LONDON (CNBC) — The UK economic contraction of 2023 will be almost as deep as that of Russia, economists expect, as a sharp fall in household living standards weighs on activity.
In its 2023 macro outlook, Goldman Sachs forecast a 1.2% contraction in the UK real GDP over the course of this year, well below all other G-10 (Group of Ten) major economies. This is set to be followed by a 0.9% expansion in 2024, the lender anticipates.
The figure places Britain only fractionally ahead of Russia, which the bank projects will see a 1.3% contraction in 2023 as it continues to wage war in Ukraine and weather punitive economic sanctions from Western powers. This will be followed by a 1.8% expansion in 2024, Goldman figures suggest.
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 UK— is expected to see a 0.6% contraction this year, then expand by 1.4% next year.
Goldman’s projections for the UK 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, the OECD has also forecast that the UK will lag significantly behind other developed nations in the coming years despite facing the same macroeconomic headwinds, putting London closer in performance to Russia than to the rest of the G-7.
The euro area and the UK 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.
The UK 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 UK 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 squeeze on incomes was cited as the main driver, as higher inflation and interest rates significantly curtail household purchasing power. The Bank of England raised rates by 50 basis points to 3.5% in December, as it looked to rein in inflation, which eased slightly last month from the 41-year high of November.
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 labor 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 UK, said the spike in food and energy prices and higher overall inflation had already cut into household purchasing power.