The age of resilience

Businesses like stability. Managers, investors and advisers are far more able to plan for the future when they have some inkling about what the future holds and a degree of confidence in economic policymaking. This has been notably absent in recent years. A series of brutal shocks have swept the globe, Donald Trump is the most capricious US President in living memory and the UK is on its seventh Prime Minister in a decade. In our annual Investment 360 Index, a barometer of sentiment across private equity and venture capital, 93% of respondents said political churn has damaged the business climate. 

As David Smith acknowledged, we are living through particularly uncertain times.  

CIL approaches this through a particular lens. We have now been running our Annual Economic Update for 20 years and Smith has been with us from the start, giving us the benefit of his insights into the confluence of politics, economics and business. This year also marks a decade of the Investment 360 Index, offering valuable clues into market sentiment. 

Even 20 years ago, black clouds were beginning to form on the horizon, fuelling the global financial crisis two years later. Businesses and individuals were subsequently stung by Brexit, the pandemic and Russia’s invasion of Ukraine, all in relatively quick succession. And, just as conditions seemed to be easing, Donald Trump swept into the White House for the second time, launching swingeing trade tariffs, attacking Iran and triggering a global energy crisis.  

The backdrop has rarely seemed so hostile. But Smith believes there is room for optimism and he revealed why in the context of five key questions: 

Better than expected 

Looking first at growth, Smith points out that, in good times, the global economy tends to grow at around 4% per annum. According to the latest IMF forecasts, global economic growth should hit 3.1% this year, rising to 3.4% next. While these rates are below par, they are still better than expected, given the external environment. Critically too, the US and the UK continue to surpass forecasts, despite their clear, respective challenges. 

The UK economy rose by 0.6% in the first quarter of this year, 0.5% in Q2 and 0.5% in July and August too, putting it on course to exceed IMF predictions of 1.3% annual growth for 2026.  Purchasing manager surveys, a robust gauge of sentiment, remain pretty strong too, despite rising energy costs and inflation. Even the subdued construction sector could begin to improve, following the latest help-to-buy scheme from the government.  

Encouragingly too, Smith believes this latest initiative suggests the new Prime Minister Andy Burnham and Chancellor John Healey are prepared to be pragmatists rather than ideologues. Under Sir Keir Starmer, there was opposition to help-to-buy, in part because it was a Tory initiative. Burnham has just repackaged the idea and it has been well received across the board.  

In recent years, growth fell back in the third quarter, as business and consumer confidence suffered from a barrage of pre-Budget doom-mongering and speculation. The rumour-mill has been much calmer this year – and that has clearly helped sentiment.  

AI has a part to play in creating a more positive outlook too. There are concerns about over-leverage, over-reach and over-investment across the AI space but Smith asserts that the positives outweigh the negatives and that employment is likely to hold up better than pessimists fear as well.  

Even productivity is improving. Previously, the Office for National Statistics said UK productivity had risen just 0.5% per year between 2007 and 2019. Last month, that figure was revised up to 1% annually, moving the UK well up the OECD productivity league. But, as Smith points out, there are caveats. The latest measure of productivity looks at GDP per hour worked. It is better than original calculations suggested not because people are working harder but because they are toiling for fewer hours than the statisticians thought. In other words productivity per worker has not changed and nor has GDP per job!  

The UK’s sluggish productivity remains a problem, Smith maintains. But a positive change is better than nothing and could presage stronger GDP growth, if other productivity metrics start to shift as well.  

More broadly, Smith makes the case that recent figures around growth show something noteworthy is happening, after years of turmoil and volatility. Look back to this spring, he explains, and there were widespread fears that the combination of trade tariffs and the Iran war would tip the UK into recession. Instead, the economy has continued to grow, slowly but at a faster pace than before.  

“Maybe shocks have become the new normal. Maybe we’ve become better at handling them. And maybe resilience is the new game in town,” he says.  

Under control 

Economic prospects are inextricably linked to both inflation and interest rates, both of which have been thrown off course by the Iranian war, the intermittent closure of the Strait of Hormuz and the subsequent surge in oil and gas prices. At the beginning of this year, inflation was expected to come down to 2% by the spring - and stay there. That would have been really beneficial for the country. But it didn’t happen. Energy markets remain unpredictable, oil prices are elevated and gas prices have been touching record highs, affecting industry costs and household bills.  

