LONDON: Goldman Sachs Group Inc expects the United Kingdom economy will slip into recession later this year, with the risk that it could turn out to be a deep contraction amid soaring energy costs.
The UK’s gross domestic product is expected to fall by around 1% through mid-2023, Goldman said in a research note yesterday. Annual output next year will likely shrink by 0.6%, a sharp turnaround from Goldman’s previous estimate of a 1.1% expansion.
“Concerns around cost-of-living pressures in the UK have continued to intensify on the back of the worsening energy crisis,” economists led by Sven Jari Stehn said. “Real consumption is still likely to decline significantly.”Goldman’s forecasts come as data last week showed economic activity weakened from the US to Europe and Asia, reinforcing concerns that rising interest rates and elevated inflation could tip the world into a recession.
Earlier this month, the Bank of England unleashed its biggest interest-rate hike in 27 years and warned the UK is heading for more than a year of recession under the weight of soaring inflation.
Goldman expects households’ saving rate to fall well below its “equilibrium rate” to a record low 3.5% in the second quarter of 2023. It forecasts real disposable incomes will fall by 2.9% and real consumption by 1.4% in 2023.
The recession prospects are still unlikely to deter the Bank of England from tightening monetary policy further, Goldman said. It expects a 50 basis-point rate hike in September and “upside risks” to its call for quarter-point increases in November and December.
“We see risks as skewed towards a more severe and protracted recession,” the economists said. “Gas prices may remain elevated for longer, households may unwind their excess savings to a lesser extent and the amount of additional fiscal support to households may turn out to be smaller than assumed in our baseline.”
In such a scenario, the UK economy will shrink by as much as 3.4% over the next year, Goldman said. — Bloomberg
