Britain is to be plunged into a deeper recession due to Liz Truss’s corporation tax U-turn and the mini-Budget market turmoil, economists warned, as the City braced for more wild swings in sterling and bonds.
Goldman Sachs cut its growth forecasts for Britain on “significantly” worse lending conditions and Ms Truss on Friday scrapping plans to cancel next April’s corporate tax hike from 19 pcs to 25 pcs.
It expects a more significant recession than originally expected and a 1 percent contraction in the economy next year, down from its previous prediction of a 0.4 percent contraction. fall in GDP. Goldman expects a recovery in 2024.
However, Goldman’s economists said the government’s U-turn will put less pressure on the Bank of England to aggressively tackle inflation with rapid rate hikes. Economist Ibrahim Quadri said the weaker growth and inflation outlook would mean the bank could avoid a significant one percentage point hike at upcoming meetings, easing the mortgage misery facing millions of households.
There were tentative signs of stabilization for the pound in Asian markets last night as City analysts warned that this week will be a key test of investor sentiment.
Sterling rose by as much as 0.8 per cent. against the dollar in thin trading to climb back above $1.12 after Mr. Hunt signaled a return to a more fiscally prudent approach. It increased by 0.8 per cent. against the euro at €1.1585 in an early indication that Mrs Truss’s U-turn and the new chancellor are beginning to calm the markets.
Hunt promised as much on Sunday he will make difficult decisions in an attempt to calm markets after the chaos caused by his predecessor who outlined £43bn. in unfunded tax breaks. However, more market volatility could be caused by the continued turmoil in Westminster and the Bank of England ending its support for bond purchases for pension schemes on Friday.
Lee Hardman, currency analyst at MUFG, said: “I expect it to be another volatile week. Obviously, Monday will be a big test, mainly I think for the gilt market.”
He said that Mr. Hunt has “a different way of thinking” to Kwasi Kwarteng, but warned there could be further sell-offs in sterling in the coming weeks ahead of Mr. Hunt’s fiscal statement on 31 October.
“What happens in the markets is that when you lose confidence, it’s much harder to get it back.”
Jane Foley, head of currency strategy at Rabobank, said: “Over the coming days it will become more apparent whether the Prime Minister’s U-turns and the intervention of the Bank of England have done enough to reassure investors.
“We continue to see difficult times ahead for the pound.”