Weekly Briefing: Extraordinary VC Returns, UK Borrowing Eases, Inflation Rises & Labour Market Softens

This week’s data offered a mixed but coherent picture of the UK economy, with encouraging signs in the public finances set against renewed inflationary pressure and a continually weakening labour market. Borrowing came in below expectations, inflation edged higher than forecast, and employment fell sharply in consumer-facing sectors.

Alongside the domestic data, a major European venture capital success story provided a reminder of where long-term capital has continued to find outsized returns.

Read on for the full context.

Public Finances Show Tentative Improvement

UK government borrowing came in lower than expected in December, offering a modest boost to the chancellor and some reassurance to bond markets. The ONS reported borrowing of £11.6bn, below the £13bn forecast by economists polled by Reuters and 38 per cent lower than the same month last year.

This improvementlooks to be largely driven by stronger tax receipts, which rose by nearly 10 per cent year on year and reached a record level for December. National insurance contributions were a key contributor, following employer rate changes introduced last April, while spending increases were described by the ONS as relatively modest in comparison.

For the financial year to date, borrowing stood at £140.4bn, just £0.3bn lower than the same period last year. While directionally positive, this does highlight how incremental the progress has been despite tax rises announced at the November Budget.

Financial markets responded favourably, with 10-year gilt yields falling to 4.42 per cent, outperforming other major bond markets. This reaction reflects confidence in improved near-term cash flow rather than a fundamental shift in the fiscal outlook.

Looking ahead, the challenge remains significant. The OBR forecasts £138bn of borrowing for the full year, implying borrowing must fall sharply in the final quarter to stay on track. As Ruth Gregory of Capital Economics put it: “The public finances are finally showing signs of improvement in recent months, but the pace of deficit reduction remains very slow.”

Inflation Rises Again, But Pressures Look Contained

Inflation edged higher in December, with the consumer price index rising to 3.4% from 3.2% in November, according to the ONS. The increase exceeded economists’ expectations of a rise to 3.3% and marked the first monthly uptick since July.

The drivers were specific rather than broad-based. Higher tobacco duties, more expensive airfares, and elevated food prices pushed inflation up, with food inflation reaching 4.5% during the key Christmas period.

These pressures were partially offset by easing rent increases and lower oil prices, which helped limit the rise in input costs. Importantly for policymakers, core inflation - which strips out volatile food and energy prices - was unchanged, contrary to expectations of a slight increase.

Services inflation, closely watched by the Bank of England, edged up only marginally to 4.5% from 4.4%. This stability suggests underlying domestic price pressures are not accelerating in line with the headline figure.

Most forecasters continue to view the December rise as temporary. The ICAEW described it as a “blip” and expects inflation to fall back towards the Bank’s 2% target by the summer, helped by lower energy bills from April. However, the higher-than-expected reading makes a near-term rate cut less likely, linking directly to the rate outlook discussed in the labour market section below.

Labour Market Weakens as Hiring Slows

The UK labour market showed clear signs of strain, with payroll employment falling by 43,000 in December, the largest monthly drop since November 2020, according to the ONS. Losses were concentrated in retail and hospitality, sectors already under pressure from rising costs and weak consumer demand since a long time.

Unemployment remained at a four-year high of 5.1% in the three months to November, up from 4.4% a year earlier. The single-month rate rose further to 5.4%, underlining the deterioration in recent conditions.

Private sector regular earnings growth slowed to 3.6%, its lowest level in five years, a key indicator for the Bank of England as it assesses inflation persistence. On the other hand, public sector pay growth remained higher.

Despite the headline weakness, there were some offsets. Workforce participation has improved, with the share of working-age adults classed as inactive close to a six-year low, supporting the economy’s supply side. Martin Beck of WPI Strategy noted this as a “positive sign”, even as overall conditions soften.

Summing up the pressure on employers, UK Hospitality chief executive Allen Simpson said: “Hospitality is being hit by costs at every angle and it is the cumulative effect of this growing tax burden that is resulting in the number of people employed in hospitality continuing to fall.”

Balderton’s Revolut Bet Delivers Rare Liquidity

Against a subdued macro backdrop, Balderton Capital’s partial exit from Revolut stood out as a reminder of how long-term venture investing can deliver exceptional outcomes. Over the past year, the firm has sold roughly $2bn worth of its shares, with the company now valued at around $75bn.

Balderton’s original £1m investment in 2015, part of a £1.5m seed round, has become one of the most lucrative investments in European venture history. The firm’s fifth fund has returned more than 25 times its original capital, while retaining a significant remaining stake.

Revolut’s success has been reinforced by strength elsewhere in Balderton’s portfolio, including Fuse’s $5bn valuation, GoCardless’s $1.1bn sale, and strong momentum in autonomous driving and defence technology investments. Partners point to conviction rather than luck. Fintech made up almost half of Balderton’s fifth fund, an unusually concentrated bet at the time.

Final Note

Fiscal metrics are moving in the right direction, but only gradually. Inflation remains sensitive to policy and sector-specific pressures, and the labour market is cooling as policy continues to weigh on hiring. On another note, the Revolut story shows that patient capital and clear strategic investments can deliver outsized returns, even when the wider environment is far from forgiving.