25 August 2026: Burnham commits to Starmer’s Brexit red lines

The Prime Minister has committed to honouring Sir Keir Starmer’s Brexit red lines, a major blow to hopes that he would find a route for Britain back into the European Union in some capacity. In an interview last year, when he was still mayor of Greater Manchester, Burnham said he wanted the UK to rejoin the EU, and there were serious hopes he would tear up Labour’s manifesto commitments not to rejoin the EU, the single market or the customs union when he took over as Prime Minister in July.

This was further fuelled when his new Brexit minister, Hamish Falconer, refused to rule out rejoining in future.

Former Conservative Prime Minister Sir John Major recently highlighted Brexit-related economic problems in an interview; he warned that Brexit is costing the UK £100bn in trade and £40bn in tax revenues each year. Sir John said rejoining the single market should be a priority.

Britain's services sector, now the engine of its economy, unexpectedly perked up this month, according to a Friday survey, adding to signs of resilience despite the conflict in the Middle East.

The S&P Global Flash UK Services Purchasing Managers' Index rose to a six-month high of 52.8 in August, up from 52.1 in July. That beat all forecasts in a Reuters poll, which had pointed to a fall to 51.8.

Companies cited improving domestic conditions, a picture backed by earlier news that consumer confidence rose to its highest level since August 2024, shortly after the Labour government was elected under Prime Minister Keir Starmer.

The surveys added to signs of surprising economic strength, a bonus for Starmer's successor, Andy Burnham, and Chancellor John Healey, who hoped to defy forecasts of a slowdown after robust growth in the first half of the year.

Labour’s tax raid has so far proven painfully effective. A decade-long squeeze on wages, driven by frozen tax thresholds that began under Rishi Sunak, the then Tory Chancellor, and was later extended by Rachel Reeves, has steadily pushed millions of workers into higher tax bands.

While the freeze has damaged households, it has also helped successive Chancellors avoid even nastier tax rises in successive Budgets.

Official figures showed that the Treasury borrowed £1.8bn to balance the books in July, despite economists predicting the Government would not need to tap the markets at all. Public borrowing so far this year is up £2.3bn compared with a year ago, largely due to higher welfare payments. But stronger-than-expected tax receipts could yet save the day before October’s Budget.

Any thoughts of significant policy innovations by the new Prime Minister are effectively on hold until October, when Burnham and his Cabinet will have a clearer sense of the funding they will have to work with for the next year.

Sterling was slightly stronger overall yesterday, with GBP/USD flat to marginally higher, modest gains against most safe-havens, and minor losses versus commodity currencies. The day was quiet: no major UK data, and GBP mostly tracked broad USD softness amid stable risk sentiment.

The Federal Reserve’s Jackson Hole Symposium, this year's edition of which takes place in a few days, has become a poor shadow of its ‘big brother’, the World Economic Forum, over the last few years.

Few significant policy announcements have been made at the Wyoming resort in the last decade, better known for its winter sports facilities.

If it continues in a similar vein, it would suit the new Fed Chairman, Kevin Warsh, who appears to want the Fed to become anonymous, allowing markets to interpret economic data as a clue to the Central Bank’s likely intentions.

Nonetheless, Warsh faces a critical test this week amid anxiety in Government Bond Markets over inflation and Donald Trump’s tax and spending plans.

As the world’s most powerful Central Bank prepares for its annual Jackson Hole conference, analysts said bond traders would continue to look for signals from Warsh about its commitment to fighting inflation.

The Trump-appointed head of the US Central Bank has previously signalled reluctance to “spoon-feed” financial markets on how it plans to set interest rates to keep fast-rising prices in check.

However, anxiety over Trump’s handling of the economy and investor fears that his war with Iran is stoking inflation have rocked global financial markets amid a dramatic sell-off in US Government Bonds.

The Chicago Federal Reserve's national activity index pointed to further cooling in US economic growth in July, with the headline index slipping to -0.08 from +0.06 in June as most underlying indicators weakened.

Three of the four broad categories deteriorated month on month, and two posted negative contributions, while the three-month moving average eased to -0.04 from +0.01, signalling activity running modestly below trend.

