Andy Burnham, the frontrunner to replace Sir Keir Starmer as Prime Minister, faces a stark economic challenge as the UK economy flat-lines this month. A survey by S&P Global reveals that businesses have seen output fall for the second consecutive month, driven by a sharp rise in costs and lower customer confidence linked to the Middle East war and political uncertainty at home.
Service sector downturn leads economic slowdown
The downturn is led by firms in the service sector—spanning banks to restaurants—which accounts for approximately 80% of the economy. According to S&P Global, new workloads fell at the fastest rate in 14 months, resulting in job losses. The economy is estimated to shrink by another 0.1% this month, meaning no growth over the past three months.
Cost pressures and geopolitical tensions
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “Price pressures remain elevated as companies point to the energy shock and supply squeeze from the war in the Middle East as exacerbating existing cost pressures from government policies. These higher costs, combined with subdued business growth expectations for the year ahead, have caused employment to continue to fall at a worryingly high rate.” He added that some war-related price pressures have moderated due to lower energy prices, and that subdued growth and labour market conditions may prevent inflation from becoming entrenched.
Challenges for the next Prime Minister
The weak economic picture is a sobering reminder of the challenges facing the next PM. Burnham, the current frontrunner, will need to appoint a new Chancellor, with Rachel Reeves expected to be replaced. Thomas Pugh, chief economist at RSM UK, said: “We doubt growth will pick up much through the rest of the year. Even if a Burnham coronation is likely, avoiding a messy, protracted leadership contest, there will still be speculation about the direction of fiscal policy in the coming months.” He reiterated RSM's forecast that the Bank of England will keep interest rates on hold next month and throughout the rest of the year before resuming cuts in 2027.
Outlook remains bleak
Professor Joe Nellis, economic adviser at MHA, said: “A flourishing services sector will be at the heart of any recovery in the wider economy. A rebound in confidence in July will be important, but this must be sustainable rather than short-lived. If inflationary and geopolitical pressures can begin to ease over the summer, and if the incoming Prime Minister can set out a clear, pro-business policy direction, a more stable and supportive operating environment could emerge - but the outlook currently remains bleak.”
