27 May 2026: The UK may be ‘tipped into a general election’ if Burnham replaces Starmer

Bank lending to UK businesses has fallen to its lowest level in nearly 30 years, marking a major structural warning sign for the UK economy. The latest data shows that lending to non-financial companies has dropped to 59% of GDP in Q3 2025, the lowest level since 1998.

This is down from a 2008 peak of close to 90%, the weakest level in almost three decades. SMEs are hit hardest: loans to small and medium-sized firms have halved over 15 years, falling from 12% of GDP in 2011 to 6.5% in 2026.

The decline is driven by weak economic growth, tighter regulation, and banks shifting away from SME lending due to higher risk and lower profitability.

At the same time, there has been a significant increase in so-called private credit. Bank of England Governor Andrew Bailey has expressed concern about this unregulated lending. He has told the Government that private credit funds face higher risks from one-off hits that could threaten confidence in the wider sector.

In his role as Chair of the Financial Stability Board, Bailey wrote to G20 Finance Ministers to express concern that the opacity of these markets could trigger a wider loss of confidence, even when the precise causes of problems are idiosyncratic to particular borrowers. He added that the FSB would “continue our monitoring and conduct further work in the months ahead.”

There has been an understandable lull in the manoeuvring to replace Sir Keir Starmer as Leader of the Labour Party and as Prime Minister. The by-election in Makerfield, in which Mayor of Manchester Andy Burnham has been parachuted, is proving to be a trickier proposition than is traditionally the case in such events.

Several reports suggest that replacing Keir Starmer with Andy Burnham could trigger a general election in the UK. This is being presented as a political risk. The idea appears in media analyses of Labour’s internal turmoil, where a leadership change amid instability could force the government into an early national vote.

Starmer faces: high-profile resignations (e.g., Wes Streeting), MPs openly urging him to step down, and speculation about coordinated moves to force a contest. This environment has been likened to a civil war within Labour.

Commentators argue that if Burnham replaces Starmer mid-term, the government could lose its mandate, especially given Labour’s severe local-election losses, the perception of a collapsing premiership, and the fact that Burnham is not currently an MP and would enter No.10 without a general election victory.

This is fuelling the idea that being “tipped into a general election” stems from a new PM without a fresh mandate, amid internal chaos, who could face overwhelming pressure to call one.

It is worth noting that when the Conservatives faced a similar situation with Sunak replacing Johnson, it was Labour that was howling for a General Election.

Of course, there is no guarantee that Labour will win in Makerfield. The by-election takes place on June 18th, and it is likely that all the jockeying for position before then will take place behind closed doors.

The pound slid back to its level last Friday as investors returned to their offices following the holidays in the UK and U.S.

It fell to a low of 1.3434 and closed at 1.3446 as the end of the war in Iran appears not to be as close as Trump is promising, and the U.S. struck bases in southern Iran that have been apparently used to send out boats to lay mines in the Strait of Hormuz.

As Kevin Warsh takes the helm at the Federal Reserve, bond investors are betting he’ll prioritise the Central Bank’s inflation-fighting credibility over U.S. President Donald Trump’s push for lower interest rates.

With the war in Iran unleashing the biggest inflation surge since 2023, traders are pricing in that the Fed is virtually certain to start raising rates by December. That’s a sharp reversal from just three months ago, when markets were betting on deeper cuts.

The shift reflects turmoil in the Middle East, the resilience of the U.S. economy, and an AI investment boom pushing the stock market higher, all of which have fuelled concerns that inflation could remain stuck above the Fed’s 2% target for some time.

While some investors fear that the AI boom may quickly turn into a bubble should one of the firms that have racked up significant investment without yet showing any significant end product collapse, the rest are “riding the wave”.

US consumer confidence slipped slightly in May, according to the Conference Board, with the headline index edging down to 93.1 from an upwardly revised 93.8 in April.

The Conference Board said the present situation index, which tracks consumers' assessments of current business and labour market conditions, fell more sharply to 121.2, down 3.2 points from the previous month.

By contrast, the expectations index, which reflects the short-term outlook for income, business and employment, ticked up to 74.4.

"Consumer confidence edged downward in May as the inflationary impacts of the war in the Middle East intensified," said Dana Peterson, Chief Economist at the Conference Board.

Trump won the 2024 presidential election largely on his promise to lower inflation, yet U.S. consumers have faced higher prices, first from his sweeping import tariffs and more recently from the U.S.-backed war with Iran. A Reuters/Ipsos survey last week showed that Trump's presidential approval rating fell to nearly its lowest level since he returned to the White House in January 2025.

