18 May 2026: Keir Starmer is now a lame duck Prime Minister

Labour’s leadership turmoil is already creating the very conditions that slow an economy: higher borrowing costs, delayed investment, and collapsing business confidence. This isn’t speculation; it’s what business leaders, markets, and even Labour’s own chancellor are warning about.

The Telegraph reports that firms are “struggling to stomach the political drama engulfing Labour”, with leadership wrangling creating a “fog of uncertainty” that is putting investment decisions on hold. Business owners cite higher taxes, rising employment costs, and regulatory changes as compounding instability.

This is the classic recipe for paralysis; firms don’t know who will be in charge or what the rules will be, so they stop spending.

The leadership chaos has pushed UK government borrowing costs to their highest level in 30 years, with 10-year gilt yields hitting levels last seen in 2008 and 30-year yields the highest since 1998. Higher yields make government debt more expensive, leaving less fiscal room.

This is exactly what happened during the Liz Truss mini-budget crisis, and markets are signalling similar fears now.

It is hard to imagine the difference between now and two years ago. The Labour Party had just won a landslide election victory. There was optimism that the Party would deliver on its election promises to cut NHS waiting lists, build more than a million houses a year, most of which would be for social housing, and “smash the gangs”, sending illegal migrants on the perilous journey across the English Channel.

Now, the Health Minister has resigned after making minimal progress on waiting lists; the architect of the housing “boom” has been scandalised and has left office; and the Prime Minister has paid France a fortune to stop the boats, with little effect.

The country now faces a period of somnambulism as we await the by-election in Makerfield, a constituency in Wigan's suburbs, where the Mayor of Manchester, Andy Burnham, will seek to return to Westminster.

It says all you need to know about the state of the Government that they face a tough challenge in Makerfield, an area where Reform UK won a significant majority of council seats a couple of weeks ago.

Should Burnham be successful, he will then have to challenge Sir Keir Starmer for the leadership, with the aforementioned former Cabinet Ministers also “throwing their hats into the ring”.

The Prime Minister is now the very definition of a Lame Duck. Under his leadership, the country faces three months in limbo, during which he will try to get on with the job at hand, while every journalist, economist and analyst asks him the same question: will you resign or fight a leadership battle?

While Starmer “mans the barricades”, his Chancellor, Rachel Reeves, faces a similar dilemma. She has little to no chance of keeping her job if there is a change of leadership, but there is another deficit that Labour is facing: who can replace Reeves and manage the country’s growing economic woes?

This may be an academically interesting time for students of politics, but for the rest of us, it is another period when the Government becomes paralysed, and nothing gets done.

This week sees the publication of employment data tomorrow and inflation numbers on Wednesday. While employment data may rise by a similar 26k to last month, April inflation data will interest the Bank of England and likely confirm a rate increase at the MPC’s June meeting.

Last week, the pound failed to react to encouraging GDP numbers, with the market attributing the data to “front-running” of activity driven by fears of the conflict in Iran.

Sterling fell to a low of 1.3315 and closed at 1.3325.

If new Federal Reserve Chair Kevin Warsh is still itching for a “good family fight” over monetary policy, he is likely to get one if he sticks to his guns on interest rate cuts.

With inflation spiking and Treasury yields surging, Warsh is likely to confront a Federal Open Market Committee in no mood to ease. In fact, several officials have recently stressed the need for the Fed to keep its options open for future rate hikes.

If it looked like outgoing Governor Stephen Miran was a lone wolf howling for reductions, seeing a Fed Chair trying to defy his fellow policymakers and push for cuts will loom even larger.

Those who have watched Warsh over the years, from his prior stint as a Fed governor through his high-profile public disagreements with Fed policy since, expect him to make a strong case for cutting. The problem is that he’s likely to lose, at least in the short term. This situation raises interesting communication issues for the new Central Bank Chair, with dissent likely to be led by his predecessor.

“I saw him in action. He does base his decisions on his view of the economy. Even his arguments for why he would favour rate cuts in general were based on his read of what’s happening structurally in the economy,” said former Cleveland Fed President Loretta Mester, who served with the Philadelphia Fed during the prior period when Warsh was on the board. “I just don’t think right now he can credibly make those arguments, because we have an inflation problem.”

Indeed, surging inflation will be Warsh’s first and primary policy challenge.

A recent CBS News poll finds mounting stress, uncertainty, and declining confidence in Trump’s handling of the economy. Approval of his economic approach has fallen to historically low levels, with frustration cutting across income groups and even parts of his traditional base.

This economic anxiety is directly shaping perceptions of Trump’s policies. Two-thirds of Americans say Trump’s policies are making the economy worse, at least in the short term. At the same time, most describe their feelings about his economic approach as “frustrated” or “angry.”

His ratings on handling inflation have slipped sharply, even among Republicans, with approval of his inflation handling dropping to 63%, far below his ratings on immigration (89%) or overall job performance (85%).

