The UK is likely to enter a deeper recession than previously expected next year, while interest rates and inflation will be lower than expected, revised analysis from Goldman Sachs.
The US investment bank downgraded its outlook for the UK in an analysis published on Sunday, predicting the UK economy would shrink by 1% next year, down from its previous estimate of a 0.4% contraction.
Goldman Sachs said the increase in corporation tax to 25% in April – after Truss U-turned on one of his key Conservative leadership commitments – was a factor.
Its report said: “Folding weaker growth momentum, significantly tighter financial conditions and the higher corporation tax from next April, we further downgrade our UK growth outlook and now expect a more substantial recession.”
Analysts said Truss’ withdrawal of her corporation tax plans could help ease pressure on the Bank of England for a tougher rate hike. Goldman Sachs, Deutsche Bank and Barclays said a 0.75 percentage point rise in interest rates to 3% was now more likely at the bank’s next meeting in November, down from earlier estimates of a one percentage point rise immediately after the mini budget.
Goldman analysts believe UK rates will now peak at 4.75%, slightly lower than the 5% previously forecast.
A separate business survey by accountants Deloitte found that UK businesses expect the rise in interest rates to make it harder to weather a fall in sales and recession over the next year.
CFOs at some of Britain’s biggest firms said borrowing was more expensive than at any time since 2010, making investment harder to justify.
The Deloitte poll found that a majority of CFOs expected revenues to fall over the next 12 months and that plans to cut costs and control cash outflows had become their top two priorities.
While the survey was conducted before Kwasi Kwarteng was fired on Friday and the Prime Minister decided to roll back much of last month’s mini-budget, it is likely that businesses will continue to focus on cutting costs to minimize the impact of the downturn.
Ian Stewart, chief economist at Deloitte, said the rise in borrowing costs following sharp rises in the Bank of England’s base rate forced companies to change the way they financed investment.
“A 12-year period of easy credit conditions is coming to an end. Businesses are experiencing a reset in the cost and availability of credit.
“Not since the credit crunch have CFOs rated debt – whether it’s bank loans or corporate bonds – as less attractive as a source of financing for their companies than they do today.”