Starmer resigns as UK PMI sinks to 49.4, deepening economic uncertainty

Keir Starmer resigned as UK prime minister Monday after months of mounting pressure, leaving the Labour Party to navigate a leadership transition as S&P Global's composite PMI fell to 49.4 — a 14-month low signaling a second consecutive month of private-sector contraction.

"The political vacuum compounds an already fragile economic picture, with firms cutting jobs at the fastest pace in two years and new orders deteriorating sharply," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

The employment sub-index dropped to 46.8, extending its contractionary streak to 21 months, while new orders slid to their weakest since January 2021. Manufacturing held in expansionary territory at 53.1, down from 53.9, but the larger services sector dragged the composite below 50 for a second month. The data followed a 0.1% contraction in May GDP, putting the UK on track for flat or negative growth in the second quarter after leading the G-7 in the first three months of the year.

Starmer's departure — announced after Andy Burnham's by-election victory cleared a path for a leadership challenge — injects political uncertainty into an economy already struggling with sticky inflation and strained public finances. Capital Economics forecasts the Bank of England will cut its benchmark rate from 3.75% to 3% by 2027, though the weakening growth picture may accelerate that timeline if the next leader prioritizes fiscal stimulus.

Leadership vacuum meets economic slowdown

The prime minister's resignation followed weeks of defections from his own cabinet. Defense Secretary John Healey and Health Secretary Wes Streeting stepped down in May and June, with Streeting publicly stating that Starmer "will not lead the Labour Party into the next general election." Business Secretary Peter Kyle told the BBC on Sunday that Starmer was "taking the time to think through what the political realities are today," signaling the government's acknowledgment of the crisis before Monday's announcement.

Burnham, the former mayor of Greater Manchester who returned to Parliament via the Makerfield by-election, is now the leading contender to succeed Starmer. In his victory speech Friday, he called the moment "a final chance to change" for Labour and advocated for "a new politics based on unity and hope." No formal leadership contest timeline has been set.

Cost pressures ease but remain elevated

One of the few positive signals in the June PMI survey was a moderation in input and output cost inflation. Energy-related price pressures have eased after oil fell from above $120 a barrel during the Iran conflict to below that level following a US-Iran truce that kept the Strait of Hormuz open. Even so, crude remains roughly $10 a barrel above pre-conflict levels, and S&P Global warned that cost pressures stayed elevated despite the recent easing.

The last time the UK composite PMI posted consecutive readings below 50 was during the 2023 downturn, when the Bank of England held rates at 5.25% for seven months before beginning its easing cycle. The current contraction, combined with a leadership transition, raises the risk that business investment — already subdued — will face further headwinds as companies await clarity on fiscal and trade policy from the next government.

US President Donald Trump weighed in on the resignation Monday, saying Starmer had "failed badly on two very important subjects — immigration and energy," and reiterating his call for expanded North Sea drilling. The relationship between the two leaders had deteriorated amid the fallout of the Iran war, adding a diplomatic dimension to the UK's political transition.

This article is for informational purposes only and does not constitute investment advice.