Weekly Briefing:  October Budget Insights, Optimism Across UK Venture Capital, UK Shop Prices Fall 0.3% & House Prices Align With Summer Trends

In this week's briefing, we will focus on the Labour government's upcoming budget, which could bring significant tax changes, the first drop in shop prices in two years, a cause for optimism in the UK’s venture capital market, and the resilience of the UK housing market amid economic challenges.

UK Economy

Labour Government Faces Tough Budget Decisions, Making Tax Increase Inevitable

• Sir Keir Starmer has warned that October's Budget will be "painful" and will demand significant sacrifices from the public, emphasising that people must endure "short-term pain for long-term good." He stressed that those with the "broadest shoulders" will bear a heavier financial burden as the government addresses inherited economic challenges.
  
  
• In his criticism of the previous Conservative administration, Starmer highlighted the creation of a £22 billion "black hole" in public finances, accusing the former government of perpetuating economic and societal failures through ineffective and populist policies.
  
  
• Although the Labour government has pledged not to increase National Insurance, income tax, or VAT, Chancellor Rachel Reeves has indicated that other tax adjustments are possible. This includes potential increases in inheritance tax and capital gains tax (CGT), as well as possible reforms to pension tax relief, reflecting a complex approach to fiscal policy.
  
  
• To manage budget constraints, the Labour government has already announced cost-cutting measures such as removing the planned cap on social care payments and withdrawing winter fuel allowances from 10 million pensioners. These decisions aim to address fiscal issues but have raised concerns among some Labour backbenchers and the public.
  
  
• Addressing the need for fiscal adjustments, Starmer stated, "To repair the economic damage and secure a stable future, we must make difficult choices now. This includes adjusting our tax policies to ensure fairness and sustainability in the long run."
  
  
• Given the potential for increased inheritance and capital gains tax rates and rules, it is clear that investors should proactively explore tax-efficient strategies to optimise their financial planning and mitigate the impact of these almost inevitable tax changes.
  
  

  FTSE 100 Shop Prices Fall for the First Time
  
  

• In August 2024, mainstream shop prices experienced their first decline in over two years, marking a pivotal shift in the UK retail landscape. This drop, reported by the British Retail Consortium (BRC), signals heightened competition among retailers who are responding to the financial pressures on consumers by reducing prices across various sectors.
  
  
• The British Retail Consortium (BRC) attributes this price reduction to a combination of competitive strategies and easing supply chain constraints, particularly in essential goods. This has provided much-needed relief to consumers, who have faced persistently high inflation over the past year.
  
  
• According to the BRC, this price decrease is a double-edged sword. While it may bolster consumer confidence and spending in the short term, it could also squeeze profit margins for retailers, particularly small and medium enterprises that may lack the financial cushion of larger corporations.
  
  
• Analysts are cautiously optimistic, suggesting that this development could herald a period of greater consumer spending, potentially driving economic growth in the latter half of 2024. However, they warn that if prices continue to fall, it may lead to a deflationary environment that could harm the broader economy.
  
  
• The BRC spokesperson emphasised, "This price drop is a welcome development for consumers, but the long-term impact on retailers’ bottom lines remains to be seen,".
  
  

  UK Venture Capital Market

  Cause for Optimism in the UK’s Venture Capital Market
  
  

• The UK’s venture capital market is showing robust signs of recovery, with a notable uptick in investment activity across key sectors such as technology, healthcare, and renewable energy, according to GlobalData.
  
  
• "The decrease in VC deal volume has not affected the overall funding value, indicating that while VC firms are exercising caution, they are still willing to make significant investments in promising startups," said Aurojyoti Bose, lead analyst at GlobalData.
  
  
• GlobalData also points out that government initiatives aimed at fostering a supportive ecosystem for start-up's, including tax incentives and grants, have played a crucial role in this resurgence.
  
  
• This positive momentum in the venture capital market is expected to continue, with experts forecasting sustained growth as more investors seek opportunities in high-growth sectors. This trend is likely to contribute significantly to the UK’s economic recovery, particularly in regions outside London, where tech hubs are rapidly expanding.
  
  
• GlobalData’s analysts observed, "the UK venture capital market is poised for a strong recovery, with increasing investor interest in sectors that promise high returns and societal impact," underscoring the optimism surrounding the future of UK startups.
  
  

  UK Property Market

  UK House Prices drop in line with long-proven summer trends
  
  

• Historically, August has consistently seen a decline in house prices from July over the past 18 years, and this month’s dip aligns with the long-term average.
  
  
• This annual decrease is typically due to a slowdown in market activity during the summer holidays, which often results in more competitive pricing by sellers.
  
  
• However, this year, there is a notable shift in the market dynamics. The Bank of England’s first rate cut in four years, reducing the rate to 5% from a 16-year high of 5.25%, has generated a significant surge in buyer interest, with the number of potential buyers contacting estate agents jumping by 19% compared to the previous year, marking an increase from the 11% rise observed in July.
  
  
• In response to this uptick in buyer activity, Rightmove has adjusted its 2024 forecast, now predicting a 1% increase in average asking prices, reversing the earlier expectation of a 1% decline. This revision reflects the positive impact of the rate cut on market sentiment.
  
  
• The market’s renewed momentum is also evident in the increase in sales agreements, which are 16% higher than during the peak mortgage rate period a year ago. Additionally, the number of new sellers entering the market has risen by 5% year-on-year.
  
  
• “As the summer holiday season comes to an end, the conditions are there for a more active autumn market,” Bannister said.

Final Note