Britain’s recession will be nearly as deep as Russia’s, economists predict

A woman walks past dilapidated and shuttered shops in Romford, England.

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LONDON — The UK’s economic contraction in 2023 will be almost as deep as Russia’s, economists expect, as a sharp fall in household living standards weighs on activity.

In its macroeconomic outlook for 2023, Goldman Sachs forecast a 1.2% contraction in UK real GDP this year, well below any other major G-10 (Group of Ten) economies. This should be followed by a 0.9% expansion in 2024, the lender predicts.

That figure puts Britain only slightly ahead of Russia, which the bank predicts will see a 1.3% contraction in 2023 as it continues to wage war on Ukraine and face punitive economic sanctions from the western powers. This will be followed by a 1.8% expansion in 2024, according to Goldman figures.

The Wall Street giant predicts US expansions of 1% in 2023 and 1.6% in 2024. Germany – the second worst performer among major economies after Russia and the UK – is expected to see a contraction of 0 .6% this year, then increase by 1.4% next year.

Goldman’s projections for the UK are below what it cites as a market consensus which projects a contraction of 0.5% in 2023 and an expansion of 1.1% in 2024. However, the OECD has also predicted that the UK will lag considerably behind other developed countries in the coming years. despite the same macroeconomic headwinds, bringing London closer in performance to Russia than the rest of the G-7.

Both the eurozone and the UK are already in recession, Goldman chief economist Jan Hatzius and his team concluded, as both have suffered a “much larger and longer rise in utility energy bills.” households” which will drive inflation to higher peaks than those observed. somewhere else.

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“In turn, high inflation is expected to weigh on real income, consumption and industrial production. We expect further declines in real income of 1.5% in the euro area through the first quarter of 2023 and 3% in UK until the second quarter of 2023, before a recovery in the second half of the year,” they said.

The UK’s independent Office for Budget Responsibility predicts the country is facing its biggest drop in living standards on record. Alongside Finance Minister Jeremy Hunt’s budget statement in November, the OBR forecasts that real household disposable income – a measure of living standards – will fall by 4.3% in 2022-23.

Consultancy KPMG has forecast UK real GDP to contract by 1.3% in 2023, amid a “relatively shallow but prolonged recession”, before experiencing a partial recovery of 0.2% in 2024.

Compression of incomes has been cited as the main driver, as rising inflation and interest rates drastically reduce household purchasing power. The Bank of England raised rates by 50 basis points to 3.5% in December as it sought to contain inflation, which fell slightly last month from November’s peak in 41 years.

KPMG expects the central bank to raise the discount rate to 4% in the first quarter of this year before adopting a “wait and see” approach as inflation gradually declines.

“The labor market is expected 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,” the officials said. KPMG economists in an outlook report in December.

Yael Selfin, chief economist at KPMG UK, said soaring food and energy prices and rising headline inflation had already reduced household purchasing power.

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“Rising interest rates have added another drag on growth. Low-income households are particularly exposed to the combination of current price pressures, as the spending categories most affected are largely necessities, with few short-term substitutes,” Selfin said in the report. .

“Households are expected to limit their spending on discretionary items in 2023 in response to pressure on incomes. As consumers reduce spending, we expect a sharp reduction in non-essential spending categories by households most affected by the rise in energy and food costs, including expenses for dining out and entertainment.

Alongside the global headwinds resulting from the war in Ukraine and supply bottlenecks related to China’s Covid-19 measures and the consequences of the pandemic, the UK faces unique national obstacles such as a long-term illness crisis that has significantly tightened its labor market. The country is also experiencing a heavily depleted trade following Brexit.

“Although commodities were behind the headline surge [in inflation]Pricing pressures have widened significantly across major Eurozone and UK categories on the back of upward inflation surprises,” Goldman’s Hatzius said.

“In fact, core price pressures in the UK are now the greatest in the G10, with a perfect energy crisis (like mainland Europe) and an overheated labor market (like the US). “

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