Economists predict that the UK recession will be almost as deep as Russia’s

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

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LONDON – Britain’s economic contraction in 2023 will be almost as deep as Russia’s, economists expect, as a sharp drop in household living standards weighs on activity.

In the macro forecast for 2023, Goldman Sachs It forecasts a 1.2% decline in UK real GDP this year, well below all other G-10 major economies. It is expected to expand by 0.9% in 2024, according to the lender’s forecast.

That figure is only marginally ahead of Russia, which the bank predicts will see a 1.3% contraction in 2023 as Britain continues to wage war in Ukraine and endures punitive economic sanctions from Western powers. Goldman figures this will follow with 1.8% expansion in 2024.

The Wall Street giant predicts that the US will expand by 1% in 2023 and 1.6% in 2024. Germany, the next worst performer among major economies after Russia and the UK, is expected to contract by 0.6% this year and then expand by 1.4%. year

Goldman’s forecasts for the UK are below market consensus, which calls for a 0.5% contraction in 2023 and a 1.1% expansion in 2024. However, the OECD also predicts that the UK will lag significantly behind other developed nations in the coming period. It puts London closer to Russia than the rest of the G-7, despite facing the same macroeconomic headwinds for years.

The eurozone and the UK are already in recession as Goldman’s chief economist Jan Hatzius and his team endure “larger and broader increases in household energy bills” that will push inflation to higher peaks than seen. elsewhere.

“In turn, higher inflation will weigh on real income, consumption and industrial production. We expect real income in the Eurozone to fall by 1.5% by the first quarter of 2023 and by 3% in the UK by the second quarter of 2023, before picking up in the second half of the year.” we predict,” they said.

The UK’s independent Office for Budget Responsibility predicts the country is facing a record fall in living standards. Alongside Chancellor of the Exchequer Jeremy Hunt’s budget statement in November, the OBR forecast that real household disposable income – a measure of living standards – would fall by 4.3% in 2022-23.

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

Income compression was cited as a key driver, as high inflation and interest rates severely limited household purchasing power. The Bank of England last month raised interest rates by 50 basis points to 3.5% in December as it sought to rein in inflation, which has eased slightly from November’s 41-year high.

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

“The labor market will begin to deteriorate from the first half of 2023, with the unemployment rate reaching 5.6% by mid-2024, an increase of around 680,000,” KPMG economists said in a December forecast report.

Yael Selfin, chief economist at KPMG UK, said that the jump in food and energy prices and the increase in general inflation had already reduced the purchasing power of households.

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

“Households are expected to rein in spending on discretionary items in response to income compression in 2023. As consumers cut back on spending, we expect sharp declines in non-essential household spending categories most affected by energy increases and food spending, including dining out and entertainment.” costs.”

Along with global headwinds from the war in Ukraine and supply bottlenecks from China’s Covid-19 measures and the fallout from the pandemic, the UK faces unique domestic headwinds such as a protracted illness crisis that has severely tightened the labor market. The country is also facing a sharp drop in trade as a result of Brexit.

“Although commodities led the initial headline increase [in inflation]price pressures widened significantly across key categories in both the eurozone and the UK following inflation surprises,” said Goldman’s Hatzius.

“In fact, the UK’s underlying price pressures are now the broadest in the G10, with a perfect energy crisis (like continental Europe) and an overheated labor market (like the US).”

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