Goldman Sachs analysts forecast Britain’s recession to be more than twice as deep as previously expected after Liz Truss removed Kwasi Kwarteng as chancellor and reversed a freeze in corporation tax.
The investment bank said rising interest rates will also play a part in the downturn though it expects the Bank of England (BoE)to be more reserved than earlier predicted.
The BoE expects Britain to enter recession in the fourth quarter of 2022 and stay there for more than one year.
Goldman Sachs has warned that the impact of recent developments in Britain’s fraught political sphere will plunge the economy lower than feared.
“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,” Bloomberg News cited the Goldman Sachs report as saying.
In a significant downgrade, the bank revised its 2023 UK economic output forecast to a 1 per cent contraction from an earlier forecast for a 0.4 per cent drop.
On Friday, political pressure finally forced Ms Truss to U-turn on her planned corporation tax freeze. The levy will now rise from 19 to 25 per cent next year as planned under the previous government.
The recent turmoil in the economy led BoE governor Andrew Bailey on Saturday to warn that the bank’s Monetary Policy Committee may raise interest rates further than expected at its next meeting on 3 November.
Despite this, Goldman Sachs has downgraded its forecast from a rise of 1 per cent to 0.75 per cent, which would bring the rate to 3 per cent, a level not seen since November 2008.
Bloomberg said Goldman Sachs also revised down its forecast for British core inflation, which does not account for fuel and is also known as the Consumer Price Index measurement, to 3.1 per cent at the end of 2023, down from 3.3 per cent previously.
Britain’s new chancellor Jeremy Hunt said his priority was to stabilise the economy after weeks of turmoil that followed his predecessor’s mini-budget.
Mr Hunt said he would take “difficult decisions” such as tax rises and spending cuts in an attempt to prevent interest rates from rising sharply amid anxiety over mortgage prices.