UK to enter recession in Q4 amid energy crisis: Goldman

Lavina Daryanani
Source: Relocate Magazine

The state of the macro-global economy is deteriorating with every passing day. On the one hand, consumers’ purchasing power has shrunk, and on the other, producers have been putting up with lackluster demand.

As reported recently, The United Kingdom (UK) registered a record high inflation in June. Per the Office for National Statistics, Consumer Price Index rose to 10.1%, from 9.4%. Notably, the number was north of the anticipated result of 9.8%. This was the highest inflation rate the country haD faced in nearly 40 years.

GS: UK economy to enter recession in Q4

Economists at Goldman Sachs have significantly cut UK’s growth forecasts and expect a recession to begin later in the year as the impact of surging inflation on households’ disposable incomes hits consumption.

The American multinational investment bank and financial services company recently released a research note, and per the same, The UK’s gross domestic product is anticipated to dip by around 1% through mid-2023. Alongside, annual output next year will likely shrink by 0.6%. The same marks a flip from the company’s estimated 1.1% expansion.

Economists led by Sven Jari Stehn said,

“Concerns around cost-of-living pressures in the UK have continued to intensify on the back of the worsening energy crisis. Real consumption is still likely to decline significantly.”

It is worth recalling that the regulator said on Friday that British energy bills would jump 80% to an average of 3,549 pounds [$4,188] a year from October, dragging millions of households into fuel poverty and businesses into peril.

Britain’s leading consumer rights champion Martin Lewis warned that people might die if they refused to cook food or heat their homes this winter. He exclaimed,

“This is a catastrophe.”

The Labour party also recently said the country could wait no longer for action. Finance spokesperson Rachel Reeves recently tweeted,

“This is a national emergency.”

Forward outlook

Goldman expects households’ savings to fall well below its “equilibrium rate” to a record low of 3.5% in the second quarter of 2023. It forecasts real disposable incomes will fall by 2.9% and real consumption by 1.4% in 2023.

The economists said,

“We see risks as skewed towards a more severe and protracted recession. Gas prices may remain elevated for longer, households may unwind their excess savings to a lesser extent and the amount of additional fiscal support to households may turn out to be smaller than assumed in our baseline.”

Per the investment bank, the recession prospects are unlikely to put off the Bank of England from further tightening monetary policy. It expects a 50 basis-point rate hike in September and “upside risks” to its call for quarter-point increases in November and December. 

Earlier this month, the Bank of England unleashed its biggest interest-rate hike in 27 years. Also, it cautioned parallelly that The UK is heading for more than a year of recession under the weight of soaring inflation.