A lady walks past rundown, shuttered shops in Romford, England.
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LONDON — The U.K. economic contraction of 2023 shall be almost as deep as that of Russia, economists expect, as a pointy fall in household living standards weighs on activity.
In its 2023 macro outlook, Goldman Sachs forecast a 1.2% contraction within the U.K. real GDP over the course of this yr, well below all other G-10 (Group of Ten) major economies. This is ready to be followed by a 0.9% expansion in 2024, the lender anticipates.
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The figure places Britain only fractionally ahead of Russia, which the bank projects will see a 1.3% contraction in 2023 because it continues to wage war in Ukraine and weather punitive economic sanctions from Western powers. This shall be followed by a 1.8% expansion in 2024, Goldman figures suggest.
The Wall Street giant forecasts U.S. expansions of 1% in 2023 and 1.6% in 2024. Germany — the following worst performer amongst major economies after Russia and the U.K. — is predicted to see a 0.6% contraction this yr, then expand by 1.4% next yr.
Goldman’s projections for the U.K. are below what it cites as a market consensus that sketches a 0.5% contraction in 2023 and a 1.1% expansion in 2024. Nevertheless, the OECD has also forecast that the U.K. will lag significantly behind other developed nations in the approaching years despite facing the identical macroeconomic headwinds, putting London closer in performance to Russia than to the remainder of the G-7.
The euro area and the U.K. are each already in recession, Goldman Chief Economist Jan Hatzius and his team concluded, since each have endured a “much larger and more drawn-out increase in household energy bills” that can drive inflation to higher peaks than seen elsewhere.
“In turn, high inflation is ready to weigh on real income, consumption, and industrial production. We forecast further declines in real income of 1.5% within the euro area through 2023Q1 and three% within the U.K. through 2023Q2, before a pickup in H2,” they said.
The U.K. independent Office for Budget Responsibility projects that the country faces its sharpest fall in living standards on record. Alongside Finance Minister Jeremy Hunt’s budget statement in November, the OBR forecast that real household disposable income — a measure of living standards — will fall by 4.3% in 2022-23.
Consultancy firm KPMG projected that the U.K. real GDP will contract by 1.3% in 2023, amid a “relatively shallow but protracted recession,” before seeing a partial 0.2% recovery in 2024.
The squeeze on incomes was cited because the important driver, as higher inflation and rates of interest significantly curtail household purchasing power. The Bank of England raised rates by 50 basis points to three.5% in December, because it looked to rein in inflation, which eased barely last month from the 41-year high of November.
KPMG expects the central bank to extend the bank rate to 4% in the course of the first quarter of this yr before adopting a “wait-and-see” approach, as inflation step by step eases.
“The labour market is ready to start out deteriorating from the primary half of 2023, with the unemployment rate reaching 5.6% by mid-2024, representing a rise of around 680,000 people,” KPMG economists said in an outlook report in December.
Yael Selfin, chief economist at KPMG U.K., said the spike in food and energy prices and better overall inflation had already cut into household purchasing power.
“Rising rates of interest have added one other headwind to growth. Lower income households are particularly exposed to the combination of current price pressures, as probably the most affected spending categories largely fall on necessities, with few substitutes within the short run,” Selfin said within the report.
“Households are expected to rein in spending on discretionary items in 2023 in response to the squeeze on income. As consumers reduce on spending, we anticipate a pointy 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.”
Together with the worldwide headwinds arising from the war in Ukraine and provide bottlenecks related to China’s Covid-19 measures and the aftermath of the pandemic, the U.K. faces unique domestic obstacles similar to a long-term sickness crisis that has severely tightened its labor market. The country can also be experiencing heavily depleted trade in consequence of Brexit.
“Although commodities drove the initial headline surge [in inflation], price pressures have broadened significantly across core categories in each the euro area and the U.K. following upside inflation surprises,” Goldman’s Hatzius said.
“Actually, U.K. core price pressures at the moment are the broadest across the G10, with an ideal storm of an energy crisis (like continental Europe) and an overheated labor market (just like the US).”