chaos.

Which shows a timeless truth: Global factors often swamp local. The developed world always has pockets of weakness and strength, but the strong generally carry the weak along during an overall expansion. Whether the UK is carrying or being carried may be up for debate, but growth looks real, and given the UK’s interconnectedness with its trading partners, we doubt it is so fragile that a new leader headlines dub “anti-growth” can disrupt it. Especially when there is so much gridlock within Labour as its factions split further apart. Because while there is abundant talk of a “lurch to the left,” there is also a fresh economic proposal signed by 100 Labour MPs that sounds like Margaret Thatcher could have co-written it. It all probably means legislation continues moving slowly and gets sanded down.

Global matters for bond markets, too. While UK yields spiked this month, this looks like sentiment to us—not a sea change in market fundamentals. Reading into the wiggles seems like an exercise in futility. They jumped Wednesday as Streeting’s resignation plans hit headlines, and fell Thursday as the rumors turned to facts. But nothing has changed, and not just because Starmer clings on for now. Rather: The UK doesn’t have a debt problem. Debt service costs remain manageable at just 8.7% of tax revenue in the 12 months through April, cheaper than America’s load.^[iv] Some say this is a mirage since the UK has more inflation-linked debt, but inflation-linked bonds actually subtracted from the interest burden in March despite faster inflation then. These bonds are actually a lot quirkier than headlines imply and don’t always behave as you would expect. Reality rarely follows simple narratives.

Exhibit 1: The UK’s Cheap Debt Load

Source: Office for National Statistics, as of 5/14/2026. Rolling 12-month interest and tax revenues, April 1998 – April 2026.

UK debt affordability doesn’t hinge on the residents of 10 and 11 Downing Street. Regardless of who is prime minister and chancellor, UK debt issuance is bound by statutory fiscal rules, which Parliament appears too fractured to change. That makes refinancing maturing debt the swing factor, and the UK’s average debt maturity is 13.64 years.^[v] Hence, short-term yield swings are largely irrelevant to financing costs in the timeframe markets care about, the next 3 – 30 months. And we strongly doubt the updrift in very long rates over the past few weeks lasts long.

Stock and bond markets move on the gap between reality and expectations. Both can be volatile in the short term as sentiment swings. But longer term they weigh fundamentals. The more fear is baked into prices today, the more positive surprise power there is for that 3 – 30 month window. UK stocks and bonds have priced a lot of fear. All the worst-case scenarios politically and economically have swirled for months, likely sapping negative surprise power from here. There is a big wall of worry. Focus there, not on fearful daily moves.