A woman walks past derelict, closed shops in Romford, England.
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LONDON – Britain’s economic contraction in 2023 will be almost as deep as Russia’s, economists expect, as a sharp decline in household living standards weighs on activity.
In its 2023 macro outlook Goldman Sachs forecast a 1.2% contraction in UK real GDP later this year, well below any other major G-10 (Group of Ten) economy. This is to be followed by a 0.9% expansion in 2024, the lender expects.
That figure puts the UK just ahead of Russia, which the bank forecasts will fall 1.3% in 2023 as it continues to wage war in Ukraine and weather economic sanctions from Western powers. This will be followed by a 1.8% expansion in 2024, according to Goldman’s numbers.
The Wall Street giant is forecasting US growth of 1% in 2023 and 1.6% in 2024. Germany — the second-worst performer among major economies after Russia and the UK — is expected to shrink by 0, registering 6% and expanding by 1.4% next year.
Goldman’s forecasts for the UK are below what it says is a market consensus, which outlines a 0.5% decline in 2023 and 1.1% growth in 2024. However, the OECD has also forecast that the UK will remain well behind other developed nations for years to come despite the same macroeconomic headwinds, putting London closer in performance to Russia than the rest of the G-7.
The euro area and the UK are both already in recession, concluded Goldman chief economist Jan Hatzius and his team, as both endure a “much larger and more protracted hike in household energy bills” that is pushing inflation to higher peaks than previously seen will drift elsewhere.
“In turn, high inflation is expected to weigh on real income, consumption and industrial production. We forecast further declines in real income of 1.5% in the euro area by Q1 2023 and 3% in the UK by Q2 2023, before a rebound in H2,” they said.
The UK’s independent Office for Household Responsibility believes the country is facing the sharpest drop in living standards on record. Alongside Treasury Secretary Jeremy Hunt’s budget statement in November, the OBR forecast that household real disposable income – a measure of living standards – will fall by 4.3% over 2022-23.
Advisory firm KPMG forecasts that UK real GDP will contract by 1.3% in 2023 amid a “relatively shallow but protracted recession” before a partial recovery of 0.2% in 2024.
Income tightening was cited as the main driver, as higher inflation and interest rates significantly reduce household purchasing power. The Bank of England hiked interest rates by 50 basis points to 3.5% in December as it sought to rein in inflation, which eased last month from November’s 41-year high.
KPMG expects the central bank to hike interest rates to 4% in the first quarter of this year before taking a wait-and-see approach as inflation begins to ease.
“The labor market is expected to deteriorate from the first half of 2023, with the unemployment rate set to reach 5.6% by mid-2024, an increase of around 680,000 people,” economists at KPMG said in a forecast report in December.
Yael Selfin, chief economist at KPMG UK, said rising food and energy prices and higher headline inflation had already hurt households’ purchasing power.
“Rising interest rates have added another headwind to growth. Lower-income households are particularly exposed to the mix of current pricing pressures, as the hardest-hit spending categories are largely on essentials and have few substitutes in the short term,” Selfin said in the report.
“Households are expected to rein in spending on consumer goods in 2023 in response to the tightening of income. As consumers rein in their spending, we expect a sharp drop in non-essential spending by households hardest hit by the energy surge and food costs, including food and entertainment spending.”
Coupled with global headwinds posed by the war in Ukraine and supply shortages related to China’s Covid-19 measures and the fallout from the pandemic, the UK faces unique domestic obstacles such as a long-term morbidity crisis that is leaving its job market severe strained. The country is also experiencing severely depleted trade as a result of Brexit.
“Although commodities fueled the initial surge in headlines [in inflation]Price pressures in core categories have expanded significantly in both the euro area and the UK following upside inflation surprises,” Goldman’s Hatzius said.
“Indeed, price pressures in the UK core are now the biggest in the G10, with a perfect storm of an energy crisis (like continental Europe) and an overheated labor market (like the US).”