Economists Predict UK’s Recession Will Be Nearly As Severe As Russia’s

Economists predict that the UK’s economic contraction in 2023 will be nearly as severe as Russia’s, as a sharp drop in household living standards weighs on activity.

Goldman Sachs forecasts a 1.2% contraction in UK real GDP this year in its 2023 macro outlook, well below all other G-10 (Group of Ten) major economies. This will be followed by a 0.9% increase in 2024, according to the lender.

The figure puts Britain just ahead of Russia, which the bank predicts will contract by 1.3% in 2023 as it continues to wage war in Ukraine and face punitive economic sanctions from Western powers. According to Goldman Sachs, this will be followed by a 1.8% increase in 2024.

The Wall Street behemoth predicts 1% growth in the United States in 2023 and 1.6% growth in 2024. Germany, the third-worst performer among major economies after Russia and the United Kingdom, is expected to contract by 0.6% this year before expanding by 1.4% the following year.

Goldman’s forecasts for the United Kingdom are lower than the market consensus, which calls for a 0.5% contraction in 2023 and a 1.1% expansion in 2024. However, the OECD predicts that the United Kingdom will lag significantly behind other developed countries in the coming years, despite facing the same macroeconomic headwinds, putting London closer to Russia than the rest of the G-7.

The eurozone and the United Kingdom are already in recession, according to Goldman Chief Economist Jan Hatzius and his team, because both have experienced a “much larger and more drawn-out increase in household energy bills,” which will drive inflation to higher peaks than seen elsewhere.

“In turn, high inflation is set to weigh on real income, consumption, and industrial production. We forecast further declines in real income of 1.5% in the euro area through 2023Q1 and 3% in the U.K. through 2023Q2, before a pickup in H2,” they said.

According to the independent Office for Budget Responsibility in the United Kingdom, the country will experience its sharpest drop in living standards on record. Along with Finance Minister Jeremy Hunt’s budget statement in November, the OBR forecasted a 4.3% drop in real household disposable income — a measure of living standards — in 2022-23.

According to KPMG, the UK’s real GDP will contract by 1.3% in 2023 due to a “relatively shallow but protracted recession,” before recovering by 0.2% in 2024.

The main driver was cited as the squeeze on incomes, as higher inflation and interest rates significantly reduce household purchasing power.

In December, the Bank of England raised interest rates by 50 basis points to 3.5% in an effort to rein in inflation, which had eased slightly from a 41-year high in November.

According to KPMG, the central bank will raise the bank rate to 4% in the first quarter of this year before taking a “wait-and-see” approach as inflation gradually subsides.

“The labour market is set to start deteriorating from the first half of 2023, with the unemployment rate reaching 5.6% by mid-2024, representing an increase of around 680,000 people,” KPMG economists said in an outlook report in December.

According to Yael Selfin, chief economist at KPMG U.K., the rise in food and energy prices, as well as higher overall inflation, has already reduced household purchasing power.

“Rising interest rates have added another headwind to growth. Lower income households are particularly exposed to the mix of current price pressures, as the most affected spending categories largely fall on necessities, with few substitutes in the short run,” Selfin said in the report.

“Households are expected to rein in spending on discretionary items in 2023 in response to the squeeze on income. As consumers cut back on spending, we anticipate a sharp reduction in non-essential categories of spend by those households most affected by the rise in energy and food costs, including spending on eating out and entertainment.”

Along with global headwinds from the Ukraine conflict, supply bottlenecks from China’s Covid-19 measures, and the aftermath of the pandemic, the United Kingdom faces unique domestic challenges, such as a long-term sickness crisis that has severely tightened its labor market. As a result of Brexit, the country’s trade is also severely depleted.

“Although commodities drove the initial headline surge [in inflation], price pressures have broadened significantly across core categories in both the euro area and the U.K. following upside inflation surprises,” Goldman’s Hatzius said.

“In fact, U.K. core price pressures are now the broadest across the G10, with a perfect storm of an energy crisis (like continental Europe) and an overheated labor market (like the US).”

(Adapted from CNBC.com)



Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy, Sustainability

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