The UK is on the brink of recession, economists at Goldman Sachs say, as inflation-plagued Britons cut spending and the Bank of England hikes interest rates.
The bank’s economists Steffan Ball and Ibrahim Quadri are forecasting a 0.7% decline in the second quarter and a 0.1% rise in the third quarter. (GDP data in the UK is presented on a quarterly basis rather than on an annual basis like in the US) “This brings the UK economy to the brink of a technical recession and points to an increased focus on UK activity data in the months ahead,” they said.
The latest weak retail sales data from the UK has shown households tightening their wallets amid rising energy prices. The Goldman team observed that the Gfk gauge of UK consumer confidence fell in June to its lowest level since records began in 1974.
“Indeed, the GfK report found that consumer sentiment is currently ‘grimmer’ than in the early stages of the Covid pandemic, the outcome of the 2016 Brexit referendum and even the shock of the 2008 global financial crisis,” they said .
Goldman Sachs forecast
Meanwhile, bearish comments from purchasing managers illustrate caution across the corporate sector.
As a result, Goldman sees a 45% chance that the UK could be in recession over the next 12 months. That’s more than the 40 percent chance they see in the eurozone and the 30 percent chance in the US that the firm forecasts are predicting.
James Gorman, CEO of Morgan Stanley, this week put the probability of a US recession at 50%.
It seems unlikely that the Bank of England will offer much support unless activity deteriorates significantly. Goldman expects the BoE to hike another 50 basis points in August and September and 25 basis points in November and December.
“However, there are risks that the BoE will tighten less quickly should the UK economy enter a clear recession,” she added.
Ironically, the political risk could provide fiscal stimulus and help the UK avoid an economic contraction later in the year. “Given the recent series of policy interventions focused on supporting budgets and the outcome of the no-confidence vote in PM [Boris] Johnson, we believe that unless the pressure on the cost of living eases, the government is more likely to respond further in the coming weeks.”
Concerns over UK economic outlook hit pound GBPUSD, +0.43%,
Sterling is trading around $1.21, down more than 10% this year. Weaker currency tends to support FTSE 100 UKX, -2.74%,
Britain’s large-cap stock index, as a large proportion of its constituents are global companies such as mining and energy companies that derive a large portion of their sales overseas. So while the FTSE 100 is down less than 5% year-to-date, the more UK-focused FTSE 250 MCX, -2.99% mid-cap index is down 22%.
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