A Quiet About-Face for Britain’s Labour Government?

Editors’ Note: MarketMinder prefers no party nor any politician. We are politically agnostic and assess developments for their economic and market effects only.

Investor sentiment is tricky to nail down. Surveys try, but they inevitably get skewed by people’s feelings in the moment, not their actual confidence in the economy or stock market. Heck, respondents might not even know their exact level of confidence and optimism. So it is vital to look at other, more qualitative indicators. One of our favorites: the tone and angle of financial news coverage. Does it couch fine news as bad? Does it ignore that the event it is covering is actually a case of things going better than everyone feared? If so, sentiment is probably far too dour, creating a lovely wall of worry. Consider the latest developments in UK politics, and we will show you what we mean.

When last we left Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves, headlines were warning fiscal policy was untenable. The tax hikes and higher minimum wage in October’s Budget would whack growth, they claimed, while higher borrowing costs would force draconian austerity. Starmer’s and Reeves’s poll numbers were sinking, and to many, the verdict was in: The new Labour government had fulfilled the widespread fears that accompanied the party’s return to power after 14 years, with stereotypical left-wing policy wrecking growth.

Since then, Starmer and Reeves have relaunched. This month, they are all about growth. Deregulation. Cutting red tape. Taking on the administrative barriers to building rail lines, runways, homes and even entire new towns. Open for business, they say, open for investment. Speech after speech, interview after interview, Davos chat after Davos chat. Both warned cabinet members won’t automatically get their way on new policies and that those that don’t fit with an outright growth agenda will get vetoed. Rumors of a rift with Climate and Energy Secretary Ed Miliband run rampant.

These things are often just words, lip service aimed at battling bad poll numbers. All parties and politicians do it. Change the conversation and all. But this week, Reeves backed it up with a pretty detailed policy plan and legislative agenda. Among the highlights:

• Finally building the third runway at London’s Heathrow airport, which Parliament approved in 2018 after about a decade of bickering, yet has been stuck in red tape since
• Making environmental policy more growth-oriented and investment-driven
• Replacing the endless environmental reviews that block construction projects with a “nature restoration fund” developers pay into
• Speeding up the construction permitting process
• Removing barriers to increasing home and office space in Cambridge and Oxford in order to enable to area to be a proper tech hub
• Welfare reform, including more means-testing and “fit-testing” disability benefits
• Boosting and freeing international trade
• Reducing the number of regulatory bodies, which presently number about 130
  
  

This is all fairly standard supply-side stuff. That is, rather than trying to boost demand through more public spending, this agenda seeks to make it easier and cheaper for businesses and individuals to create, build and invest. It is the kind of policy suite one might associate, for reasons of bias and stereotype, with center-right administrations. Ronald Reagan liked to cut red tape. So did Margaret Thatcher. Giorgia Meloni, Italy’s prime minister, talks about it a lot. We recall a lady named Liz Truss being quite the fan during her 49 days as UK prime minister.

Actually, what it really reminds us of is Bill Clinton and the Tony Blair/Gordon Brown duo in the 1990s. We are old enough to remember sentiment when Clinton and Blair took office in 1993 and 1997, respectively. In both cases, there was a lot of fear left-leaning administrations would undo their predecessors’ deregulatory progress, hamstringing the US and UK economies with higher taxes, higher spending and no means of growing enough to escape the pain. And both administrations did do some of the things people feared in their first year or two. But both then shifted their policies and priorities, governing in practice a lot like the center-right governments that preceded them. Pundits called it the “third way” movement and hailed it as magical for growth and stocks.

Today, we aren’t seeing any such cheer over Starmer and Reeves’s new agenda, even though it was very “third way.” Just a lot of complaining, from publications one would associate with both ends of the political spectrum. Grousing that their head is in the sand, that these measures will take too long to bear fruit, that the devil is in the details, which we don’t yet know. Some of these are probably fair points, and this is all part of public debate. But it is also worth noting investors have complained for years about grassroots opposition blocking development. As we write, a long-delayed UK nuclear plant is once again in question because its cooling system may affect the local salmon population and people can’t agree on how to mitigate it. Yes, making developers pay into a restoration fund is an added cost. But there is also a good chance developers see this as a fine tradeoff for avoiding years of uncertainty and costly legal wrangling any time they want to build an apartment block.

So we agree none of this is going to move the needle in the near term, presuming it gets through Parliament. Supply-side reforms are always a slow burn. The governments that pass them usually don’t stay in power long enough to reap the fruit. But that is beside the point for markets. What we have here is a simple case of reality shaping up better than investors expected. Very few people had a Blair/Brown Damascene conversion on their Starmer/Reeves BINGO card when Labour won last July. Starmer may have run for office on his moderate reputation, but headlines warned it was a false front and the party’s more radical elements would dictate policy. Wolf in sheep’s clothes and all that. Those fears may now be starting to prove false.

Stocks are telling us as much, too. When 2025 started, they were still negative since the UK election in both pounds and dollars, and flat since former Prime Minister Rishi Sunak scheduled the election. There are a lot of reasons for this, not least the UK’s market composition (lots of value-oriented sectors and a relatively high weighting to natural resources, which underperformed globally in 2024). But political uncertainty probably also weighed, alongside the Budget’s negative effects on sentiment.

Now, it seems the fog is clearing and moods are lifting. UK stocks had a pretty dynamite January, clocking new highs in pounds and getting a good deal of the way there in dollars. Even if headlines don’t clock reality beating expectations, stocks are pricing it in. And since no one is talking about it, the surprise power probably persists. This, in our view, is stocks climbing the wall of worry. People aren’t outright looking or acting happier, but markets sure seem to be.