Goldman Sachs expects worse UK recession in 2023

Bank tips economy to shrink 1% in downgraded forecast, but also predicts lower inflation and interest rates

The UK is likely to enter a deeper recession than previously expected next year, while interest rates and inflation will be lower than forecast, according to revised analysis from Goldman Sachs.

The US investment bank downgraded its outlook for Britain, in analysis released on Sunday, forecasting the UK economy would shrink by 1% next year, down from its previous estimate for a 0.4% contraction.

Goldman Sachs said that the increase in corporation tax to 25% in April – after Truss U-turned on one of her key Conservative leadership campaign commitments – was one factor.

Its report said: “Folding in weaker growth momentum, significantly tighter financial conditions, and the higher corporation tax from next April, we downgrade our UK growth outlook further and now expect a more significant recession.”

Analysts said that Truss backtracking on her corporation tax plans could help to ease pressure on the Bank of England for a tougher rise in interest rates. Goldman Sachs, Deutsche Bank and Barclays said a 0.75 percentage point increase in rates to 3% was now more likely at the Bank’s next meeting in November, down from previous estimates for a rise of one percentage point made immediately after the mini-budget.

Goldman analysts believe UK interest rates will now peak at 4.75%, slighter lower than the 5% previously factored in.

A separate business survey by the accountants Deloitte found that UK companies are expecting the rise in interest rates will make it more difficult to cope with a slump in sales and recession over the next year.

Finance directors at some of Britain’s largest firms said that borrowing was more costly than at any time since 2010, making investments harder to justify.

The poll by Deloitte found that a majority of finance directors expected revenues to fall over the next 12 months and that plans to cut costs and control the outflow of cash had become their top two priorities.

While the survey was conducted before Kwasi Kwarteng was sacked on Friday and the prime minister decided to roll back much of last month’s mini-budget, it is likely companies will continue to focus on reducing costs to minimise the impact of the downturn.

Ian Stewart, chief economist at Deloitte, said the rise in borrowing costs following steep rises in the Bank of England base rate was forcing firms to change the way they financed investment.

“A 12-year period of easy credit conditions is drawing to an end. Corporates are seeing a reset in the cost and availability of credit.

“Not since the credit crunch have chief financial officers rated debt – whether that’s bank borrowing or corporate bonds – as being less attractive as a source of finance for their businesses than they do today.”


Gwyn Topham and Phillip Inman

The GuardianTramp

Related Content

Article image
The UK may avoid a recession for now but it won’t feel like it for many
Jeremy Hunt is not getting carried away by November growth, and monthly GDP moves can be erratic

Larry Elliott Economics editor

13, Jan, 2023 @9:43 AM

Article image
Britain the only G7 economy forecast to shrink in 2023
IMF says UK economy is likely to contract 0.6% as rising interest rates and higher taxes take toll

Larry Elliott Economics editor

31, Jan, 2023 @1:30 AM

Article image
OBR forecasts likely to show £60bn-£70bn hole after Kwarteng’s mini-budget
Predictions handed to chancellor expected to paint gloomy picture for UK economy amid sweeping tax cuts

Richard Partington Economics correspondent

07, Oct, 2022 @5:20 PM

Article image
Bank of England raises interest rates to 3.5% in ninth increase in a year
Majority of MPC rate-setters back hike of 0.5 percentage points despite fears UK is entering a long recession

Phillip Inman

15, Dec, 2022 @7:00 PM

Article image
Fragile state of UK economy scrutinised as nation mourns
GDP, inflation and retail sales figures due to be released over next few days

Zoe Wood

11, Sep, 2022 @5:29 PM

Article image
Jeremy Hunt warns of ‘tough road ahead’ as UK economy shrinks
GDP fall of 0.2% for three months to September gives bleak picture in run-up to autumn statement

Richard Partington Economics correspondent

11, Nov, 2022 @2:30 PM

Article image
UK economy shrinks by 0.3% on back of manufacturing slump
August GDP data from ONS gives strong signal that UK is entering recession

Phillip Inman

12, Oct, 2022 @6:26 AM

Article image
UK economy grew by only 0.1% in November
Figure comes as people began Christmas shopping, while World Cup gave pubs and bars a boost

Phillip Inman

13, Jan, 2023 @7:34 AM

Article image
UK workforce exodus could force BoE to raise interest rates, says chief economist
Departure of more than 500,000 workers since Covid risks stoking inflation, says Huw Pill

Richard Partington Economics correspondent

23, Nov, 2022 @6:21 PM

Article image
Rising bills and tax hikes to make UK families hundreds of pounds worse off
Study commissioned by Guardian details scale of hit to household finances from April

Phillip Inman and Rupert Jones

31, Mar, 2023 @5:00 AM