Goldman Sachs Group Inc. expects the UK economy to slip into recession later this year, but risks a deep contraction amid rising energy costs. Britain’s gross domestic product is expected to fall by about 1% by mid-2023, Goldman said in a research note on Monday.
Annual output next year is likely to shrink by 0.6%, a significant recovery from Goldman’s previous forecast of a 1.1% expansion. “As the energy crisis deepens, there are growing concerns about pressure on the cost of living in the UK,” said economists led by Sven Jari Stehn.
Goldman’s forecast said last week’s data showed a slowdown in economic activity from the US to Europe to Asia, with higher interest rates and higher inflation expected to continue.
It was announced in response to concerns it could plunge the world into recession. Earlier this month, the Bank of England announced its biggest rate hike in 27 years and warned the UK was headed for more than a year of recession under the weight of rising inflation.
Looming UK recession
As the looming UK recession distracts from long-term growth challenges, Goldman said the household savings rate was well below his ‘equilibrium rate’ in the second quarter of 2023, with real consumption.
We expect it to drop 1% to a record low of 3.5%. Goldman said the recession should not prevent the Bank of England from tightening further.
Expect 50 basis point rate hike in September and sees “upside risks” to her call for a quarter point rate hike in November and December. “We see the risk of a deeper and longer recession,” economists said.
“Gas prices could stay high longer, households would reduce their surplus savings, and the level of additional fiscal support for households could be lower than our baseline assumptions.”
In our scenario, the UK economy will recover over the next year, down as much as 3.4%, according to Goldman. However, our base case is that “with fiscal support, excess savings and strong labor market dynamics,” the recession will be relatively mild.