Moreover, Prime Minister Keir Starmer’s landslide victory was widely anticipated by financial markets and, as Fordham Global Foresight noted, “was a textbook example of a smooth democratic transition” with “no allegations of impropriety, and no one refusing to accept the result”. Britain’s drama-free election has reinforced the perception among investors that the country has entered a phase of “greater political and policy stability”, in the words of JPMorgan.

The shift in sentiment is remarkable. Almost two years ago, former Conservative prime minister Liz Truss’ reckless fiscal plan almost caused a full-blown financial crisis. Bond markets took fright, driving up borrowing costs sharply and forcing Truss to resign after just 49 days in the job. Her tenure contributed significantly to the calamitous defeat of the Tories in the election and provides an additional guarantee that Starmer’s government will act responsibly. Hedge fund bets on a stronger pound have risen to their highest level since 2018.

Two other factors are working in Britain’s favour. The first is that France is now the main source of instability and uncertainty in Europe. While the threat of a far-right government failed to materialise, a left-wing alliance dominated by a hard-left party won the largest number of seats in the second round of the parliamentary elections on July 7. Yet, with none of the three main blocs having enough seats to govern, France is left with a hung parliament and the prospect of a long period of political turmoil.

Markets do not know what to make of the result, which is telling in itself. Although many investors are taking comfort from the fact that political gridlock makes it more difficult to implement populist policies, the inescapable truth is that voters in the euro zone’s second-largest economy backed populist parties of the left and right. The economic programme of the far-left, moreover, is much more reckless than Truss’ plan, exacerbating political divisions.

However, the risk of another “Truss moment” in France pales in comparison with the dire consequences of US President Joe Biden’s bid for re-election this year. Mounting concerns about his physical and mental state are diverting attention from former president Donald Trump’s manifest unfitness for office. They are also eroding faith in the US political system and injecting more uncertainty into post-election economic, monetary and trade policy.

At a time when so much is riding on the state of the US economy and geopolitics, the disintegration of the domestic political opposition to a second Trump term – one of the biggest threats to the global economy – is frightening. US politics looks like a slow-motion train wreck, regardless of whatever happens in the next four months.

02:48

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Still, while the turmoil in the US and France accentuates Britain’s post-election appeal, Labour’s victory belies the deep-seated political and economic problems facing Britain. First, the party’s huge majority says more about the quirks of the UK’s “first-past-the-post” electoral system than it does about support for Labour.

The party’s 34 per cent share of the vote was less than the 40 per cent won in 2017 by Starmer’s predecessor, the far-left leader Jeremy Corbyn, which gave Labour 150 fewer seats than its current tally. If Britain had a proportional representation voting system, Nigel Farage’s far-right Reform UK Party – which won 14 per cent of the vote – would have 94 seats instead of five.

Second, the UK has been one of the worst-performing major economies since the 2008 financial crisis. According to the Institute for Fiscal Studies, growth has been slower in per capita terms than in the United States, Germany and European Union as a whole. Growth in average earnings, moreover, has been “almost non-existent”. External factors are partly to blame, but low investment, policy mistakes, political instability and Brexit have all exacerbated the slowdown.

An exit poll predicting the Labour Party would win 410 seats in Britain’s general election is projected on BBC Broadcasting House in London on July 4. Despite his party’s large majority and widespread consensus that Brexit was a mistake, Prime Minister Keir Starmer has ruled out Britain rejoining the European single market in his lifetime. Photo: AFP

Third, Starmer’s caution is most apparent in the area that requires the boldest rethink. British voters increasingly see Brexit for what it is: a colossal mistake. Yet Starmer, fearful of reopening an old wound, has ruled out Britain rejoining the European single market or even the customs union. As long as Starmer sticks to his Brexit “red lines”, the new government will find it even more difficult to revive the economy.

Britain is having its moment in the sun. With nationalists and populists posing an acute threat to democracy and economic reform in developed countries, the UK stands out for its relative stability. Yet Britain was an economic underperformer even before the Brexit shock. Investors should temper their enthusiasm.

Nicholas Spiro is a partner at Lauressa Advisory

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