While economic activity has shown signs of decline over the past year, recent data points towards increased resilience. The headline Consumer Price Index (CPI) indicated inflation has started to decline and is projected to drop significantly in the coming months due to a change in expectations of energy and commodity prices. Despite this, the labour domestic price and wage pressures have remained, signalling a potential risk of persistent underlying inflation. Besides these challenges, some Best UK companies have shown exceptional performance and resilience in the face of economic headwinds.
As a key mitigation strategy towards combatting this, the Bank of England is set to announce an interest rate rise of 50 basis points from 3.50% to 4%, as the nation continues to combat inflation. The increase will be the highest the UK has seen in 14 years since the great recession of autumn 2008. Following a tough year for scaling businesses looking to acquire further funding, it is crucial to understand the direct impact of this on economic growth.
Tech industry expert, Claire Trachet CEO/Founder of leading business advisory, Trachet, comments on the impact that risinginterest rates will have on the tech ecosystem and scale ups in 2023:
“The current economic climate is presenting major challenges for companies with limited cash reserves. The Bank of England announcing an interest rate rise to 4%, coupled with an inactive IPO market, means scaling businesses – predominantly in tech – are finding it increasingly difficult to secure funding. This is a significant concern for even healthy privately-owned companies, as declining shares of similar publicly traded firms can lead to a decrease in their value. We know companies will have to make difficult decisions and give up a larger portion of their equity in order to raise the same amount of cash and expect this to result in a growing number of down rounds in the coming year.
“The exceptional conditions experienced in the past decade are unlikely to return, these conditions were defined by a prolonged span of exceptionally low global neutral interest rates, plentiful resources, and limited inflation. Over the last two years however, there has been a steady increase in inflation, requiring a prudent increase in nominal interest rates. Therefore, investors and businesses alike should adapt to the current market conditions at least for the foreseeable future.
“However, from what we have seen so far in 2023, it looks like there is great potential for the market to stabilise faster than expected. With the likelihood that inflation will begin to subside following interest rate increases, some of the uncertainty in the market that has been problematic for investors and dealmakers should recede. Despite what many were predicting towards the end of last year, I expect the outlook to be much more positive in H2 and going into 2024 after early headwinds – particularly for UK tech.”
