"Successor" faces tough challenge: Stalmier resigns, leaving "economic pit", PMI shrinks adding further gloom.

British Prime Minister Keir Starmer announced his resignation on Monday, with a series of strategic mistakes during his tenure enough to fill a thick book. However, the root of most of the mistakes lies in a misjudgment: that the British economy, which was severely hit by the Ukraine war in 2023, was about to experience a sharp rebound, balancing high-speed growth with easy financial readjustment. Currently, investors are waiting for further news on the successor to British Prime Minister Keir Starmer after his resignation. On Tuesday, the pound fell slightly against a strengthened US dollar. Meanwhile, the Composite Purchasing Managers' Index (PMI) shows that business activity in the UK shrank this month. Starmer's dilemma is not over, and now, as tensions ease in Iran, his successor may face a similar test - and must ensure that the government shows a firm control of the situation. Starmer's resignation paved the way for an orderly transition of power, with newly elected McField district MP and former Mayor of Greater Manchester, Andy Burnham, expected to take over as Prime Minister. It is not yet clear whether Burnham will face a formal leadership challenge, or if potential competitors will voluntarily withdraw. Burnham's biggest potential rival, former Health Secretary Wes Streeting, announced on Monday that he was withdrawing from the race and would support Burnham. Tommy von Bromsen, foreign exchange strategist at Swedish Bank, said, "The path for Burnham to become the next Prime Minister is clear, and I think the market is relieved about this." Successors still face economic reality challenges Burnham advocates strengthening state control over utilities, and increasing taxes on real estate, wealth, and investment income. However, he has promised to adhere to Starmer's fiscal constraint framework, including balancing daily spending and pushing the debt-to-GDP ratio into a downward trend. As these rules are based on official forecasts rather than actual revenue and spending, the UK's independent fiscal watchdog, the Office for Budget Responsibility (OBR), will continue to play a crucial role in determining the fiscal credibility. Recently, the OBR's forecasts have significantly influenced policy direction, with last year's Autumn Budget causing turmoil due to downward revisions in productivity forecasts. However, less attention has been paid to whether Starmer's commitments are based on overly optimistic forecasts. A key issue is the exclusion of the possibility of raising income tax and value-added tax, leading government officials to scramble to balance revenue and expenditure. One solution is to increase employer national insurance contributions, which has angered the business community and pushed inflation and interest rates levels higher in 2025. Looking back at 2024, the expectation of a strong economic recovery was not unreasonable. The departure of the Conservative government in favor of Brexit brought in foreign investment, cooling inflation to target levels, and impending consumer spending. The OBR forecasted GDP growth to increase from 0.3% in 2023 to 2% in 2025, driving people out of the welfare system. However, the reality is that household consumption remains cautious, disability welfare spending is rising, food inflation is exacerbated by a new round of energy shocks in the Middle East, clouding the economic outlook, and interest rates remain high. By March of this year, the OBR had revised its growth forecast for this year down to just 1.1%. Indeed, no government can avoid bad luck, and the Starmer government has implemented many policies catering to its base, such as taxing businesses to maintain welfare, expanding labor rights, building renewable energy capacity, and controlling immigration. But using uncontrollable economic variables as a yardstick for performance is a decision-making mistake. Now, Burnham may face a similar trap: if the peace agreement between the US and Iran is maintained, economic data for 2027 could suddenly improve, and a Treasury Secretary candidate who is pro-business - such as former Secretary of State for Health Wes Streeting - could help calm the bond market. However, relying solely on tweaking tax and subsidy policies will not help Burnham win the 2029 election. Therefore, he needs to recreate his "visible political achievements" during his time in Manchester, such as making radical reforms to social housing. Regardless, he needs to chart his own path - overly relying on macroeconomic waves often leads to a direct collision with reefs. Pressure on the pound weakens, UK business activity shrinks again As of the time of writing, the pound fell 0.2% against the US dollar, trading at $1.3222, slightly higher than the March low of $1.31635 reached last Friday. The pound against the euro remained stable, trading at 86.27 pence. Swedish Bank foreign exchange strategist von Bromsen believes, "Looking ahead, market focus will shift to the Treasury Secretary candidates, but I think most candidates will have cautious positions and will not cause market turmoil. We will not see the chaos of the Trass era." He was referring to the crisis in September 2022 when Prime Minister Lees Trass briefly held office, leading to a historical low in the pound against the dollar. According to the trading community at the Polymarket betting site, the competition for the new Treasury Secretary has evolved into a two-horse race, with Streeting having a close to 70% chance of winning, and Ed Miliband around 20%. Francisco Pesolle, a foreign exchange strategist at Dutch International Group, pointed out in a report, "Streeting is usually considered a more market-friendly candidate than Miliband, who is said to be another major competitor for the Treasury Secretary position." The next Prime Minister will inherit an economically weary UK. On Tuesday, the Comprehensive Purchasing Managers' Index (PMI) released by S&P Global showed that business activity in June shrank at the fastest pace since April 2025, due to continued weakness in the service sector. Composite services and manufacturing data fell from 49.7 to 49.4; the service sector PMI fell from 49.3 to 48.7, the lowest level since January 2023. A PMI reading below 50 indicates economic contraction. Rob Wood, Chief UK Economist at Pantheon Macro, said, "The S&P Global survey shows that business confidence in June continues to be suppressed by political uncertainty. Therefore, Starmer's resignation earlier this week may help alleviate concerns about the leadership transition chaos among businesses." But he also pointed out, "There is still significant uncertainty about Burnham's policy agenda, and we believe that in the coming months, businesses will continue to adopt a wait-and-see attitude, dragging down GDP growth."