The diffusion index also softened, dropping to 0.05 from 0.09, with less than half of the indicators making positive contributions.

Production added +0.01, down from +0.04, and sales, orders and inventories contributed +0.02, also easing from +0.04. At the same time, employment provided a mild offset, improving to -0.01 from -0.05, while personal consumption and housing weakened sharply, swinging to -0.09 from +0.04.

President Trump has threatened to raise U.S. tariffs on all cars, trucks and automotive parts from Canada to 50% from January 1, escalating a trade fight after negotiations collapsed last week.

The trade deal on the table would have cut the top-line tariff rate on Canadian cars and light-duty trucks from 25% to 15%. The tariffs on aluminium and steel would have dropped from 50% to 25%. Still, the deal fell apart on Friday over several points of contention, including whether U.S. tariff relief would have applied to medium- or heavy-duty trucks.

Trump's main concern is that the U.S. runs a trade deficit with Canada, but if he studied the numbers, he would see that the data is skewed by U.S. imports of Canadian heavy crude oil, which U.S. refineries are uniquely placed to refine. Without oil imports, the country would run a trade surplus with Canada.

It appears that, much like an impetuous child, once the President gets an idea in his head, he listens to no one. As he said when he was elected for the second time, tariff is his favourite word.

The US dollar was modestly stronger yesterday, recovering slightly from last week’s sharp sell-off. The dollar index edged towards 99.00, supported by cautious market sentiment, safe-haven demand ahead of the Iran sanctions announcement, and a rebound in USD/CAD amid US–Canada trade tensions.

In an interview the Italian media published yesterday, European Central Bank Governing Council Member and former Deputy Bank of Italy Governor Piero Cipollone said the risk of economic stagnation and a sharp rise in inflation due to the crisis in the Strait of Hormuz is rather remote but possible.

"We will, of course, need to monitor changes in the macroeconomic environment, but for the time being no significant signs are pointing to a scenario of stagflation," he said.

The wave of bankruptcies in Germany remains at a historically high level and shows no signs of abating. According to the Federal Statistical Office (Destatis), German local courts registered 2,276 corporate insolvency filings in April 2026. This is a 7.1% increase on the same month last year. For the first quarter as a whole, the year-on-year increase was 6.5%.

While politicians talk about promoting economic growth, hundreds of businesses are disappearing from the market every day. For many entrepreneurs, the burden of costs, competitive pressure, and labour shortages has become too great.

What’s particularly alarming is that it’s no longer just struggling businesses that are affected. According to the credit reporting agency Creditreform, even companies with good or at least average creditworthiness are now being forced to shut down.

“The crisis is now eating its way through the entire economy,” warns a Creditreform spokesperson.

While the bankruptcies of large corporations regularly make headlines, thousands of small and medium-sized enterprises often disappear from the market almost unnoticed.

Experts identify several causes of this dramatic trend. Companies are grappling with rapid technological change, intensifying competitive pressure, and the ongoing shortage of skilled workers.

Added to this is a problem that has been escalating for years. Many company executives are retiring but cannot find a successor. “Nearly a third of all voluntary closures are now due to retirement,” said Sandra Gottschalk, a researcher at the Leibniz Centre for European Economic Research (ZEW) in Mannheim.

Surprisingly, only 13% of companies filed for bankruptcy in 2025. Most businesses voluntarily ceased operations.

The next monetary policy meeting of the ECB’s Governing Council will be held on 9th September. Financial markets are increasingly pricing in a more hawkish European Central Bank as geopolitical tensions risk prolonging energy-related inflation and complicating the central bank’s efforts to bring price pressures under control, Reuters reported.

Investors now expect the ECB’s deposit rate to approach 3% by late 2027, with markets assigning a higher probability to further rate increases after an expected September hike. The ECB raised rates in June in response to inflationary pressures triggered by an energy shock linked to the U.S.-Iran conflict.

The Euro softened slightly yesterday, with EUR/USD drifting lower toward 1.1666, giving back part of last week’s strong rally. The move was driven by mild USD stabilisation, profit‑taking after overbought conditions, and position‑squaring ahead of Jackson Hole. Against other majors, EUR performance was broadly flat.

Have a great day!