Goldman Sachs now expects the UK economy to enter recession in the fourth quarter

Goldman Sachs Group Inc. expects the UK economy to slip into recession later this year at the risk it could prove to be a deep contraction amid rising energy costs.

Britain’s gross domestic product is expected to fall by about 1 percent by mid-2023, Goldman said in a research note on Monday. Annual production next year is likely to contract 0.6 percent, a sharp reversal from Goldman’s earlier estimate of a 1.1 percent expansion.

“Concerns about the pressure on the cost of living in the UK have increased further as the energy crisis deepens,” said economists led by Sven Jari Stehn. “Real consumption is likely to drop significantly.”

Goldman’s forecasts come as last week’s data showed that economic activity had slowed from the US to Europe and Asia, raising concerns that rising interest rates and elevated inflation could plunge the world into recession.

Earlier this month, the Bank of England published its biggest rate hike in 27 years and warned that the UK is headed for more than a year of recession under the weight of rising inflation.

Goldman expects the household saving rate to fall well below its “equilibrium rate” to a record low of 3.5 percent in the second quarter of 2023. It forecasts that real disposable income will fall by 2.9 percent and real consumption by 1.4 percent in 2023.

The prospect of a recession should still not prevent the Bank of England from tightening further, Goldman said. She expects a 50bp rate hike in September and “upside risks” to her call for a quarter-point hike in November and December.

“We see risks towards a deeper and more protracted recession,” the economists said. “Gas prices may remain elevated for longer, households may be less likely to run off their excess savings, and the amount of additional fiscal support for households may be lower than our baseline assumptions.”

In such a scenario, the UK economy will contract by as much as 3.4 percent next year, Goldman said. However, the base case is that the recession will be “relatively mild given fiscal support, excessive savings and strong labor market momentum.” Goldman Sachs now expects the UK economy to enter recession in the fourth quarter

Fry Electronics Team

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