Weekly Briefing: inflation set to fall, record IHT receipts & Glasgow and Manchester named best UK cities for property investment

This week's briefing covers a range of topics, from UK inflation to central bank digital currencies, as well as headlines surrounding venture capital, private equity and property. One of the most significant announcements from this week is that inheritance tax receipts in the UK have reached a record £7.1bn, making tax-efficient investment routes such as the EIS and SEIS increasingly essential tools for UK investors in 2023.

UK economy

Former Bank of England Chief Economist anticipates a rapid inflation fall

• Andy Haldane, a former chief economist at the Bank of England, predicts that UK inflation will fall rapidly over the coming months, more than halving from its current level of 10.1% to between 3% and 5% by the end of 2023.
• Haldane cites several factors expected to contribute to the decline in inflation, including lower energy prices and the easing of global supply chain disruptions, noting that the impact of higher interest rates may not yet be fully felt.
• Other economists, such as Samuel Tombs of Pantheon Macroeconomics, have also predicted a decline in inflation but believe it may take longer than Haldane suggests.

Reuters: UK economic outlook

• According to Reuters, British businesses reported March 2023 as their busiest month in the past year as consumer confidence increased.
• The preliminary reading of the S&P Global/CIPS UK Composite Purchasing Managers' Index (PMI) also showed the slowest input cost inflation in over two years, but price pressures look strong enough for the Bank of England to raise rates again next month.
• A further 0.25 percentage point rise of the UK Bank Rate is anticipated for May 2023, potentially taking the figure to 4.5%.
• Overall, the UK economy not only showed resilience but gained growth momentum as we headed into the second quarter – a positive sign for private investors and startups alike, as wider economic stability can provide a more favourable environment for exit activity.
  
  

Global economy

World Economic Forum survey reveals Chief Economists’ expectations about global economic activity in 2023

• 100% of Chief Economists who responded to the World Economic Forum’s survey in January 2023 expect geopolitical fault lines to continue realigning global economic activity.
• Furthermore, ‘weak demand’ and ‘high cost of borrowing’ are expected by 91% and 87% of respondents respectively to have a significant drag on business activity.
• 63% of respondents anticipate a global recession to take place in 2023, and it was revealed that ‘reducing costs by cutting operational expenses’, ‘reducing costs by laying off workers’, and ‘optimising supply chains’ are the three most expected business responses to the potential economic headwinds this year.
  

CBDCs: what are they?

• Central banks around the world have accelerated planning for their own central bank digital currencies (CBDCs), with 114 countries – representing over 95% of global GDP – currently exploring CBDCs.
• Last month, the Bank of England released a Consultation Paper regarding a ‘digital pound’, which would be a token-like digital instrument that would need to be held in a digital wallet provided by banks or other institutions.
• It could be spent or transferred online, through smartphones or cards, as is the case today with conventional bank deposits.
• All G7 countries are in the development stage, and 11 countries have already launched digital currencies. China’s (the largest) reaches a quarter of a billion people, and is scheduled to expand to the whole country in 2023.
• The governor of the ECB, Christine Lagarde, has said that the ECB would like to see a euro CBDC in operation within two years.
  
  

UK tax update

UK inheritance tax receipts reach record figure of £7.1bn

• As reported by Professional Adviser, inheritance tax (IHT) receipts in the UK reached £7.1bn between April 2022 and March 2023.
• The latest figures showed government IHT revenue was up £1bn year-on-year.
• IHT is now affecting not only the wealthiest estates, but a much wider segment of the UK population – as evidenced by the record figures, which are largely attributed to rising house prices.
• Tax-efficient investment routes such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) can be used to invest in UK startup companies and potentially assist with reducing an IHT liability, making them important tools for UK taxpayers to consider.
• Overall, figures published by HMRC show the total amount received in tax and national insurance in the financial year to date was £368.5bn – a significant increase of £44.9bn compared to the same period a year earlier.
  
  

Venture capital

Seed-stage VC fares relatively better than later-stage counterparts

• Thirty-five venture funds raised $1 billion or more in 2022 – more than twice as many as any year prior to 2021.
• That fundraising pace, however, slowed significantly throughout last year – almost entirely by Q4.
• However, investors appear to be staying positive regarding seed-stage ventures.
• Seed-stage funding didn't decline in 2022 as much as later-stage funding did, and the median deal size for seed companies in Q1 of 2023 was $3 million, a rise from 2022's median of $2.6 million. 
• Median pre-valuation for seed-stage startups are also rising, hitting $13 million in Q1 compared to a median $10.5 million last year.
• This suggests that there is still significant opportunity in the VC and startup investing landscape, even during challenging economic periods. As Beauhurst reports, since 2011, 26,500 companies used equity investment to finance their growth, and a remarkable one in 10 of those has already exited.
  
  

Private equity

Global PE activity in Q1 2023

• The value of PE deals in Q1 2023 increased by over 11% compared to the previous quarter, indicating that investors remain interested in making larger investments in companies.
• However, the total number of PE deals fell by more than 9% over this period, suggesting investors are being more selective in the companies they invest in.
• Exit activity also decreased, indicating that PE firms may be holding onto their investments for longer periods, possibly to wait for more favourable market conditions.

Toshiba take-private deal set to be the largest in Japan’s history 

• A consortium led by Japan Industrial Partners has bid to acquire Toshiba for $15.3bn. 
• If this deal materialises, it would be the largest take-private deal in the country’s history.
• Public-to-private activity remains busy across the world, with aggregate deal value reaching $254.2bn in 2022, and the US accounting for 81% of the total.
  
  

Property

Glasgow and Manchester named best cities in the UK for property investment 

• Strong rental yields, rising property prices, and great transport links have helped to make Glasgow and Manchester two of the best UK cities for property investors, according to the latest investment research from Redmayne Smith.
• When compiling data from official Hometrack and Zoopla reports, both Glasgow and Manchester scored 28 out of a possible 30.
• Glasgow’s rental yield came out on top at 6.8% and the Scottish city also delivered a strong annual property value percentage increase of 14.1%.
• Manchester shared the top spot with Glasgow, with an annual property value percentage increase of 15.6%, strong transport links, and a rental yield of 5.1%.
• Ultimately, these statistics reiterate the growing appeal of UK property investments outside of London (where the lowest house price growth [2.9%] was observed in the UK between February 2022 and February 2023).
• Opportunities in the North in particular, where comparatively low house prices represent significant opportunity for higher investment returns, have proved increasingly attractive in recent years.
  
  

A final note

In conclusion, the UK economy is showing resilience and growth momentum. UK unemployment is currently lower than expected, a recession is likely to be avoided and inflation is set to fall sharply over the next 12 months, potentially creating greater stability and a more favourable environment for both investors and startups. Overall, while there are still some uncertainties ahead, the UK economy appears to be on a positive trajectory and there are reasons to be cautiously optimistic about its future prospects.