Weekly Briefing: UK avoids technical recession, family offices continue to impact PE & Berlin’s SuperVenture takes place
This week, we explore key updates and statistics regarding the UK economy including inflation, interest rates, GDP growth, and house prices. We also cover wider economic headlines from across the globe, such as the falling probability of a US recession, Australia’s weak economic growth, and the plummeting value of the Turkish lira following a new plan of ‘intentional devaluation’.
Furthermore, we focus on movements and key events in the alternative investment industry. This includes the potential of the UK Government’s Venture Capital Schemes to help high earners reduce growing tax liabilities, the optimistic outlook for VC observed at the SuperVenture conference in Berlin, and the implications of private family capital exceeding the value of both private equity and venture capital, as reported by EY.
The UK has avoided a technical recession so far in 2023, but risks to economic recovery remain elevated
- A new report by KPMG found that the UK economy experienced a better start to 2023 than originally expected, and is now expected to grow by 0.3% this year, compared with the previous prediction of just 0.1%.
- However, the Bank of England is expected to raise the Bank Rate – currently 4.5% – three more times in 2023.
- The figure will most likely hit a peak of 5.25% later this year, in an attempt to tame the persistently high rate of inflation.
- “We’ve seen a slightly stronger momentum for the UK economy,” said Yael Selfin, chief economist at KPMG UK.
- “The UK economy has so far avoided a technical recession. But risks are still elevated. Stickier inflation will see monetary policy tightening even further, increasing the risk of unwelcome side effects, among other potential headwinds.”
- KPMG said that, while inflation eased to 8.7% in April – down from 10.1% in March and a peak of 11.1% last October – it was not falling as fast as had been hoped.
- “Inflation is on the way down, but the pace of moderation is slower than we previously thought,” said KPMG.
Record service sector and recruitment activity boosts optimism index
- Global accounting firm, BDO, reported that a 10-month high in output from the UK services sector and resilient recruitment activity delivered a confidence boost for businesses in May.
- The firm said its monthly “optimism index” grew for the second consecutive month to 99.75, increasing by 1.53 points to its highest reading since August 2022, when concerns of a recession first set in.
From the US to Pakistan: last week’s key economic movements around the world
- The probability of a US recession within the next 12 months has fallen to 25%, according to Goldman Sachs. The investment bank’s economists previously estimated this probability to be 35%.
- The Bank of Canada has increased its overnight interest rate to 4.75% (a 22-year high) and is expected to follow with a further increase next month.
- The Australian economy grew at its weakest pace in over a year during the last quarter. This is most likely a result of higher prices and rising interest rates (the country's central bank raised interest rates to an 11-year high on 6th June).
- Mexico's annual rate of inflation fell to 5.84% in May, the fourth consecutive month of slowing.
- Inflation in Brazil has also fallen in May, hitting its lowest mark (3.94%) in over two years – the first time it's fallen beneath 4% since late 2020.
- The Reserve Bank of India has kept its key lending rate at 6.50% – unchanged for a second consecutive policy meeting.
- This comes as Pakistan also left its key interest rate unchanged on 12th June, remaining at 21% in an attempt to curb inflation of 38%.
- Additionally, the Turkish lira hit a record low against the US dollar, as the country's new finance minister pursues a plan of ‘intentional devaluation’.
UK tax update
2% tax on certain UK families “could raise £22bn a year”
- A 2% tax on assets above £10m held by all members of the Sunday Times Rich List could raise as much as £22bn, according to analysis by Tax Justice UK, the Economic Change Unit, and the New Economics Foundation (NEF).
- The campaigners said similar wealth taxes in Norway, Spain and Switzerland had helped to reduce inequality and eased the cost of living crisis for some of the poorest people in those countries.
- In 2021, the independent Wealth Tax Commission recommended that the government introduced a one-off 1% wealth tax on households with more than £1m, which they said would generate £260bn.
- In response, a Treasury spokesperson stated: “The UK’s taxes on wealth are on par with other G7 countries and our progressive system means that the top 5% of income taxpayers pay half of all income tax, with millions lifted out of paying it altogether.”
- Ultimately, with the tax burden on high earners in the UK potentially rising further, Government-backed investment schemes such as the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), Venture Capital Trusts (VCTs) and Social Investment Tax Relief (SITR) can be highly beneficial to all parties involved.
- Via these schemes, investors can access the potential to minimise personal tax bills and target superior returns, whilst simultaneously supporting the growth of early-stage UK businesses, boosting the start-up economy, providing employment opportunities, and generating wider positive social, environmental and economic impact.
How to 'green' the global economy
- Last week, the President of the European Bank for Reconstruction and Development (EBRD), Odile Renaud-Basso, delivered the 2023 Mais Lecture at the Bayes Business School, London.
