Economists predict Britain’s recession will be nearly as deep as Russia’s

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

In the macroeconomic forecast for 2023, Goldman Sachs It forecasts a 1.2% contraction in UK real GDP this year, well below any other major G-10 (Group of Them) economies. This will be followed by a 0.9% expansion in 2024, according to the lender’s forecast.

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

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

Goldman’s forecasts for the UK are below what it cited as market consensus, which calls for a 0.5% contraction in 2023 and a 1.1% expansion in 2024. However, the OECD also predicted that the UK would lag far behind other developed countries. years to come. despite the same macroeconomic headwinds, it puts London closer to Russia in terms of performance than the rest of the G-7.

Both the eurozone and the U.K. are already in recession, Goldman chief economist Ian Hatzius and his team concluded, with both suffering from “larger and longer increases in household energy bills,” which pushed inflation higher than observed. will reach high heights. . elsewhere.

“In turn, high inflation is expected to affect real income, consumption and industrial production. We forecast real income to fall by 1.5% in the Eurozone by Q1 2023 and by 3% in the UK by Q2 2023, before recovering further in the second half of the year. ,’ they said.

The UK’s independent Office for Budget Responsibility predicts the country’s living standards are at a record high. 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.

Consultancy firm KPMG forecasts that UK real GDP will contract by 1.3% in 2023 in a “relatively shallow but prolonged recession” before partially recovering to 0.2% in 2024.

Income compression has been cited as a key driver, as rising inflation and interest rates have sharply reduced household purchasing power. The Bank of England raised interest rates by 50 basis points in December to 3.5% last month as it sought to rein in inflation, which fell slightly below its November peak of 41 years.

KPMG expects the central bank to raise the key rate to 4% in the first quarter of this year before taking a wait-and-see approach as inflation gradually moderates.

“The labor market is expected to begin to deteriorate from the first half of 2023, with the unemployment rate reaching 5.6% by mid-2024, an increase of about 680,000 people.”

Yael Selfin, chief economist at KPMG UK, said rising food and energy prices and rising inflation were already reducing household purchasing power.

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

“Households are expected to curb spending on discretionary items in 2023 in response to income pressure. As consumers cut back on spending, we expect a sharp decline in the non-essential spending categories of households most affected by rising energy and food prices. »

Along with global headwinds from the war in Ukraine and supply bottlenecks related to China’s Covid-19 measures and the fallout from the pandemic, the UK faces unique national obstacles such as a protracted illness crisis that has significantly tightened the labor market. The country also faces severely depleted trade following Brexit.

“Although commodities were behind the headline gains [in inflation]Pricing pressures widened significantly amid rising inflation surprises in key Eurozone and UK categories,” Goldman’s Hatzius said.

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