Should Trump prevail and see interest rates cut, the problem is only going to get worse over the summer, particularly if he carries through on his threat to begin bombing Iran if they fail to agree to his ceasefire terms.

At the recent high-stakes diplomatic summit between China and the United States, much of the international press has concluded that Xi Jinping emerged with clearer strategic gains, even though the U.S. framed the meeting as constructive.

Xi arrived with a tightly defined agenda: stability, economic reassurance, and a demonstration of China’s global stature. He delivered all three without making major concessions. Chinese state media emphasised images of Xi as a confident global statesman. The U.S. side, by contrast, appeared more reactive, especially amid domestic political turbulence and economic anxiety. The choice of venue, in Xi’s backyard, did not aid Trump’s cause.

Xi used the summit to signal that China remains open for business, courting foreign investment at a moment when Western economies are grappling with inflation, supply-chain fragility, and geopolitical risk.

He also portrayed China as a stabilising force while the U.S. is entangled in the Iran conflict, Middle East tensions, and internal political division. That contrast played well internationally.

Meanwhile, Trump arrived under pressure, with falling economic approval ratings, rising domestic frustration, and market volatility. The U.S. did not secure major concessions on trade, fentanyl, or military-to-military communication.

Washington’s tone oscillated between confrontation and cooperation, making the U.S. position appear less coherent.

The minutes of the latest FOMC meeting will be published on Wednesday. They are likely to underscore the challenge Warsh will face next month at his first meeting as Chairman.

There is a level of militancy among members of the rate-setting committee that hasn’t been seen in many years. Neel Kashkari and Beth Hammack both objected to the tone of the statement following the last meeting, saying it failed to reflect the balance needed between hawkish and dovish expectations.

The dollar index climbed to a high of 99.32 last week as the market reflected concerns about the lack of progress in peace negotiations between the U.S. and Iran. Trump apparently spoke with Israeli Prime Minister Netanyahu, and he is unlikely to have been told of Israel's willingness to retreat once more to within its borders with Lebanon, while it is also itching to renew bombing Iran.

The index eventually closed at 99.27.

Oil shocks and resurgent inflation are forcing a fundamental reset of eurozone economic policy, with the European Central Bank (ECB) shifting from a near-term easing bias to renewed risks of tightening. The Iran-driven energy disruption is the central catalyst.

The war in the Middle East has sharply increased oil and gas prices, with disruptions through the Strait of Hormuz creating volatility and raising import costs. ECB economists’ projections show oil averaging around $90 per barrel in Q2 2026, which already looks optimistic given gas near €50/MWh, with prices easing later in the year.

This spike is already feeding into higher consumer prices and eroding purchasing power.

The prediction that the spike will ease is still based on an “early conclusion” to the conflict.

Inflation accelerated to 3% in April 2026, up from 2.6% in March, driven largely by a 10.9% year-on-year surge in energy prices. This has pushed headline inflation further above the ECB’s 2% target.

Christine Lagarde has warned that the conflict in Iran has a “material impact” on near-term inflation. The ECB now expects inflation to average 2.6% in 2026, but in adverse scenarios—where energy disruptions persist—headline inflation could rise to 3.5% and, in severe cases, 4.4%.

This marks a significant shift from earlier expectations of a smooth disinflation path.

The ECB has paused rate cuts and is signalling the possibility of rate hikes in 2026. Markets are now pricing in one to two increases, reversing last year’s easing cycle. Rising oil prices and inflation fears have forced policymakers to reconsider their stance.

A Bloomberg survey suggests the ECB may raise rates twice, next month and in September, bringing the deposit rate from 2.0% to 2.5% by late 2026.

This pivot reflects the ECB’s concern that energy-driven inflation could spill over into wages and services.

Higher energy costs are squeezing real incomes and business confidence. The ECB has revised eurozone GDP growth for 2026 down to 0.9%, barely above stagnation.

Eurostat data show Q1 2026 growth of just 0.1%, with Germany outperforming slightly at 0.3% while France is flat. The combination of rising prices and slowing output is creating a stagflationary environment. German businesses may also have front-run fears of rising prices.

Oil shocks and inflation are reshaping Eurozone policy in several ways: Monetary policy tightening is returning, with rate increases back on the table. Energy security has become macro-critical; the conflict has exposed Europe’s vulnerability to external energy shocks. Fiscal policy may need to cushion households; with real incomes falling, governments may face pressure to support consumers and energy-intensive industries.

Investment in defence and infrastructure is rising, and ECB projections highlight increased Government spending, especially in Germany, as a medium-term growth driver.

Data for economic output is due for release later this week, with economists predicting a further fall as the rise in energy costs begins to bite into both manufacturing and industrial output, while Trump's threat of further tariffs is causing alarm in the automotive sector.

The Euro lost ground last week as risk appetite waned. It fell to a low of 1.1617 and closed at 1.1624.

Have a great day!