The darkening mood poses a challenge for the Republican Party as it seeks to retain control of the U.S. Congress in the mid-term elections in November.

"Americans are upset about high prices and trying to stretch every dollar, but they aren't as gloomy as they were during the Great Recession, the COVID recession, or just after 'Liberation Day' last year," said Heather Long, chief economist at Navy Federal Credit Union.

Households with annual incomes ranging from $15,000 to $39,999 saw a sharp decline in confidence. Lower-income households have been disproportionately affected by gasoline prices, which have risen more than 50% since the war began in late February.

The Conference Board noted that consumers' write-in responses on factors affecting the economy continued to skew towards pessimism.

"References to prices and oil and gas increased in frequency for a second consecutive month, while mentions of war, geopolitics, and continued conflict remained elevated, likely signalling consumers' underlying concerns about the inflationary impacts of the war in the Middle East on their wallets," Peterson continued.

Consumer appraisals of current business conditions and the labour market were less positive than last month. This was somewhat offset by modest improvements in consumers' expectations for business conditions and the labour market six months from now. Meanwhile, income expectations eased in May, as those anticipating less income rose.

U.S. allies in Asia are trying to shield themselves from Donald Trump’s unpredictability, and this has become one of the defining geopolitical dynamics of 2026. The reporting paints a picture of governments preparing for a second round of disruptive U.S. policy swings, especially on security guarantees, trade, and China strategy.

Trump has so far imposed tariffs on U.S. imports at varying levels, affecting several countries in different ways, and has invaded Iran. American allies are wondering what he will do next, particularly if/when he is bruised by November’s midterms.

The Dollar index gained ground yesterday as hopes of a swift end to the war in Iran faded, which led to a fall in risk appetite.

The index rallied to a high of 99.25 and closed at 99.14.

The ECB expects to revise its euro-area inflation forecasts upwards in June, as part of a new macroeconomic framework it will present that month, coinciding with its Governing Council meeting. At that meeting, the institution could opt to raise its base interest rate after a year of unchanged rates, in response to the economic impact of the war in the Middle East.

"It is likely that in June we will revise inflation forecasts upwards," the ECB's chief economist, Irishman Philip Lane, has announced in statements to the Japanese newspaper 'Nikkei', noting that the rise in oil prices has exceeded March's projections, while the effect on gas prices has so far been relatively limited.

"We anticipate indirect effects beyond energy prices," added the ECB Executive Board Member, warning that if this, starting from an energy crisis, becomes a more widespread inflationary problem, "it would be a serious matter", and reiterating that the speed with which the war is resolved will be key.

Thus, although the ECB avoids pre-committing to a specific decision, Lane believes the situation could be overlooked only if the disruption to energy supply were limited and temporary.

On the other hand, if the disruption persists over time, even if it is of moderate intensity, some adjustment of interest rates could be justified, "but limited and not a full cycle of monetary tightening", and only if the disruption worsens and spreads non-linearly would a more forceful monetary policy response be needed.

As the ECB’s June meeting approaches, its heavy-hitters are reiterating the need for calm heads and telling markets that, if, in their judgement, the rise in inflation becomes more widespread, they will have no option but to act.

Indeed, Isabel Schnabel, another member of the European Central Bank’s Executive Board, says the ECB needs to raise interest rates at its June meeting. Even if a peace deal materialises in Iran, she argues, the damage already done to energy markets and inflation is too deep to ignore.

Markets are currently pricing in an 85% probability of a 25-basis-point hike at the ECB’s June 10-11 meeting. That would push the deposit facility rate from 2.00% to 2.25%.

Italy’s annual Confindustria assembly, hosted by the country’s main business organisation, became a joint call from business and government for a tougher European industrial strategy, as Prime Minister Giorgia Meloni and industrial leaders linked energy costs, geopolitical instability and manufacturing competitiveness in unusually direct terms.

Meloni, speaking before President Sergio Mattarella and Italy’s business elite at Rome’s La Nuvola Convention Centre, used the occasion to defend a broader strategy that combines support for defence spending with emergency economic flexibility for households and companies.

Rome is increasingly framing industrial competitiveness as a national security issue. The Government is pushing the EU to widen fiscal flexibility beyond defence spending to include energy-related support measures.

Confindustria is escalating pressure on Brussels over Chinese industrial overcapacity and EU climate regulation, while the Government is using the energy crisis to relaunch its nuclear agenda and attack parts of the EU’s green regulatory framework.

The Euro reacted to the disappointment over yet another rumour of a peace deal between the U.S. and Iran, which has come to nothing. It fell to a low of 1.1616 and closed at 1.1630.

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