Goldman Sachs downgraded its UK growth forecast, and now expects the country’s economy to shrink 1% next year. UK prime minister Liz Truss resigned Thursday after her tax cut plans rattled markets. Tighter financial conditions and tax rises will plunge the UK into a recession, strategists said. Loading Something is loading.
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The UK should now brace for an even worse recession than previously feared as it battles to calm its chaotic markets, according to Goldman Sachs.
Strategists at the bank downgraded their 2023 growth forecast for the country from a 0.4% fall to a 1% plunge in a recent research note.
They’ve revised their outlook after a turbulent week that saw prime minister Liz Truss scrap her tax cut proposals – and then resign as UK leader after just 45 days in office.
“The UK government said it was reversing most of the tax cuts announced in its mini-budget from September in an attempt to calm markets,” the bank said Friday.
Analysts added that they now expect “a deeper recession as financial conditions tighten and the corporate tax rate increases in April”.
Truss made a U-turn on her tax cut pledges after her $48 billion package dragged the British pound to an all-time low against the dollar and pushed 30-year government bond yields above 5%.
Her newly-appointed finance minister Jeremy Hunt announced Monday that he would no longer be slashing the basic rate of income tax from 19% to 18% and that corporation tax would rise from 19% to 25%.
Truss quit as prime minister Thursday and potential successors Boris Johnson, Penny Mordaunt and Rishi Sunak are expected to stress fiscal responsibility as they battle to be elected the UK’s next leader.
While the abandonment of tax cuts will stabilize markets, it will increase the likelihood of a UK recession as monetary and fiscal policies tighten further, according to Goldman Sachs.
The Bank of England is also currently hiking interest rates in a bid to tame red-hot UK inflation, which hit a four decade high of 10.1% Wednesday. That could also increase the risk that the country slips into a deep recession.
And Goldman Sachs isn’t the only forecaster expecting the UK to suffer economic decline next year.
The Bank of England has predicted that growth will shrink of 1.4%, while economists surveyed by Bloomberg anticipate a 0.2% contraction in 2023.
Read more: These 3 charts show the chaos that ran through markets during the 45 days that Liz Truss was UK prime minister