26 August 2025: Is Labour already blowing its chances in 2029?

Voters were promised that they would see a “new style” of Government when they elected the Labour Party in July last year. A Government that would be honest with voters and work with them to improve living standards after thirteen years of mismanagement under the Conservatives.

Sir Keir Starmer and his Cabinet promised that the mistakes that had befallen the last Labour Governments of Tony Blair and Gordon Brown would not be repeated. Once the fiscal problems created by a succession of Conservative Prime Ministers had been dealt with, the country could look forward to a bright future.

Chancellor of the Exchequer Rachel Reeves expressed shock and surprise at what she and her team found when they entered the Treasury, a £20 billion “black hole” of unfunded commitments, which she promised would not happen again once dealt with.

Over the past thirteen months, that black hole was indeed plugged, but has been replaced by another that is twice the size, as Reeves has stuck slavishly to her desire to see day-to-day expenses covered by day-to-day income.

She employed a typical politician’s ploy of promising not to raise income tax, national insurance, and VAT for ordinary people, only to increase the employer’s national insurance contribution, which indirectly affects working people. The changes she made in the treatment of the farming community by significantly reducing their inheritance tax threshold saw protests in Westminster, while the means testing of the pensioners' winter fuel payment, which has since been reversed, was both cruel and thoughtless.

The Government has the luxury of a large majority in the House of Commons and time on its side to be able to drive its agenda forward, but the Prime Minister has made the mistake of not realising that he does not govern “in a vacuum”.

Other issues like the Russian invasion of Ukraine, the behaviour of the U.S. President and several other unforeseen issues have also had to be addressed.

Now the economy is faltering, and while a recession is not the majority view in the City of London, growth has been singularly hard to find, while inflation is unlikely to fall close to the Bank of England’s 2% target before the end of next year, which will see interest rates maintained close to their current level of 4% well into 2026.

Time flies for Governments that are struggling to make an impression, and the only saving grace, as far as Starmer, Reeves, and Rayner are concerned, is that, for now, they have fought off any challenge to their leadership, but at a significant cost.

The changes to the welfare state that were brought in by Reeves last October saw the Government come close to being defeated in the Commons until the Prime Minister made not one but two U-turns to stave off catastrophe.

Public sector borrowing continues to skyrocket as Reeves sticks to her self-inflicted rules on borrowing, and the country is already bracing itself for what she is planning in this year's budget, which she will present to the Commons in October.

The country may be facing yet another “wasted year” of marginal growth, high inflation, and wasted opportunities while the issues of undocumented immigration and NHS waiting lists still drive social unrest.

By the end of the year, voters can expect another “reset” to be announced by the Prime Minister and his Chancellor, their third so far, and with Nigel Farage waiting in the wings and well ahead in opinion polls, the Labour Party is coming close to entering the last chance saloon.

The pound saw a significant rise last Friday as the dollar was hit by a dovish speech by Fed Chairman Jerome Powell. It rose to a high of 1.3544, but it retraced its steps yesterday, falling back to a low of 1.3446 and finishing at 1.3454.

Jerome Powell used his final Jackson Hole appearance as Fed chair to hint at a possible rate cut in September, but divisions inside the central bank, political pressure from Washington, and sticky inflation leave the path uncertain.

The annual Jackson Hole symposium is typically a venue for policy reflection, but it turned into a tense affair this year. Jerome Powell used his keynote speech to signal that the Federal Reserve could cut rates as soon as its September 16–17 meeting, while warning that the economic outlook remains highly uncertain.

Policymakers face a dual challenge: inflation running above the 2% target and signs of a softer labour market, including weak July payrolls and downward revisions to earlier data. Powell described the backdrop as a “challenging situation,” acknowledging that risks are pulling in opposite directions.

The split inside the FOMC has grown sharper, primarily due to interference by President Trump, who has appointed two Fed Governors who are “stirring the pot”, and another who will replace a more hawkish member next month.

July’s meeting already saw dissent over the decision to hold rates steady, and the coming vote could expose further fractures if some members argue for cuts while others resist easing.

Tariffs have pushed up the prices of several items, while the broader concern lies in services and wage inflation, which remain resilient. The readings for PCE and CPI due later this month and early next are expected to show inflation stuck above 3%, well above the Fed’s comfort zone.

This won’t allow the Fed to join the ECB in aggressively cutting rates. A series of cuts now would likely stoke inflation and be counterproductive, since it may well lead to pressure further down the line when the economy may need the Fed’s support.

Boston Fed President Susan Collins, speaking before Powell took to the stage in Jackson Hole, told reporters that, in her view, the risks proposed by higher inflation and a weakening labour market are now roughly balanced. This was seen as a vote for unchanged rates next month.

Meanwhile, Austan Goolsbee, the Chicago Fed President, lauded Powell for the low level of disagreement that has been seen at the FOMC during his tenure.

In the 62 FOMC meetings he’s chaired, he’s seen 18 dissents, a rate of one dissent every 3.4 meetings, according to data compiled by the St. Louis Fed.

His predecessor Janet Yellen saw 22 dissents over 32 meetings, or one every 1.5 meetings, while Bernanke logged 48 dissents in 66 meetings, or one every 1.4 meetings.

The dollar index fell significantly in the wake of Powell’s speech, reaching a low of 97.56, but it bounced strongly yesterday, climbing to a high of 98.54 and closing at 98.44.

Chancellor Friedrich Merz has characterised Germany’s current economic difficulties as a profound “structural crisis” rather than a brief phase of “weakness.” He acknowledged that efforts to restore the nation’s economic health have proven to be more challenging than initially expected.

Speaking on Saturday to members of his Christian Democratic Union (CDU) in Osnabrück, a key city in Lower Saxony and home to automotive giant Volkswagen, Merz reflected on the daunting scope of the issue.

“I say this also self-critically – this task is bigger than one or the other may have imagined a year ago,” he admitted. Merz further emphasised that significant portions of Germany’s economic sectors are “no longer truly competitive.”

He cited the dramatic drop in Volkswagen’s net profits, which saw a staggering 36% decline after taxes in the second quarter of the year, labelling it as just “one of many messages” revealing the country’s financial distress.

“No one should be under any illusions about how deep and far-reaching the challenges that face us are,” the chancellor stated, noting the urgency of the situation. While he commended German firms for maintaining “quality” and showing awareness of the current difficulties, Merz criticised the broader economic environment.

“The underlying conditions in Germany simply haven’t been good enough for the last decade,” he concluded, indicating a need for long-term structural reform.

Meanwhile, ECB President Christine Lagarde, making one of her first speeches since returning to Frankfurt from her summer vacation, said that it was the foreign workforce that had helped the eurozone weather repeated economic shocks, such as inflation and rising energy prices, while continuing to grow and preserve jobs. The number of people employed in the bloc increased by 4.1% between 2021 and 2025.

Lagarde told Bankers at the Fed’s Jackson Hole Symposium that although they made up only 9% of the total number of employees, foreign workers generated half of the economic growth in the last three years. She added that without immigrants, labour market conditions would be more difficult and growth would be lower.

The ECB president singled out Germany and Spain for special mention. Without the immigrant workforce, Germany’s GDP would be 6% lower today, and Spain has been able to recover successfully thanks to migrants. She also said that migration plays a key role in offsetting Europe’s declining birthrate and satisfying Europeans’ desire to work shorter hours.

The Euro saw an increase in volatility over the long weekend that was taking place in Britain. It climbed to a high of 1.1742 before falling back yesterday to a low of 1.1602, roughly where it closed last Friday, before settling at 1.1618.

Have a great day!