- The lecture examined the current climate emergency and outlined why the current economic system is failing, how it must change, and how to action those changes.
- Renaud-Basso stated that the overarching role of the EBRD is to catalyse systemic change by using investments and policy dialogue to promote regulatory and market reforms that make climate investments economically viable.
- Central to that role is the commitment that all of the Bank’s activities align with the goals of the Paris Agreement.
- For the EBRD, that commitment took effect from the beginning of 2023 and forces the organisation to look at every activity and every investment through the sustainability lens and ask the question: "is this consistent with a transition to a low carbon, resilient future?"
Optimism reigns supreme among VCs at Berlin’s SuperVenture conference
- Balderton Capital general partner Suranga Chandratillake summed up the views at the SuperVenture conference in Berlin last week, describing the general health of the tech market in Europe and overseas as "underhyped."
- "I'm overall very enthusiastic and optimistic about where we find ourselves in Europe," Chandratillake stated.
- "It's easy to get caught up with cyclical financial realities and macroeconomics trends, which obviously are having an impact, but we're still seeing a lot of new companies starting up, and investments are at a very high level compared to any year prior to 2020."
- No one can deny that VC valuations have taken a hit over the past 12 months, and even if investors believe in the health of the venture market, startup price tags could still fall further.
- "More valuation cuts are coming," Techstars CEO Maëlle Gavet said. "I think for many VCs, markdowns are below where they need to be.”
- Additionally, investors are paying more attention to ESG than ever before, with a particular focus on the climate crisis and corporate governance.
- New regulation has been introduced in Europe in recent years, including the Sustainable Finance Disclosure Regulation, which requires asset managers and other financial market participants to publicly disclose ESG information.
- "We're definitely seeing more of a focus on ESG," Seedcamp director Antonia Whitecourt said.
- But building sustainable ESG practices for the VC market is not without its challenges, cautioned Camilla Richards, head of investor relations at Atomico.
- Richards stated: "A lot of startups and GPs don't have the resources or data on hand to be able to comply with the requirements. I think we need to have more of a standardised approach to ESG on the part of the LPs to help with the huge resource and time requirements."
Family offices continue to make an impact in the private equity industry
- According to EY, “private family capital is larger than private equity and venture capital combined.”
- This growth has been fueled by globalisation and increased wealth concentration among affluent families (many of the 10,000 single-family offices in the world were created in the past 15 years).
- While this is a relatively new and fragmented market, family offices are expected to continue positively disrupting private equity and venture capital over the coming years – similar to how private equity and venture capital changed public markets in the early 1980s.
- Family offices will make a difference in the private capital markets because of the large amount of capital they manage and the genuine alignment of interests with the investments they make.
- Unlike most venture capital and private equity firms, single-family offices are designed to protect and grow wealth for future generations. They possess several attributes that can align with the companies they invest in:
- Because of their long investment time horizon, they aren’t constrained by investing cycles and accelerated liquidity plays, enabling them to remain a stable investor for a growing venture.
- The family itself may have business experience that can further benefit its portfolio companies.
- When the founder of a venture investment achieves their initial growth goals, family offices can often add new networks and additional capital to scale.
- Conversely, if things are not going as planned, the families can often bring transactional, risk mitigation, and operational experience to the table, as well as their networks – and keep their capital in longer.
- As family offices continue to grow and institutionalise, the alignment between single-family offices and company founders could further change the landscape of wealth management and private capital markets.
UK house prices set to fall by 10% over the next two years, according to Moody’s
- House prices in Britain could fall by 10% over the next 24 months, and a more severe downturn in the housing market could trigger a lengthy recession, credit ratings agency Moody's said last week.
- "Persistently high inflation and the recent spike in lending rates will trigger a correction in the UK (Aa3 negative) housing market," Moody's Investor Service said in a report.
- The housing market somewhat recovered earlier in 2023 after weakening at the end of 2022 following a jump in mortgage rates triggered by the economic agenda of former Prime Minister, Liz Truss.
- However, many economists expect a further fall in house prices this year as the Bank of England’s increases in borrowing costs filter through into higher mortgage costs.
- Both house price indexes published this month by Halifax and Nationwide showed year-on-year average house price declines for the first time since 2012.
A final note
Overall, the global economy appears to be steadying. Following recent years, which brought a pandemic and war in Eastern Europe – amongst many other unforeseen events – the global economy has managed to fare relatively well, with some nations displaying particular resilience.
As we continue to face global challenges – especially climate change – certain investment opportunities and strategies are revealing particular appeal. ESG is growing in popularity and importance, with many investors set to assist the global drive to generate positive environmental, social and economic impact, whilst simultaneously targeting competitive financial returns and, in some cases, generous tax reliefs.