Instability in London: the possibly imminent resignation of Keir Starmer rattles markets. What does this mean around the world?

London’s financial markets, and in particular the UK government bonds, Gilts, are feeling the effect of the instability of Keir Starmer’s government. After Starmer’s make-or-break speech yesterday - intended to calm the stormy waters in London following the election results – there’s been no pause in the rise in Gilt rates, with record numbers being reached. Borrowing now costs the British government a record high. But what does all of this mean, not only for British citizens, but also around the world?

Financial Instability

The financial instability London is experiencing is the result of a series of different factors, to which the latest local elections have only added yet another pressure. Since the Covid-19 pandemic, during which the UK also left the European Union, and the subsequent war in Ukraine, the country has lived a period of deep financial uncertainty.

The yield of Gilt bonds, the UK government bond, has touched several record values in the past few days. The ten-year bond has hit a record high of 5.13% on Tuesday morning, a figure not touched since the Financial Crisis of 2008. At the same time, the thirty-year bond yield hit 5.81%.

For investors, the key question is credibility. If the Labour party were to abandon Starmer, they would need to reassure markets that Britain remains committed to fiscal discipline and long-term stability. Without that reassurance, the pressure on Gilts could continue, increasing the cost of borrowing even further, after the jump of almost ten basis points on Monday.

In an interview with the Guardian, Kathleen Brooks, research director at XTB, reiterated that there is a real risk of a meltdown of the UK bond market and that it’s hard to see how the bond market can stabilize, and there could be further downside ahead.

Slowed growth

In a report published this morning, consultancy firm EY made predictions on the UK’s economic growth, taking into account the current instability in London as well as the disruptions related to the war in Iran.

In particular, higher oil and gas prices will hit UK economic growth. The forecast suggests that prior to the beginning of the war in the Middle East, the British government could have expected GDP growth of 1.3% in 2026. This has now been lowered to 0.8% in the case that the Strait of Hormuz reopens by July of this year. Whereas, if the situation continues to escalate, keeping the Strait closed, GDP growth could be reduced to 0.3% this year.

The Strait of Hormuz is one of the most important routes for global oil and gas supplies. If it remains blocked, energy prices are likely to stay high. For Britain, this would mean more expensive fuel, higher transport costs, and renewed pressure on household energy bills. Businesses would also face higher costs, which could reduce investment and hiring.

This could also complicate the work of the Bank of England. If higher energy prices push inflation upwards again, the Bank may be forced to keep interest rates higher for longer. This would put further pressure on mortgage holders, renters, businesses, and consumers. As a result, Britain could face the dangerous combination of weak growth, high borrowing costs, and renewed inflationary pressure.

The international fall-out

The fall-out of the crisis in London will not be limited to the United Kingdom. As one of the world’s largest financial centres, and as the EU’s second largest trading partner in terms of exports, instability in Britain has immediate consequences for global markets. Investors will not hesitate in reacting strongly if there is uncertainty over leadership, fiscal policy, and the future direction of government.

Keir Starmer is the UK’s fourth prime minister since the beginning of 2022. When he came to office he promised to put an end to the instability of the later years of the Conservative governments. However, even Starmer has shown that he is not immune to turbulence from within his own party, that could soon see him ousted.

The possibility of Starmer’s resignation has raised fears not only about who might replace him, but also about whether a new government would retain existing economic commitments. Some possible successors are seen as politically further to the left, which could make investors nervous about future tax and spending policy. If the UK wants to attract the foreign investment it needs, Starmer’s government will have to provide stability. At present, this looks increasingly difficult.