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The Bank of England (BoE) has forecasted a UK recession by the end of 2022. Yet how likely is this, and what might the implications be for investors? Below, our team at Bure Valley Group offers some reflections from our exclusive network insights. We hope you find this content useful. To find out more about our EIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding (for investors and founders, respectively), you can reach us via:
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Why is the UK predicted a recession in 2022?
A recession is defined as two consecutive quarters (six months) of negative GDP growth in the UK. The most recent one was in 2022, when COVID-19 wreaked havoc on the economy and helped cause negative GDP growth in Q1 and Q2. Recessions can be caused by a wide range of economic forces and are historically preceded by a sharp rise in unemployment.
In 2022, the situation is unique because the BoE is predicting a recession that could run from October until the end of 2023, yet the UK labour market is still very “tight”. Indeed, in June, job vacancies hit a new high as the “Great Resignation” continued. At the present time the BoE and other leading organisations are attributing a likely recession to the spiralling cost of energy (gas, petrol and electricity) which could drive inflation up as high as 13%.
This would, naturally, put great pressure on UK households which would have less to spend on consumer discretionary products/services (e.g. digital subscriptions and new cars) as more of their income is needed to pay annual energy bills (which could rise to £4,266 per year in 2023; far higher than the £1,277 annual cap in 2021). The situation may also lead more people to cut back on saving and investing into ther pensions as they seek to make ends meet.
How might the investment landscape be affected?
The typical response to a sharp inflation rise is for central banks – like the BoE – to raise interest rates to try and “cool down” the economy. This is precisely what the Bank has done, increasing the base rate six times since late 2021 from a historic low of 0.10% to 1.75% today. So far, this has failed to stop inflation hitting its current 40-year high of 10.1%, partly because much of the UK’s inflation can be attributed to global forces (e.g. oil price rises) rather than domestic ones which are more under the Bank’s control – such as wage growth.
Many analysts expect that the base rate may need to rise to 3% or even more (according to one former BoE polic maker), before the UK’s inflation rate starts to reverse. However, at this point there would be enormous pressure on households as any variable-rate mortgages become simply unpayable. There would also be considerable “gravity” on stock market prices as more investors flee to the “safety” of less volatile, fixed-income securities such as UK government bonds (gilts). In a worst case scenario, this could lead to market crash.
What are the implications for angel investors?
A rising base rate is not particularly good news for small businesses and startups, since it may be more expensive for them to take out loans to fund their growth. This, arguably, means that angel investors are likely to become even more important as a funding source for early-stage business founders (who may prefer turning to equity rather than debt).
However, rising inflation likely means higher input costs for startups (e.g. materials to make products). This could lead to a longer duration before the business becomes profitable, unless the added costs can be passed down to the customer. Yet this could be difficult in many sectors as startups often try to “disrupt” the existing marketplace by offering cheaper, faster products or services compared to the existing players. Customers will also be reluctant to pay more for an “untested” product if their finances are struggling due to inflation and stagnant wage growth.
Angel investors will need to be particularly aware of these dynamics when running their due diligence on different startups. Is the business in question particularly vulnerable to a possible rise in input costs? Or, does it operate in a sphere which is more shielded from this (e.g. many SaaS businesses). Extra care will need to be taken with startups that have higher levels of debt on their balance sheets. Startups which focus on a value proposition which makes a certain part of customers’ lives easier and cheaper (e.g. energy-saving solutions), however, may find that customers are more receptive within a more challenging economic environment.
Fortunately, despite the outlook for the UK at present, the country is still a very attractive place to start a business and for investors to benefit using tax-effcient schemes (e.g. SEIS). Here at Bure Valley Group, we would love to introduce you to some of these opportunities from our exclusive investor network.
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