UK economy to enter recession in fourth quarter of this year, Goldman Sachs says

Economic slowdown unlikely to deter Bank of England from tightening monetary policy further

Closed retail stores on Oxford Street, London, England. Goldman Sachs forecasts recession for the UK economy. EPA

Goldman Sachs Group expects the UK economy will go into recession later this year, with the risk that it could turn out to be a deep contraction as energy costs soar.

The UK’s gross domestic product is expected to fall about 1 per cent through until the middle of 2023, Goldman said in a research note on Monday.

Annual output next year will be likely to shrink by 0.6 per cent, a sharp turnaround from Goldman’s previous estimate of a 1.1 per cent expansion.

“Concerns around cost-of-living pressures in the UK have continued to intensify on the back of the worsening energy crisis,” economists, led by Sven Jari Stehn, said.

“Real consumption is still likely to decline significantly.”

Goldman’s forecasts come as data last week showed economic activity weakened from the US to Europe and Asia, reinforcing concerns that rising interest rates and elevated inflation could tip the world into an economic recession.

This month, the Bank of England made its biggest interest-rate rise in 27 years and said that the UK is heading for more than a year of recession under the weight of inflation.

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

The recession prospects are unlikely to deter the Bank of England from tightening monetary policy further, Goldman said.

It expects a 50 basis-point rate rise in September and “upside risks” to its call for quarter-point increases in November and December.

“We see risks as skewed towards a more severe and protracted recession,” the economists said.

“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.”