According to experts, the UK’s economic downturn in 2023 will be virtually as severe as Russia’s as a steep decline in household living standards weighs on activity.
In its 2023 macro view, Goldman Sachs predicted that the real GDP of the United Kingdom will fall by 1.2% over the course of this year, far less than that of the other G-10 (Group of Ten) major nations. The lender predicts that a 0.9% expansion in 2024 will come after this.
The result puts Britain just slightly ahead of Russia, which the bank predicts would experience a 1.3% contraction in 2023 as a result of its ongoing conflict in Ukraine and struggle to withstand harsh economic sanctions imposed by Western powers. According to Goldman calculations, a 1.8% expansion will occur in 2024.
The Wall Street giant forecasts U.S. expansions of 1% in 2023 and 1.6% in 2024. Germany the next worst performer among major economies after Russia and the U.K. is expected to see a 0.6% contraction this year, then expand by 1.4% next year.
Goldman’s projections for the U.K. are below what it cites as a market consensus that sketches a 0.5% contraction in 2023 and a 1.1% expansion in 2024. However, despite facing the same macroeconomic headwinds, the Organization for Economic Cooperation and Development has also predicted that the United Kingdom will lag other developed countries significantly in the coming years, placing London closer in performance to Russia than to the rest of the G-7.
The euro area and the U.K. are both already in recession, Goldman Chief Economist Jan Hatzius and his team concluded, since both have endured a “much bigger and more drawn-out increase in household energy bills” that will drive inflation to higher peaks than seen elsewhere.
“In turn, high inflation is set to weigh on real income, consumption, and industrial production. We forecast further declines in real income of 1.5% in the euro area through 2023Q1 and 3% in the U.K. through 2023Q2, before a pickup in H2,” they said.
Rising interest rates have added another headwind to growth. Lower income households are particularly exposed to the mix of current price pressures, as the most affected spending categories largely fall on necessities, with few substitutes in the short run. Households are expected to rein in spending on discretionary items in 2023 in response to the squeeze on income. As consumers cut back on spending, we anticipate a sharp reduction in non-essential categories of spend by those households most affected by the rise in energy and food costs, including spending on eating out and entertainment.
Yael Selfin, chief economist at KPMG U.K.
The U.K. independent Office for Budget Responsibility projects that the country faces its sharpest fall in living standards on record. Alongside Finance Minister Jeremy Hunt’s budget statement in November, the OBR forecast that real household disposable income a measure of living standards will fall by 4.3% in 2022-23.
Consultancy firm KPMG projected that the U.K. real GDP will contract by 1.3% in 2023, amid a “relatively shallow but protracted recession,” before seeing a partial 0.2% recovery in 2024.
The main cause was attributed to the compression on incomes as increased inflation and interest rates severely reduced household purchasing power. In an effort to control inflation, which had moderated in November after reaching a 41-year peak in October, the Bank of England hiked interest rates by 50 basis points to 3.5% in December.
KPMG expects the central bank to increase the bank rate to 4% during the first quarter of this year before adopting a “wait-and-see” approach, as inflation gradually eases.
“The labour market is set to start deteriorating from the first half of 2023, with the unemployment rate reaching 5.6% by mid-2024, representing an increase of around 680,000 people,” KPMG economists said in an outlook report in December.
Yael Selfin, chief economist at KPMG U.K., said the spike in food and energy prices and higher overall inflation had already cut into household purchasing power.
“Rising interest rates have added another headwind to growth. Lower income households are particularly exposed to the mix of current price pressures, as the most affected spending categories largely fall on necessities, with few substitutes in the short run,” Selfin said in the report.
“Households are expected to rein in spending on discretionary items in 2023 in response to the squeeze on income. As consumers cut back on spending, we anticipate a sharp reduction in non-essential categories of spend by those households most affected by the rise in energy and food costs, including spending on eating out and entertainment.”
Along with the global challenges brought on by the conflict in Ukraine, supply constraints brought on by China’s Covid-19 regulations, and pandemic aftermath, the United Kingdom also faces specific domestic challenges like a persistent sickness crisis that has significantly tightened its labor market. The country is also experiencing heavily depleted trade as a result of Brexit.
“Although commodities drove the initial headline surge in inflation, price pressures have broadened significantly across core categories in both the euro area and the U.K. following upside inflation surprises,” Goldman’s Hatzius said.
“In fact, U.K. core price pressures are now the broadest across the G10, with a perfect storm of an energy crisis (like continental Europe) and an overheated labor market (like the US).”
