Goldman Sachs sees deeper UK recession after tax U-turn

Oct 17 (Reuters) – Goldman Sachs has downgraded Britain’s economic outlook and warned of a deeper recession next year after Prime Minister Liz Truss sacked Kwasi Kwarteng last week. his chancellorship and abandoned parts of his unpopular economic program.

The Wall Street bank has revised its forecast for UK economic output for 2023 to a 1% contraction from an earlier forecast of a 0.4% drop in output, with core inflation at 3.1% end of 2023, compared to 3.3% previously.

“Due to weaker growth momentum, significantly tighter financial conditions and higher corporation tax from next April, we are further downgrading our UK growth outlook and expect now to a deeper recession,” Goldman analysts led by Sven Jari Stehn said in a note dated Sunday. .

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With financial markets in turmoil, Truss said on Friday Britain will go ahead with a 25% corporation tax hike next year, reversing his pledge to freezing it at 19% after the UK economy also unexpectedly shrank in August.

Goldman Sachs hinted at possible policy reversals in the coming days, but said the energy price guarantee program was less likely to be revised because it was needed to protect household bills during Winter.

He also sees less pressure on the Bank of England (BoE) to tighten aggressively and has lowered its final discount rate estimate to 4.75% from 5%, forecasting 75 basis point hikes in November and December. from the central bank.

“The persistence of underlying inflation and the continued tightening of the labor market suggest that the BoE has yet to bring monetary policy into significantly restrictive territory,” Goldman analysts wrote.

“That said, following Prime Minister Truss’ policy reversal, we believe there is less pressure for the BoE to act aggressively in future meetings,” they added.

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Reporting by Jahnavi Nidumolu and Subhadeep Chakravarty in Bengaluru; Editing by Tomasz Janowski and Shailesh Kuber

Our standards: The Thomson Reuters Trust Principles.

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