Burnham Inherits a UK Economy That’s Just Starting to Look Up

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(Bloomberg) — As Keir Starmer was reeling from heavy local election losses last month, it was hard to see why anyone would be trying to take over the embattled prime minister’s job.

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Oil prices were hovering near $100 a barrel. Gilt yields were hitting their highest levels in decades as markets braced for as many as three UK interest-rate hikes this year. And the Bank of England had just warned inflation could double to 6% if the energy shock got any worse.

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Seven weeks on from the vote that sealed Starmer’s exit, the bleak economic inheritance awaiting his successor — likely to be former Greater Manchester Mayor Andy Burnham — is suddenly looking improved, if not quite yet rosy.

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Now, “some of the worst outcomes can be ruled out, or are at least less probable,” said Matt Swannell, chief economic adviser to the ITEM Club of forecasters. “The inflation story is looking more optimistic, partly because we have seen the improvements in energy prices — if they stick.”

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The main development has been a slide in the price of oil since the US and Iran deal inked just hours before, somewhere west of Manchester, Burnham was winning the by-election that would catapult him back into Westminster politics and ensure the success of his maneuvers against Starmer.  

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The breakthrough has been key for the UK’s outlook, since the IMF and OECD expected it to be the advanced economy worst affected by the war. Easing tensions led to oil prices sliding below $75 per barrel on Wednesday, nearing levels not seen since before the conflict.

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The domestic picture also suggests that the worst-case inflation scenarios pored over by BOE officials and ministers can be set aside.

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The past two inflation prints have surprised to the downside, which means price growth now runs half a percentage point below where the BOE expected it to be in its most recent forecasts. S&P Global’s UK PMI on Tuesday also suggested input-price inflation for firms is beginning to moderate, amid a sharp slowdown in growth in the second quarter. 

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Bloomberg Economics now expects inflation could peak below 3% in the fourth quarter, should the moves in energy markets stick, just a tick up from the 2.8% it’s at currently. That would be more benign than even the best-case scenario the BOE was considering in April, and could allow the UK central bank to avoid rate hikes that would constrict the economy.

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Markets have responded sharply to the plunge in energy prices, reining in bets on interest-rate increases to price in just under one quarter-point increase by the end of the year. Borrowing costs for the government are also off their highs. The benchmark 10-year gilt yield has fallen almost half a percentage point since its May peak, easing the fiscal constraints facing a new PM.