The UK economy will slip into recession at the end of this year amid surging inflation, according to Goldman Sachs.
The bank said in a research note that it now expects the UK to enter a recession in the fourth quarter, with real GDP contracting by around 1.0% through the second quarter.
“Concerns around cost-of-living pressures in the UK have continued to intensify on the back of the worsening energy crisis, with Ofgem raising the energy price cap for households by 80% from October,” GS said.
It now expects the economy to grow 3.5% in 2022 and contract 0.6% in 2023, down from a previous forecast for 3.7% and 1.1% growth, respectively.
“Our updated growth forecasts are meaningfully below consensus expectations but not quite as pessimistic as the Bank of England’s,” it said. “In our base case, we expect the incoming recession to be relatively mild given fiscal support, excess savings and strong labour market momentum.”
In its base case scenario, Goldman expects the incoming recession to be “relatively mild” given fiscal support, excess savings and strong labour market momentum.
“However, we see risks as skewed towards a more severe and protracted recession,” it 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. We estimate that in such scenarios, real GDP would likely contract by 2.5% to 3.4% over the next year.”
Despite the incoming recession, GS said it still expects the BoE to hike by another 50 basis points in September and sees upside risks to its expectation of 25bp hikes in November and December “given continued upside inflation and wage growth surprises and the need to keep inflation expectations anchored”.
By: Michele Maatouk