Goldman now sees UK economy entering recession in fourth quarter

Concerns around cost-of-living pressures in the UK have continued to intensify. PHOTO: REUTERS

SYDNEY (BLOOMBERG) - Goldman Sachs Group expects the UK 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 per cent through mid-2023, Goldman said in a research note on Monday (Aug 29). Annual output next year will likely shrink by 0.6 per cent, a sharp turnaround from Goldman's previous estimate of a 1.1 per cent 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 that 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 per cent in the second quarter of 2023. It forecasts real disposable incomes will fall by 2.9 per cent and real consumption by 1.4 per cent 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 per cent over the next year, Goldman said. Its base case, though, is for the recession to be "relatively mild given fiscal support, excess savings and strong labour market momentum."

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