As Smith highlights, this is the second energy shock in just four years, bringing back uncomfortable memories of the 1970s, when global economies were hit by the oil crisis of ’73, followed by the Iranian revolution five years later. Back then, global economies were hit by rocketing inflation, recession and hardship. Fortunately, Smith does not expect a repetition of those days but he does accept that rising energy prices will inevitably send inflation higher, probably reaching 4% by early next year.  While that is higher than the Bank of England feels comfortable with, it has been a lot higher in the recent past and would almost certainly have been on target without the Iran war. 

Going up 

Interest rates are the most widely used tool to curb inflation and, sure enough, the Federal Reserve and the European Central Bank both raised rates by 0.25% last month. While the Bank of England kept the base rate steady at 3.75% this year, it too is clearly preparing the ground for an increase.  

For many observers, this begs an interesting question. Why do central banks choose to raise rates in response to rising energy prices, given they have no control or influence over them? As Smith explains, central banks used to ‘look through’ such events. Now, however, they are deeply concerned by so-called ‘second round effects’: signs that higher energy prices might fuel wage growth, encourage businesses to raise prices and set off an inflationary spiral.  

With this in mind, Smith believes the Bank of England may well increase base rates November. But he thinks the vote will be split and his personal view is that the Bank should hold off on two counts: first, wage settlements remain subdued and second, a rate hike may look like a judgement on the Budget, which will have taken place just eight days earlier. However, even if the Monetary Policy Committee does raise rates on 5 November, Smith is more sanguine than many pundits. They maintain we are in line for four rate hikes over this year and next. Smith suggests there may be one next month and another in February, but that will be sufficient to keep inflation at bay.  

To tax or not to tax 

We are just days away from the Budget and concerns are mounting about how the Chancellor will attempt to balance the books. Government debt has ballooned, gilt yields have surged and interest payments alone now exceed £100bn per annum. Fiscal headroom was around £24 billion when Healey moved to the Treasury. It has probably halved since then, fuelling fears about higher taxes, particularly for business and the better-off. In our 360 Index survey, 66% of respondents say they expect business tax rises in the Budget 

Smith is reassuring here. Describing Healey as a straightforward operator, he believes the Chancellor has learnt valuable lessons from his predecessor, Rachel Reeves; namely that unpopular policies are unwise, especially if they do not raise much money. There has been speculation that Healey might decide to equalise income tax and capital gains tax. Smith thinks this is highly unlikely, not least because HMRC calculations show that if CGT is increased, revenues are reduced in subsequent years.  

Healey has apparently been listening to business too. Keenly aware that most operators feel battered and bruised by Government policies, he would like his Budget to be seen as pro-business - and supportive of individuals too. To that end, Smith suspects the Government will be prepared to live with less fiscal headroom, not just because Burnham wants to be liked but because he and his team believe it would be wrong to make big and damaging decisions in the middle of an energy crisis.  

There is also an expectation that the war with Iran will be resolved, that the US mid-term elections will drive change and that economic conditions will start to improve.  

Capital punishment?  

There have been suggestions that London could suffer under Burnham, a proud Northerner who wants to bolster growth across the UK. Smith has little truck with such fears. Hugely resilient in its own right, London is still ranked as the world’s second most important financial centre, after New York and has become a magnet for AI and fintech talent too. Recognising that the UK would benefit from more widespread growth, he does not think this will come at London’s expense.  

 In the CIL 360 Index, just 3% of respondents said the government is doing a good job – the joint lowest ever. Smith is more upbeat. Burnham has not been in Downing Street long enough to think through a proper growth strategy but he has promised a ten-year plan, he says he is committed to growth and, critically, he is surrounded by some good economic advisers. 

Smith’s ‘Skip Index’ is promising too. An informal but historically accurate indicator, this looks at the number of skips in Smith’s street.  None at all implies zero growth or recession. Two skips suggest the economy is on trend. Three or four imply an unsustainable boom. There are two in his street right now and there have been for some while. Perhaps Smith is right: we live in an age of resilience.  

 

CIL continues to monitor trends and activity in the UK. If you would like to discuss key developments or strategic opportunities, please get in touch.